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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-43189
PROSPECTUS
GRAHAM-FIELD HEALTH PRODUCTS, INC.
OFFER TO EXCHANGE
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
($100,000,000 PRINCIPAL AMOUNT)
FOR
ALL OUTSTANDING
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
[GRAHAM-FIELD LOGO] ($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON FEBRUARY 9, 1998, UNLESS EXTENDED
------------------------
Graham-Field Health Products, Inc., a Delaware corporation (the "Company"
or "Graham-Field"), hereby offers, upon the terms and subject to conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"; together with the Prospectus, the
"Exchange Offer"), to exchange up to an aggregate principal amount of $100
million of its 9 3/4% Senior Subordinated Notes due 2007, Series A (the "New
Notes") for up to an aggregate principal amount of $100 million of its
outstanding 9 3/4% Senior Subordinated Notes due 2007 (the "Old Notes"). The
terms of the New Notes are identical in all material respects to those of the
Old Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes. The New Notes will be issued pursuant to, and
entitled to the benefits of, the Indenture (as defined herein) governing the Old
Notes. The New Notes and the Old Notes are sometimes referred to collectively as
the "Notes."
The New Notes will bear interest at the rate of 9 3/4% per annum, payable
semi-annually on February 15 and August 15, commencing February 15, 1998.
Holders of the New Notes will receive interest on February 15, 1998 from the
date of initial issuance of the New Notes, plus an amount equal to the accrued
interest on the Old Notes from the date of initial issuance thereof to the date
of exchange thereof pursuant to the Exchange Offer. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the New Notes in
exchange therefor.
The New Notes are redeemable for cash at any time on or after August 15,
2002, at the option of the Company, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid interest to the date of
redemption. In addition, on or before August 15, 2000, the Company may redeem up
to $25 million aggregate principal amount of the Notes with the net proceeds
from one or more public offerings of common stock of the Company at the
redemption price set forth herein plus accrued and unpaid interest to the date
of redemption; provided that at least $75 million aggregate principal amount of
the Notes would remain outstanding after giving effect to any such redemption.
Upon a Change of Control (as defined herein), the holders of the Notes will have
the right to require the Company to repurchase their Notes, in whole or in part,
at a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the repurchase date. See "Description of New Notes."
The New Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of the Company, including indebtedness under the Credit Facility
(as defined herein). The New Notes will be guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a senior subordinated basis by all
existing and future Restricted Subsidiaries (as defined herein) of the Company
(the "Guaranteeing Subsidiaries"). The Subsidiary Guarantees will be
subordinated in right of payment to all existing and future Senior Debt of the
Guaranteeing Subsidiaries including any guarantees by the Guaranteeing
Subsidiaries of the Company's obligations under the Credit Facility. As of
September 30, 1997, the Company had no Senior Debt outstanding and the
Guaranteeing Subsidiaries had $10.5 million of Senior Debt outstanding. In
addition, the Company had approximately $71.8 million available for borrowing
under the Credit Facility. The available borrowings were increased by $25
million on December 30, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF THE OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January 9, 1998
<PAGE> 2
(Continued from Cover)
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on February 9, 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. In the event the Company
terminates the Exchange Offer, and does not accept for exchange any Old Notes
with respect to the Exchange Offer, the Company will promptly return the Old
Notes to the holders thereof. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered for exchange, but is
otherwise subject to certain customary conditions. The Old Notes may be tendered
only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guaranteeing Subsidiaries contained in the
Registration Rights Agreement dated August 4, 1997 (the "Registration Rights
Agreement") by and among the Company, the Guaranteeing Subsidiaries and Smith
Barney Inc., as the initial purchaser (the "Initial Purchaser") with respect to
the Initial Offering.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by the respective holders thereof (other than any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act")), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that the New Notes are acquired in the ordinary course of such holder's
business and such holder has no arrangement with any person to participate in
the distribution of such New Notes and is not engaged in and does not intend to
engage in a distribution of the New Notes. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of the New Notes received in exchange for Old Notes
if such New Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the New
Notes. There can be no assurance as to the liquidity of any markets that may
develop for the New Notes, the ability of holders to sell the New Notes, or the
price at which holders would be able to sell the New Notes. Future trading
prices of the New Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the New Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the New Notes, if such
market develops, will not be subject to similar disruptions. The Initial
Purchaser has advised the Company that it currently intends to make a market in
the New Notes offered hereby. However, the Initial Purchaser is not obligated to
do so and any market making may be discontinued at any time without notice.
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses incident to the Exchange Offer.
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AVAILABLE INFORMATION
The Company and the Guaranteeing Subsidiaries have filed with the
Commission a Registration Statement on Form S-4 under the Securities Act for the
registration of the New Notes offered hereby (the "Registration Statement").
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company or the New Notes
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto, which may be inspected without charge at the public reference
facility maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of which may be obtained from the Commission at
prescribed rates. Statements made in this Prospectus concerning the contents of
any document referred to herein are not necessarily complete. With respect to
each such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Commission. Such reports
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at its regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, on payment of prescribed charges. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information filed by the Company with the
Commission through its Electronic Data Gathering Analysis and Retrieval (EDGAR)
System. Such reports, proxy statements and other information concerning the
Company can also be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
For so long as any Notes remain outstanding, the Company is obligated under
the Indenture to remain subject to the reporting requirements of Section 13 or
Section 15(d) of the Exchange Act and to continue to file with the Commission
such information, documents and other reports which are specified in such
sections of the Exchange Act. The Company is obligated to file with the Trustee
(as defined herein) and cause to be provided to the holders of the Notes copies
of such annual reports and of the information, documents and other reports which
the Company is required to file with the Commission.
INCORPORATION BY REFERENCE
The information in the following documents filed by the Company with the
Commission pursuant to the Exchange Act is incorporated by reference in this
Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as amended by Form 10-K/A-3 dated December 23, 1997;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997, as amended by Form 10-Q/A dated July 9, 1997;
3. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997;
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997;
5. The Company's Current Report on Form 8-K dated as of March 12,
1997, as amended by Form 8-K/A dated May 12, 1997 (Date of Event: February
28, 1997);
6. The Company's Current Report on Form 8-K dated as of March 20,
1997, as amended by Form 8-K/A dated May 19, 1997 (Date of Event: March 7,
1997);
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7. The Company's Current Report on Form 8-K dated as of May 14, 1997
(Date of Event: May 1, 1997);
8. The Company's Current Report on Form 8-K dated as of June 25, 1997
(Date of Event: June 25, 1997);
9. The Company's Current Report on Form 8-K dated as of July 17, 1997
(Date of Event: July 17, 1997);
10. The Company's Current Report on Form 8-K dated as of September 2,
1997 (Date of Event: August 28, 1997);
11. The Company's Current Report on Form 8-K dated as of September 11,
1997 (Date of Event: September 5, 1997);
12. The Proxy Statement/Consent Solicitation Statement/Prospectus
dated December 19, 1997 contained in the Company's Registration Statement
on Form S-4/A (Reg. No. 333-42561); and
13. The Company's Current Report on Form 8-K dated as of December 31,
1997 (Date of Event: December 30, 1997).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Exchange Offer shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of the
filing of such documents. Any statement contained in this Prospectus or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained herein, or in any subsequently filed document that also is
or is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified and superseded, to constitute a part of this Prospectus.
The Company will furnish, without charge, to any person to whom this
Prospectus is delivered, upon such person's written or oral request, a copy of
any and all of the information filed by the Company that has been incorporated
herein by reference (not including exhibits to the information that is
incorporated by reference herein unless such exhibits are specifically
incorporated by reference in such information). Requests for such copies should
be directed to the Company at 400 Rabro Drive East, Hauppauge, New York 11788,
Attention: Corporate Secretary (telephone number (516) 582-5900).
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the related notes thereto, appearing elsewhere in this Prospectus or
incorporated by reference herein. Unless otherwise indicated or where the
context otherwise requires, all references herein to "Graham-Field" or the
"Company" refer to Graham-Field Health Products, Inc. and its consolidated
subsidiaries.
THE COMPANY
Graham-Field Health Products, Inc. ("Graham-Field" or the "Company")
manufactures, markets and distributes medical, surgical and a broad range of
other healthcare products targeting the home healthcare and medical/surgical
markets through a network of dealers and other customers in North America. The
Company also markets and distributes products throughout Europe, Central and
South America, and Asia. In November 1996, the Company completed the acquisition
of Everest & Jennings International Ltd. ("Everest & Jennings"), a major
manufacturer and distributor of a broad line of wheelchairs and a distributor of
homecare beds. In addition, as more fully described under "Recent Developments",
on December 30, 1997, the Company completed the acquisition of Fuqua
Enterprises, Inc. ("Fuqua"), one of the leading manufacturers of durable medical
equipment and furnishings in the United States.
The Company's strategic business objective is to become the leading
provider of medical products to the rapidly growing home healthcare and
medical/surgical markets by offering a comprehensive product line, single-source
purchasing and technologically advanced, cost-effective delivery systems. The
cornerstone of the Company's sales and marketing strategy is the Company's
Consolidation Advantage Program ("C.A.P."). Through C.A.P., the Company strives
to become the most efficient and reliable low-cost provider of medical products
by offering the Company's customers the ability to reduce their operating costs
significantly by consolidating the purchase of multiple product lines through a
single source. The Company's sales and marketing representatives consult with
the Company's customers to identify the cost efficiencies and savings that can
be derived from purchasing all of their product needs through the Company. By
consolidating the purchase of multiple products through a single source, the
Company's customers significantly reduce their operating costs associated with
the purchasing process, including the reduction of delivery expenses,
administrative costs and other expenses. The Company believes that its C.A.P.
program significantly improves the level of service to its customers by
streamlining the purchasing process, decreasing order turnaround time, reducing
delivery expenses, and providing inventory on demand.
The Company markets and distributes products under its own brand names and
under suppliers' names throughout the world. The Company maintains manufacturing
and distribution facilities in the United States, Canada, Mexico and Puerto
Rico. The Company continuously seeks to expand its product lines by increasing
the number of distributorship agreements with suppliers, forming strategic
alliances and acquiring other companies and product lines. The Company's
products are marketed principally to hospital, nursing home, physician and home
healthcare dealers, and healthcare product wholesalers and retailers, including
drug stores, catalog companies, pharmacies and home-shopping related businesses.
Prior to the acquisition of Fuqua, the Company's principal products and
product lines included durable medical equipment (such as wheelchairs, homecare
beds, ambulatory aids, bathroom and safety equipment, and power wheelchair
seating systems), sphygmomanometers (blood pressure measuring devices),
stethoscopes, ECG instruments, electronic thermometers, infrared heat treatment
devices, adult incontinence products, nutritional supplements, specialty
cushions and mattresses for the treatment and prevention of pressure sores,
medicated and rubber elastic bandages, respiratory equipment and supplies,
urologicals, ostomy products, wound care products, infection control products,
first aid supplies, laboratory supplies, antiseptics, topical anesthetics and
sterile disposable medical products. By offering a wide range of products from a
single source, the Company enables its customers to reduce purchasing costs,
including transaction, freight and inventory expenses.
5
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THE EXCHANGE OFFER
The New Notes.............. The forms and terms of the New Notes are identical
in all material respects to the terms of the Old
Notes for which they may be exchanged pursuant to
the Exchange Offer, except for certain transfer
restrictions and registration rights relating to
the Old Notes described under "-- Terms of New
Notes."
The Exchange Offer......... The Company is offering to exchange up to $100
million aggregate principal amount of 9 3/4% Senior
Subordinated Notes due 2007, Series A (the "New
Notes") for up to $100 million aggregate principal
amount of its outstanding 9 3/4% Senior
Subordinated Notes due 2007 (the "Old Notes"). Old
Notes may be exchanged only in integral multiples
of $1,000.
Expiration Date; Withdrawal
of Tender................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on February 9, 1998, or such later
date and time to which it is extended by the
Company (the "Expiration Date"). The tender of the
Old Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
Any Old Notes not accepted for exchange for any
reason will be returned without expense to the
tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer.
Certain Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Certain Conditions to the
Exchange Offer."
Procedures for Tendering
Old Notes................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Old Notes and any other required
documentation to the Exchange Agent (as defined) at
the address set forth herein. By executing the
Letter of Transmittal, each holder will represent
to the Company that, among other things, (i) any
New Notes to be received by it will be acquired in
the ordinary course of its business, (ii) it has no
arrangement or understanding with any person to
participate in the distribution of the New Notes
and (iii) it is not an "affiliate", as defined in
Rule 405 of the Securities Act, of the Company or,
if it is an affiliate, it will comply with the
registration and prospectus delivery requirements
of the Securities Act to the extent applicable.
Interest on New Notes...... The New Notes will bear interest at the rate of
9 3/4% per annum, payable semi-annually on February
15 and August 15 of each year, commencing February
15, 1998. Holders of the New Notes will receive
interest on February 15, 1998 from the date of
initial issuance of the New Notes, plus an amount
equal to the accrued interest on the Old Notes from
the date of initial issuance of the Old Notes to
the date of exchange thereof pursuant to the
Exchange Offer. Interest on the Old Notes accepted
for exchange will cease to accrue upon issuance of
the New Notes in exchange therefor.
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Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender such Old Notes in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering his or her Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from
the registered holder. The transfer of registered
ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
Guaranteed Delivery
Procedures............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent, prior to the Expiration Date, must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Registration
Requirements............... The Company has agreed to use its best efforts to
(i) cause the registration statement of which this
Prospectus constitutes a part to become effective
and (ii) to consummate, no later than 30 days
following the date on which such registration
statement becomes effective, the registered
Exchange Offer pursuant to which holders of the Old
Notes will be offered an opportunity to exchange
their Old Notes for the New Notes which will be
issued without legends restricting the transfer
thereof. In the event the applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange Offer
or in certain other circumstances, the Company has
agreed to file a Shelf Registration Statement (as
defined under "Old Notes; Registration Rights")
covering resales of the Old Notes and to use its
best efforts to cause such Shelf Registration
Statement to be declared effective under the
Securities Act and, subject to certain exceptions,
keep such Shelf Registration Statement effective
until two years after the effective date thereof.
Certain Federal Income Tax
Considerations........... For a discussion of certain Federal income tax
considerations relating to the exchange of the New
Notes for the Old Notes, see "Certain Federal
Income Tax Considerations Relating to the Exchange
Offer."
Exchange Agent............. American Stock Transfer & Trust Company is the
Exchange Agent. The address and telephone number of
the Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent."
The Old Notes are currently eligible for trading in the Private Offerings,
Resale and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to its consummation, the Old Notes
may continue to be traded in the PORTAL market. Following consummation of the
Exchange Offer, only Old Notes not exchanged will be eligible for PORTAL
trading.
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TERMS OF NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the New Notes are registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof. See
"Description of New Notes."
New Notes.................. $100,000,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes due 2007, Series A.
Maturity Date.............. August 15, 2007.
Interest Payment Dates..... February 15 and August 15 of each year, commencing
February 15, 1998.
Subordination.............. The New Notes will be general unsecured obligations
of the Company, subordinated in right of payment to
all existing and future Senior Debt of the Company,
including indebtedness under the Credit Facility.
The New Notes will be guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a senior
subordinated basis by all existing and future
Restricted Subsidiaries of the Company (the
"Guaranteeing Subsidiaries"). The Subsidiary
Guarantees will be subordinated in right of payment
to all existing and future Senior Debt of the
Guaranteeing Subsidiaries including any guarantees
by the Guaranteeing Subsidiaries of the Company's
obligations under the Credit Facility. As of
September 30, 1997, the Company had no Senior Debt
outstanding and the Guaranteeing Subsidiaries had
$10.5 million of Senior Debt outstanding (excluding
guarantees by the Guaranteeing Subsidiaries of the
Company's obligations under the Credit Facility).
In addition, the Company had approximately $71.8
million available for borrowing under the Credit
Facility. The available borrowings were increased
by $25 million on December 30, 1997. See
"Description of Credit Facility."
Optional Redemption........ Except as provided below, the New Notes are not
redeemable at the Company's option prior to August
15, 2002. Thereafter, the New Notes will be
redeemable, in whole or in part, at the option of
the Company, at the redemption prices set forth
herein plus accrued and unpaid interest to the date
of redemption. In addition, prior to August 15,
2000, the Company may, at its option, redeem up to
$25 million aggregate principal amount of the Notes
with the net proceeds from one or more public
offerings of common stock of the Company at the
redemption price set forth herein plus accrued and
unpaid interest to the date of redemption; provided
that at least $75 million aggregate principal
amount of the Notes would remain outstanding after
giving effect to any such redemption. See
"Description of New Notes -- Optional Redemption."
Change of Control.......... In the event of a Change of Control, each holder of
Notes will have the right to require the Company to
repurchase such holder's Notes, in whole or in
part, at a purchase price of 101% of the principal
amount thereof plus accrued and unpaid interest to
the date of repurchase. In the event a Change of
Control were to occur, there can be no assurance
that the Company will have available funds
sufficient to repurchase all of the Notes that
holders elect to tender. In addition, the Credit
Facility prohibits the Company from repurchasing
Notes without the consent of the lenders. See
"Description of New Notes -- Repurchase at the
Option of Holders -- Change of Control."
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Offer to Purchase.......... The Company will be required in certain
circumstances to make an offer to purchase Notes
and certain other indebtedness, at a purchase price
equal to 100% of the principal amount thereof plus
accrued and unpaid interest to the date of
purchase, with the net cash proceeds of certain
asset sales. The Credit Facility, however,
prohibits the Company from repurchasing Notes
without the consent of the lenders. See
"Description of New Notes -- Repurchase at the
Option of Holders -- Asset Sales."
Restrictive Covenants...... The indenture under which the Old Notes were issued
and the New Notes will be issued (the "Indenture")
contains covenants including, but not limited to,
covenants with respect to limitations on the
following matters: (i) the incurrence of additional
indebtedness, (ii) the creation of liens, (iii)
restricted payments, (iv) sales of assets, (v)
mergers and consolidations, (vi) payment
restrictions affecting subsidiaries and (vii)
transactions with affiliates. See "Description of
New Notes -- Certain Covenants."
Use of Proceeds............ There will be no cash proceeds to the Company from
the Exchange Offer. See "Use of Proceeds of New
Notes."
RISK FACTORS
Holders of Old Notes should carefully consider matters set forth under the
caption "Risk Factors" prior to making a decision with respect to the Exchange
Offer. See "Risk Factors."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, --------------------------------
--------------------------------------------------- PRO FORMA PRO FORMA
AS AS
ACTUAL COMBINED(1) ACTUAL COMBINED(1)
1992 1993 1994 1995 1996 1996 1996 1997 1997
------- -------- -------- -------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Medical equipment and
supplies............... $91,626 $101,526 $105,951 $112,113 $143,083 $328,390 $100,674 $189,515 $279,910
Interest and other
income..................... 771 81 75 301 559 2,369 537 759 946
------- ------- ------- -------- -------- -------- -------- --------
92,397 101,607 106,026 112,414 143,642 330,759 101,211 190,274 280,856
Costs and expenses:
Cost of revenues......... 61,334 72,537 74,079 78,525 99,641 232,574 69,203 128,100 186,891
Selling, general and
administrative............. 24,799 31,078 31,964 29,428 34,578 104,644 25,678 43,976 72,566
Interest expense......... 1,727 2,447 2,697 2,720 2,578 15,923 1,962 4,557 10,370
Purchased in process
research & development
costs(2)................... -- -- -- -- 12,800 12,800 -- -- --
Merger related
charges(2)................. -- -- -- -- 3,000 3,000 -- -- --
Reorganization charge(3)... 1,640 -- -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------- --------
89,500 106,062 108,740 110,673 152,597 368,941 96,843 176,633 269,827
------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before income
taxes (benefit),
extraordinary item and
cumulative effect of
change in accounting
principle................ 2,897 (4,455) (2,714) 1,741 (8,955) (38,182) 4,368 13,641 11,029
Income taxes (benefit)..... 1,092 (1,418) (735) 694 2,918 (6,689) 1,943 5,395 4,837
------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle................ 1,805 (3,037) (1,979) 1,047 (11,873) (31,493) 2,425 8,246 6,192
Extraordinary loss on early
retirement of debt (net
of tax benefit of
$383)(4)................. -- -- -- -- (736) (736) -- -- --
Cumulative effect of change
in accounting
principle................ -- 530 -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------- --------
Net income (loss).......... 1,805 (2,507) (1,979) 1,047 (12,609) (32,229) 2,425 8,246 6,192
Preferred stock
dividends................ -- -- -- -- -- 1,065 -- 799 799
------- ------- ------- -------- -------- -------- -------- --------
Net income (loss) available
to common stockholders... $ 1,805 $ (2,507) $ (1,979) $ 1,047 $(12,609) $(33,294) $ 2,425 $ 7,447 $ 5,393
======= ======= ======= ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Gross margin(5)............ 33.1% 28.6% 30.1% 29.9% 30.4% 29.2% 31.3% 32.4% 33.2%
Depreciation and
amortization............. $ 2,327 $ 3,136 $ 3,531 $ 3,347 $ 3,539 $ 12,622 $ 2,487 $ 4,700 $ 9,102
EBITDA(6).................. $ 7,820 $ 1,047 $ 3,439 $ 7,507 $ 12,403 $ 3,794 $ 8,280 $ 22,139 $ 29,555
Adjusted EBITDA(6)(7)...... -- -- -- -- -- $ 12,143 -- -- --
Capital expenditures....... $ 1,821 $ 762 $ 1,123 $ 709 $ 1,085 -- 762 3,637 --
Ratio of EBITDA to interest
expense(6)............... 4.5x 0.4x 1.3x 2.8x 4.8x 0.2x 4.2x 4.9x 2.9x
Ratio of adjusted EBITDA to
interest expense(6)(7)... -- -- -- -- -- 0.8x -- -- --
Ratio of earnings to fixed
charges(8)............... 3.2x N/A N/A 1.6x 3.3x N/A 3.0x 3.8x 2.0x
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
-------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................................. $ 5,682 $ 7,650
Working capital........................................................................................ 115,172 112,463
Total assets........................................................................................... 293,048 558,576
Long-term debt (including capital leases due after one year)........................................... 108,440 161,906
Stockholders' equity................................................................................... 136,258 300,948
</TABLE>
10
<PAGE> 11
- ---------------
(1) Gives effect to (a) the acquisitions (including the acquisition of Fuqua)
described in the Pro Forma Combined Condensed Financial Information
appearing elsewhere in this Prospectus and (b) the sale of the Old Notes and
the application of the net proceeds therefrom, as if such transactions had
occurred on January 1, 1996 for the purpose of the Statement of Operations
Data, and as if those transactions that were completed subsequent to
September 30, 1997 had occurred at that date for the purpose of the Balance
Sheet Data. Does not give effect to interest income derived from the net
proceeds from the Offering, after giving effect to the repayment of certain
indebtedness as described in "Use of Proceeds of Old Notes." See "Pro Forma
Combined Condensed Financial Information."
(2) During 1996, the Company recorded charges of $15,800,000 related to the
acquisition of Everest & Jennings. The charges included $12,800,000
associated with the write-off of purchased in-process research and
development costs and $3,000,000 of merger-related expenses. See Note 2 of
Notes to Consolidated Financial Statements of the Company included elsewhere
in this Prospectus.
(3) The results of operations for 1992 include a reorganization charge relating
primarily to the implementation and opening of the Company's St. Louis
Facility (as defined herein).
(4) The extraordinary item is related to the early retirement of the
indebtedness underlying the John Hancock Mutual Life Insurance Note and
Warrant Agreement dated as of March 12, 1992, as amended (the "John Hancock
Indebtedness"), and represents a "make-whole" payment and the write-off of
unamortized deferred financing costs associated with this indebtedness. See
Note 8 of Notes to Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
(5) Represents (i) net revenue from medical equipment and supplies minus cost of
revenues as a percentage of (ii) net revenue from medical equipment and
supplies.
(6) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges, interest and other
income and extraordinary items. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring a
company's ability to service its debt; however, EBITDA does not represent
cash flow from operations, as defined by generally accepted accounting
principles, and should not be considered as a substitute for net earnings as
an indicator of the Company's operating performance or for cash flow as a
measure of liquidity.
(7) Adjusted EBITDA represents 1996 EBITDA, on a pro forma basis as adjusted,
after giving effect to certain cost savings related to the acquisition of
Everest & Jennings, including (i) payroll and other savings related to the
reduction in the Everest & Jennings headcount, (ii) elimination of corporate
offices of Everest & Jennings, (iii) closing of the outside warehouses of
Everest & Jennings, (iv) renegotiation of the telephone contracts of Everest
& Jennings, (v) elimination of the MIS consultants of Everest & Jennings,
and (vi) outsourcing the manufacture of homecare wheelchairs of Everest &
Jennings, in each case as if these cost savings had been realized as of
January 1, 1996.
<TABLE>
<CAPTION>
ADJUSTED
EBITDA
--------------
(IN THOUSANDS)
<S> <C>
EBITDA pro forma as adjusted.......................... $ 3,794
Payroll and other savings related to reduction in
Everest & Jennings headcount........................ 6,309
Elimination of corporate offices of Everest &
Jennings............................................ 177
Closing of outside warehouses of Everest & Jennings... 145
Renegotiation of telephone contracts.................. 108
Elimination of MIS consultants of Everest &
Jennings............................................ 300
Outsourcing the manufacture of homecare wheelchairs of
Everest & Jennings.................................. 1,310
-------
Adjusted EBITDA....................................... $ 12,143
=======
</TABLE>
(8) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from operations before income taxes, non-recurring items and
extraordinary items plus fixed charges. Fixed charges include interest
expense, amortization of debt issuance costs and the estimated interest
component of rent expense. The ratio of earnings to fixed charges for the
year ended December 31, 1996 on a pro forma as adjusted basis after giving
further pro forma effect to the cost savings referred to in Note 7 above
would have been .83x. Earnings did not cover fixed charges during the
following periods by the following amounts: 1993 -- $4,455,000;
1994 -- $2,714,000; and 1996 pro forma as adjusted -- $22,382,000.
11
<PAGE> 12
THE COMPANY
The Company was organized under the laws of the State of Delaware on April
6, 1981 under the name, Patient Technology, Inc. On May 27, 1988, the Company
changed its name to Graham-Field Health Products, Inc. Except where the context
otherwise requires, the word "Company" or "Graham-Field" as used herein includes
all of its subsidiaries. The Company's executive offices are located at 400
Rabro Drive East, Hauppauge, New York 11788, and its telephone number is (516)
582-5900.
RISK FACTORS
Holders of Old Notes should carefully consider the specific factors set
forth below as well as the other information included in this Prospectus before
deciding to accept the Exchange Offer. The risk factors set forth below are
generally applicable to the Old Notes as well as the New Notes.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company has indebtedness which is substantial in relation to its
stockholders' equity, as well as interest and debt service requirements which
are significant compared to its cash flow from operations. As of September 30,
1997, the Company had approximately $108.4 million of long-term debt
outstanding, net of the current portion, including the Old Notes, which
represents 44% of total capitalization. See "Capitalization." In addition, as of
September 30, 1997, the Company had available approximately $71.8 million under
the Company's credit facility (the "Credit Facility") with IBJ Schroder Business
Credit Corp. ("IBJ"). The available borrowings were increased by $25 million on
December 30, 1997. See "Description of Credit Facility."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for operations and
other purposes; (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or general
corporate purposes may be impaired; and (iii) certain of the Company's
borrowings are and will continue to be at variable rates of interest, which
exposes the Company to the risk of increased interest rates.
The Company's ability to pay interest on the Notes and to satisfy its other
obligations will depend upon the Company's future operating performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, many of which are beyond the Company's control. Although the
Company's cash flow from operations has been sufficient to meet its debt service
obligations in the past, there can be no assurance that the Company's operating
results will continue to be sufficient for the Company to meet its obligations.
The Company may be required to refinance the Notes at maturity. No assurance can
be given that, if required, the Company will be able to refinance the Notes on
terms acceptable to it, if at all. If the Company is unable to service its
indebtedness, it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
effected on terms acceptable to the Company, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS
The Indenture contains certain restrictive covenants which will affect, and
in many respects significantly limit or prohibit, among other things, the
ability of the Company to incur indebtedness, make prepayments of certain
indebtedness, make investments, engage in transactions with affiliates, create
liens, sell assets and engage in mergers and consolidations. The Credit Facility
contains similar and more restrictive covenants, including a restriction on the
repayment and prepayment of principal on the Notes, and also requires the
Company to meet certain financial ratios and tests. These covenants may
significantly limit the operating and financial flexibility of the Company and
may limit its ability to respond to changes in its business or competitive
activities. The ability of the Company to comply with such provisions may be
affected by events
12
<PAGE> 13
beyond its control. In the event of any default under the Credit Facility or the
Notes, the Credit Facility lenders could elect to declare all amounts borrowed
under the Credit Facility, together with accrued interest, to be due and
payable. If the Company were unable to repay such borrowings, the lenders
thereunder could proceed against the collateral securing the Credit Facility,
which consists of substantially all of the property and assets of the Company.
If the indebtedness under the Credit Facility were to be accelerated, there can
be no assurance that the assets of the Company would be sufficient to repay such
indebtedness and the Notes (which are subordinated in right of payment to such
indebtedness) in full. See "Description of Credit Facility."
SUBORDINATION
The payment of principal, premium, if any, interest and Liquidated Damages
(as defined under "Old Notes; Registration Rights"), if any, on the Notes will
be subordinated to the prior payment in full of all existing and future Senior
Debt of the Company, including indebtedness under the Credit Facility, and,
therefore, in the event of the bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will not be available to pay obligations
under the Notes until all such Senior Debt has been paid in full. Furthermore,
any payment with respect to a Subsidiary Guarantee also will be subordinated to
the payment of Senior Debt of that Guaranteeing Subsidiary, including the
Guaranteeing Subsidiary's guarantee of the Company's obligations under the
Credit Facility. As a result, there may not be sufficient assets remaining after
such bankruptcy, liquidation or reorganization to pay amounts due on the Notes.
As of September 30, 1997, the Company had no Senior Debt outstanding and the
Guaranteeing Subsidiaries had $10.5 million of Senior Debt outstanding
(excluding guarantees by the Guaranteeing Subsidiaries of the Company's
obligations under the Credit Facility). In addition, as of September 30, 1997,
the Company had approximately $71.8 million available for borrowings under the
Credit Facility. The available borrowings were increased by $25 million on
December 30, 1997 in connection with an amendment to the Credit Facility. See
"Description of Credit Facility." The Indenture permits the Company to incur
additional Senior Debt from time to time, subject to certain limitations.
The subordination provisions of the Indenture provide that no payment may
be made by the Company with respect to the Notes upon the occurrence of a
default in the payment of principal, premium, if any, or interest on certain
Designated Senior Debt (as defined herein). In addition, upon the occurrence of
any other event entitling the holders of such Designated Senior Debt to
accelerate the maturity thereof and receipt by the Trustee (as defined herein)
of written notice of such occurrence, the holders of such Designated Senior Debt
will be able to block payment on the Notes for specified periods of time. If the
Company fails to make any payment on the Notes when due or within any applicable
grace period, whether or not on account of the payment blockage provisions
referred to above, such failure would nonetheless constitute an event of default
under the Indenture and would entitle the holders of the Notes to accelerate the
maturity thereof. See "Description of New Notes -- Subordination."
BIL OWNERSHIP
As of September 30, 1997, BIL (Far East Holdings) Limited ("BIL"), a Hong
Kong corporation and the former majority stockholder of Everest & Jennings, and
its affiliate, BIL Securities (Offshore) Limited, a New Zealand corporation
(collectively, "BIL") controlled approximately 34% of the voting power of the
Company's capital stock. This amount declined to approximately 24% following the
issuance of shares to Fuqua stockholders in connection with Graham-Field's
acquisition of Fuqua. Pursuant to an amendment dated as of May 1, 1997 to the
Amended and Restated Stockholder Agreement dated as of September 3, 1996, as
amended on September 19, 1996 (the "BIL Stockholder Agreement"), among the
Company, BIL and Irwin Selinger, the Chairman of the Board and Chief Executive
Officer of the Company, BIL may purchase in the open market an aggregate of up
to 49% of the voting power of the Company's capital stock. This could make it
difficult for a third party to acquire control of the Company without the
consent of BIL and, therefore, may discourage third parties from making an
acquisition proposal or seeking to acquire the Company. A third party would be
likely to negotiate any such transaction with BIL and the interests of BIL may
be different from the Company's other stockholders. In addition, BIL is entitled
pursuant to the terms of
13
<PAGE> 14
the BIL Stockholder Agreement to nominate two directors to the Company's Board
of Directors. The BIL Stockholder Agreement also requires the Company, prior to
issuing securities in certain transactions, to offer BIL the right to
participate proportionally in such issuance. However, the BIL Stockholder
Agreement places certain restrictions on BIL's ability to purchase or sell
shares of the Company's capital stock. Such restrictions limit BIL's ability to
acquire the Company or to facilitate the acquisition of the Company by a third
party. See "Certain Transactions -- BIL Stockholder Agreement."
RISKS ASSOCIATED WITH ACQUISITIONS AND JOINT VENTURES
The Company has historically pursued, and intends to continue to pursue, a
strategy of growth through acquisitions and joint ventures. From January 1, 1996
through September 30, 1997, the Company completed seven acquisitions. See "Pro
Forma Combined Condensed Financial Information." In addition, on December 30,
1997, the Company completed the acquisition of Fuqua. See "Recent Developments."
Acquisitions and joint ventures involve numerous risks, including the risks
associated with entering into new geographic or product markets, assuming
undisclosed liabilities and incurring additional debt and amortization expense
related to goodwill and other intangible assets, any of which could have an
adverse effect on the Company's operating results.
The process of integrating management, services, administrative
organizations, facilities, management information systems and other operational
aspects of acquired businesses or product lines can be time consuming and costly
and may distract management from day-to-day operations. The difficulties of
integration may be increased by challenges in coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. If the Company is to
realize the anticipated benefits of past and future acquisitions, the operations
of the acquired entities must be combined and integrated successfully and
efficiently. There can be no assurance that the Company's integration processes
will be successful or that the anticipated benefits of any past or future
acquisitions will be realized. Furthermore, there can be no assurance that there
will not be substantial unanticipated costs or other material adverse effects
associated with past or future acquisitions and integration activities conducted
by the Company. See "Pro Forma Combined Condensed Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, Graham-Field's allocation of the purchase price paid in
connection with the acquisition of Fuqua among Fuqua's assets and liabilities
(including purchased in-process research and development) set forth in the pro
forma financial statements appearing elsewhere in this Prospectus is preliminary
and may be adjusted based on fair value appraisals to be conducted by
Graham-Field. See Note 1.d. under "Unaudited Pro Forma Combined Condensed
Financial Information -- Unaudited Pro Forma Combined Condensed Financial
Information of Graham-Field Health Products, Inc." Such appraisals could result
in a material reallocation of the purchase price among the assets and
liabilities of Fuqua, which could in turn have a material adverse effect on the
results of operations of the combined entity through a charge to earnings from a
write-off of purchased in-process research and development costs or a change to
goodwill from that set forth in the pro forma statements of operations,
resulting in a corresponding change in amortization expense from that currently
reflected in the pro forma statements of operations.
Finally, although Graham-Field considers Fuqua's Leather Operations (as
defined under "Recent Developments") an asset, Graham-Field views them as
unrelated to Graham-Field's principal and core business. Accordingly,
Graham-Field intends to dispose of the Leather Operations as soon as reasonably
practicable and, consequently, will treat the Leather Operations as an asset
held for sale for accounting purposes. See "Unaudited Pro Forma Combined
Condensed Financial Information." However, there can be no certainty as to when,
and if, the Leather Operations will be disposed of, the consideration
Graham-Field will receive therefor and the terms associated with such
disposition.
COMPETITION
The medical supply industry is characterized by intense competition. Many
of the Company's competitors have substantially greater financial and other
resources than the Company and may succeed at utilizing
14
<PAGE> 15
these resources to obtain a temporary or permanent competitive advantage over
the Company. Many of the products distributed by the Company are available from
several sources, and many of the Company's customers tend to have relationships
with several distributors. Price reductions by the Company's competitors could
result in similar price reductions by the Company. The Company purchases certain
products from its competitors and sells certain of its products to its
competitors. In addition, competitors of the Company could obtain exclusive
rights from manufacturers to market particular products not currently subject to
the Company's exclusive distribution arrangements. Manufacturers could also
increase their efforts to sell directly to healthcare providers, and thereby
eliminate the role of distributors, such as the Company.
The changing United States healthcare environment in recent years has led
increasingly to intense competition among medical, surgical and healthcare
distributors and to industry consolidation among healthcare providers and
medical/surgical supply distributors. The acquisition of any of the Company's
significant customers could result in the loss of such customers by the Company,
thereby negatively impacting its business and operating results. In addition,
barriers to entry in each of the Company's markets are relatively low, and the
risk of new competitors entering any market, including the risk of any of the
Company's existing competitors expanding into new markets, particularly on a
local level, is high. There can be no assurance that competitors of the Company
will not succeed in developing or marketing products which are more effective or
efficient than those marketed by the Company. Such developments may render the
Company's products obsolete or noncompetitive. Accordingly, the Company's
success is dependent in part upon its ability to respond to both medical and
technological changes through the development, introduction, sourcing and
distribution of new products. Given that product development involves a high
degree of risk, there can be no assurance that the Company's new product
development efforts will result in commercially successful products. In each of
the Company's markets, any of the foregoing competitive pressures, as well as
further consolidation of medical/surgical supply distributors and of healthcare
providers generally, may inhibit the Company's ability to achieve price
increases or may result in price decreases and consequently may negatively
impact revenues and margins. There can be no assurance that the Company will be
able to compete effectively in its industry.
DEPENDENCE ON KEY SUPPLY CONTRACTS
Everest & Jennings' business is heavily dependent on its maintenance of two
key supply contracts. Everest & Jennings obtains the majority of its commodity
wheelchairs and wheelchair components pursuant to an exclusive supply agreement
(the "Wheelchair Supply Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"),
an Indonesian manufacturer. The term of this agreement extends until June 30,
2000, and on each July 1 thereafter will be automatically extended for one
additional year unless Everest & Jennings elects not to extend or Everest &
Jennings has failed to order at least 50% of the contractually specified
minimums and P.T. Dharma elects to terminate. If the Wheelchair Supply Agreement
is terminated, there can be no assurance that Everest & Jennings will be able to
enter into a suitable wheelchair supply agreement with another manufacturer. The
failure by the Company to secure alternative sources of supply would result in a
material adverse effect on the Company's business and financial condition.
Everest & Jennings obtains homecare beds for distribution solely pursuant
to a supply agreement with Maxwell Products, Inc. (the "Bed Supply Agreement").
The Bed Supply Agreement contains an initial term of two years expiring in
August 1999, and provides for the supply of a minimum and maximum number of
homecare beds during the term of the agreement. If the Bed Supply Agreement is
terminated, there can be no assurance that Everest & Jennings will be able to
enter into a suitable supply agreement with another manufacturer. The failure by
the Company to secure alternative sources of supply would result in a material
adverse effect on the Company's business and financial condition.
CHANGES IN HEALTHCARE INDUSTRY
In recent years, the healthcare industry has undergone significant change
driven by various efforts to reduce costs, including efforts at national
healthcare reform, trends toward managed care, cuts in Medicare, consolidation
of healthcare distribution companies and collective purchasing arrangements by
office-based healthcare practitioners. The Company's inability to react
effectively to these and other changes in the
15
<PAGE> 16
healthcare industry could adversely affect its operating results. The Company
cannot predict whether any healthcare reform efforts will be enacted and what
effect any such reforms may have on the Company or its customers and suppliers.
While the growth of the healthcare industry continues to be strong, the
impact of third-party pricing pressures and low barriers to entry have
dramatically reduced profit margins for suppliers. Continued growth in managed
care and capitated plans have pressured independent home medical equipment
suppliers to find ways of becoming more cost competitive with national
providers. This has also led to consolidations among manufacturers and
distributors as smaller companies with limited product lines seek out partners
with potential for significant synergies. In addition, certain healthcare
product suppliers are consolidating in order to promote better utilization of
resources and improve service to customers, thereby maintaining margin and
market share. The Company's inability to react effectively to these and other
changes in the healthcare industry could adversely affect its operating results.
GOVERNMENTAL REGULATION
The Company and its customers and suppliers are subject to extensive
Federal and state regulation in the United States, as well as regulation by
foreign governments, and the Company cannot predict the extent to which future
legislative and regulatory developments concerning its practices and products
for the healthcare industry may affect the Company. Certain of the Company's
products are subject to government regulation in the United States and other
countries. In the United States, the Food, Drug, and Cosmetic Act, as amended
(the "FDC Act"), and other statutes and regulations govern or influence the
testing, manufacture, safety, labeling, storage, record keeping, marketing,
advertising and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notices and criminal
prosecution. Under the FDC Act, the Company, as a marketer, distributor and
manufacturer of healthcare products, is required to obtain the approval of
Federal and foreign governmental agencies, including the Food and Drug
Administration ("FDA"), prior to marketing, distributing and manufacturing
certain of those products. Delays in receipt of or failure to receive required
approvals or clearances, the loss of previously received approvals or
clearances, or failures to comply with existing or future regulatory
requirements in the United States or in foreign countries could have a material
adverse effect on the Company's business. Foreign sales are subject to similar
pre-marketing requirements.
The Company is required to comply with the FDA's "Good Manufacturing
Practices for Medical Devices" ("GMP") regulations which sets forth requirements
for, among other things, the Company's manufacturing process and associated
record creation and maintenance, including tests and sterility. Further, the
Company's plants and operations are subject to review and inspection by local,
state, Federal and foreign governmental entities. The FDA also has the authority
to issue performance standards for devices manufactured by the Company, which it
has not done to date. In the event that such performance standards were issued,
the Company's products would be required to conform, which could result in
significant additional expenditures for the Company. The impact of FDA
regulation on the Company has increased in recent years as the Company has
increased its manufacturing operations. The Company's suppliers are also subject
to similar governmental requirements. There can be no assurance that changes to
current regulations or additional regulations imposed by the FDA will not have
an adverse impact on the Company's business and financial condition in the
future.
In addition, the Company is subject to a variety of other federal and state
regulations, including, but not limited to, those administered by the U.S.
Department of Labor and the U.S. Occupational Safety and Health Administration.
See "Business -- Governmental Regulation."
REIMBURSEMENT OF HEALTHCARE COSTS
In certain cases, the ability of the Company's customers to pay for the
products supplied by the Company depends upon governmental and private insurer
reimbursement policies. Consequently, those policies have an impact on the level
of the Company's sales and its ability to collect receivables on a timely basis.
Continuing
16
<PAGE> 17
governmental and private third-party payor cost-cutting efforts have led and may
continue to lead to significant reduction in reimbursement levels. Furthermore,
governmental reimbursement programs, such as the Medicare and Medicaid programs,
are subject to substantial regulation by Federal and state governments, which
are continually reviewing and revising the programs and their regulations. For
example, the Balanced Budget Act of 1997 provides for a five-year freeze through
2002 on updates to the Medicare fee reimbursement schedules for durable medical
equipment. Although the Company does not believe that this freeze would have a
material adverse effect on the Company, there can be no assurance that this or
any other change to reimbursement levels will not have a material adverse effect
on the Company.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's profitability depends in part on its ability to establish and
maintain patent protection of its proprietary technologies, products and
processes, and the preservation of its trade secrets. In addition, the Company
must operate without infringing upon the proprietary rights of other parties.
There can be no assurance that any United States or international patents issued
or licensed to the Company will not be successfully challenged, invalidated or
circumvented or will provide commercially significant protection to the Company,
or that patents will be issued in respect of patent applications to which the
Company currently holds rights. In addition, there can be no assurance that
others will not independently develop substantially equivalent proprietary
information not covered by patents to which the Company owns rights or obtain
access to the Company's know-how or that others will not be issued patents which
may prevent the sale of one or more of the Company's products or require
licensing and the payment of significant fees by the Company in order to enable
the Company to conduct its business. The Company is involved in the ordinary
course of business in patent-related lawsuits or other actions, none of which
the Company believes is material. However, defense and prosecution of patent
claims is costly and time consuming, regardless of an outcome favorable to the
Company, and can result in the diversion of substantial financial and managerial
resources from the Company's primary business activities. Additionally, adverse
outcomes of such claims could have a material adverse effect on the Company's
business and financial condition.
RISK OF PRODUCT LIABILITY CLAIMS AND INSURANCE
The sale, manufacture and distribution of healthcare products involve an
inherent risk of product liability claims and related adverse publicity. There
can be no assurance that the Company will not become subject to a significant
number of such claims or incur significant liabilities due to such claims.
Although the Company maintains product liability insurance coverage and has
certain rights to indemnification from third parties, there can be no assurance
that claims outside of or exceeding such coverage will not be made, that the
Company will be able to continue to obtain insurance coverage at commercially
reasonable costs or at all or that the Company will be successful in obtaining
indemnification from such third parties. Potential losses from liability claims
and the effect which product liability litigation may have on the reputation and
marketability of the Company's products could have a material adverse effect on
the Company's business and financial condition.
COST OF SHIPPING
Shipping is a significant expense in the operation of the Company's
business. The Company ships its products to customers generally by United Parcel
Service and other delivery services and typically bears certain costs of
shipment. Accordingly, any significant increase in shipping rates could have an
adverse effect on the Company's operating results. Similarly, strikes or other
service interruptions by such shippers could adversely affect the Company's
ability to deliver products on a timely basis, which could have an adverse
effect on the Company's relationships with its customers.
DEPENDENCE ON AND NEED FOR KEY PERSONNEL
Due to the specialized nature of its business, the Company is dependent
upon the continued services and management of its Chairman of the Board and
Chief Executive Officer, Irwin Selinger, and the other executive officers listed
in the table under "Management." Although the Company believes it has incentive
17
<PAGE> 18
and compensation programs designed to retain key executives, the Company
generally does not have contracts with its executive officers other than Mr.
Selinger. In July 1981, Mr. Selinger entered into a ten-year employment
agreement with the Company, which was extended in June 1991 for a five-year
period ending July 8, 1996, and on May 3, 1996 for an additional five-year
period ending July 8, 2001. The employment agreement provides, among other
things, that if Mr. Selinger's employment is terminated for any reason (other
than dishonesty or disability), the Company shall pay (i) to Mr. Selinger if he
is then living, (ii) to his surviving widow if the employment agreement
terminates by reason of death, or (iii) to Mr. Selinger's legal representative
if Mr. Selinger leaves no surviving widow, or if Mr. Selinger's surviving widow
dies prior to the fulfillment of the Company's obligations, as the case may be,
an amount equal to Mr. Selinger's annual salary payable in the year of
termination multiplied by the number, including any fraction, of years from the
date of termination to the end of the employment term. In addition, Mr.
Selinger's employment agreement provides that during the employment term and for
a period of one year following termination of employment, if termination occurs
as a result of a breach of the employment agreement by Mr. Selinger, Mr.
Selinger will not directly or indirectly engage in any business or invest in any
privately held company or own more than one percent of the outstanding
securities of any publicly owned corporation which competes with any business of
the Company. The Company also does not maintain key-man insurance with respect
to any of its executive officers. If Mr. Selinger or any of such other executive
officers were to leave the Company, operating results could be adversely
affected. In addition, the Company's continued growth is dependent upon its
ability to attract and retain skilled employees. There can be no assurance that
the Company will be successful in recruiting and retaining personnel of the
requisite calibre or quantity to enable the Company to conduct its business as
planned.
CURRENCY FLUCTUATIONS; RISKS RELATING TO INTERNATIONAL OPERATIONS
A portion of the Company's operations are conducted outside the United
States. As a result of its international operations, the Company is subject to
risks associated with operating in foreign countries, including devaluations and
fluctuations in currency exchange rates, imposition of limitations on
conversions of foreign currencies into dollars or remittance of dividends and
other payments by foreign subsidiaries, imposition or increase of withholding
and other taxes on remittances and other payments by foreign subsidiaries, trade
barriers, political risks, including political instability, hyperinflation in
certain foreign countries and imposition or increase of investment and other
restrictions by foreign governments. There can be no assurance that such risks
will not have a material adverse effect on the Company's business and operating
results.
POTENTIAL INABILITY TO EFFECT A CHANGE OF CONTROL OFFER OR AN ASSET SALE OFFER
A Change of Control would require the Company to refinance substantial
amounts of indebtedness. Upon a Change of Control, the holders of the Notes
would be entitled to require the Company to repurchase their Notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the repurchase date. In addition,
certain asset sales by the Company will require the Company to make an offer to
repurchase Notes with the proceeds of such asset sales at a purchase price equal
to 100% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, to the repurchase date. However, the Credit Facility
prohibits the purchase of the Notes by the Company unless and until the
indebtedness under the Credit Facility is repaid in full and the Credit Facility
has been terminated. The Company's failure to purchase the Notes would result in
a default under the Indenture and the Credit Facility. The inability to repay
the indebtedness under the Credit Facility, if accelerated, would also
constitute an event of default under the Indenture, which could have adverse
consequences to the Company and the holders of the Notes. In such event, there
can be no assurance that the Company would have sufficient assets to satisfy all
of its obligations under the Credit Facility and the Notes. See "Description of
Notes -- Repurchase at the Option of Holders."
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<PAGE> 19
FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER
If the court in a lawsuit brought by an unpaid creditor or representative
of creditors, such as a trustee in bankruptcy or the Company or a Guaranteeing
Subsidiary, as the case may be, as a debtor-in-possession, were to find under
relevant Federal or state fraudulent conveyance statutes that the Company or
Guaranteeing Subsidiary, as the case may be, did not receive fair consideration
or reasonably equivalent value for incurring the indebtedness represented by the
Notes or the Subsidiary Guarantees and that, at the time of such incurrence, the
Company or such Guaranteeing Subsidiary (i) was insolvent, (ii) was rendered
insolvent by reason of such incurrence, (iii) was engaged in a business or
transaction for which the assets remaining with the Company or such Guaranteeing
Subsidiary constituted unreasonably small capital or (iv) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, such court, subject to applicable statutes of limitation, could avoid
the Company's obligations under the Notes or such Guaranteeing Subsidiary's
obligations under its Subsidiary Guarantee, subordinate the Notes or such
Subsidiary Guarantee to other indebtedness of the Company or such Guaranteeing
Subsidiary or take other action detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all that company's property at a fair valuation, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could avoid an
incurrence of indebtedness, including the Notes or a Subsidiary Guarantee, if it
determined that such transaction was made with intent to hinder, delay or
defraud creditors, or a court could subordinate the indebtedness, including the
Notes or a Subsidiary Guarantee, to the claims of all existing and future
creditors on similar grounds. Based upon financial and other information
currently available to it, management believes the Company and each Guaranteeing
Subsidiary is solvent. However, there can be no assurance as to what standard a
court would apply in order to determine whether the Company or a Guaranteeing
Subsidiary was "insolvent" upon consummation of the sale of the Notes and the
granting of the Subsidiary Guarantees.
Additionally, under Federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or a Guaranteeing Subsidiary within 90 days after any payment by the
Company with respect to the Notes or any payment by a Guaranteeing Subsidiary
with respect to its Subsidiary Guarantee or if the Company or a Guaranteeing
Subsidiary anticipated becoming insolvent at the time of such payment, all or a
portion of such payment could be avoided as a preferential transfer and the
recipient of such payment could be required to return such payment.
UNSPECIFIED USE OF PROCEEDS
In addition to repayment of certain indebtedness under the Credit Facility
and the repayment in full of the BIL Senior Loan (as defined herein), the
Company intends to use the net proceeds from the Initial Offering for general
corporate purposes, including the possible acquisition of one or more
businesses, the opening of additional Graham-Field Express facilities and
strategic alliances. However, a final determination of the use of such proceeds
has not been made. See "Use of Proceeds of Old Notes." Thus, management and the
Board of Directors of the Company will be able to determine the specific uses
for such proceeds without first seeking approval from the Company's
stockholders, unless such approval is required by law.
ABSENCE OF PUBLIC MARKET; TRANSFER RESTRICTIONS
There is no existing market for the New Notes, and there can be no
assurance as to the liquidity of any markets that may develop for the New Notes,
the ability of holders of the New Notes to sell their New Notes or the price at
which such holders would be able to sell the New Notes. Future trading prices of
the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. Historically, the market for securities similar to the New
Notes, including non-investment grade debt, has been subject to disruptions that
have caused substantial volatility in the prices of such securities. There can
be no assurance that any market for the New Notes, if
19
<PAGE> 20
such market develops, will not be subject to similar disruptions. The Initial
Purchaser has advised the Company that it currently intends to make a market in
the New Notes. However, the Initial Purchaser is not obligated to do so and any
market making may be discontinued at any time without notice. Notwithstanding
the registration of the New Notes in the Exchange Offer, holders who are
"affiliates" (as defined under Rule 405 of the Securities Act) of the Company
may publicly offer for sale or resell the New Notes only in compliance with the
provisions of Rule 144 under the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE; POSSIBLE ADVERSE EFFECT ON TRADING MARKET
FOR OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Notes as set forth in the legend thereon as a consequence of
the issuance of the Old Notes pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act and applicable state laws, or
pursuant to an exemption therefrom. Subject to the obligation by the Company to
file a Shelf Registration Statement covering resales of Old Notes in certain
circumstances, the Company does not intend to register the Old Notes under the
Securities Act and, after consummation of the Exchange Offer, will not be
obligated to do so. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes may be deemed to have received restricted securities and, if so, will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Additionally, as a
result of the Exchange Offer, it is expected that a substantial decrease in the
aggregate principal amount of Old Notes outstanding will occur. As a result, it
is unlikely that a liquid trading market will exist for the Old Notes at any
time. This lack of liquidity will make transactions more difficult and may
reduce the trading price of the Old Notes. See "The Exchange Offer" and "Old
Notes; Registration Rights."
USE OF PROCEEDS OF NEW NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the New Notes offered hereby. In consideration
for issuing the New Notes as contemplated in this Prospectus, the Company will
receive, in exchange, Old Notes in like principal amount. The form and terms of
the New Notes are identical in all material respects to the form and terms of
the Old Notes, except as otherwise described herein under "The Exchange
Offer -- Terms of the Exchange Offer." The Old Notes surrendered in exchange for
the New Notes will be retired and cancelled and cannot be reissued. Accordingly,
issuance of the New Notes will not result in any increase in the outstanding
debt of the Company.
USE OF PROCEEDS OF OLD NOTES
The net proceeds to the Company from the sale of the Old Notes, after
deducting fees and expenses payable by the Company in connection with the
Initial Offering, were approximately $95.5 million. The Company has used
approximately $52.7 million of the net proceeds from the Initial Offering to
repay a portion of the outstanding indebtedness under the Credit Facility and
$5.0 million of the net proceeds from the Initial Offering to repay in full the
BIL Senior Loan. See "Description of Credit Facility" and "Certain
Transactions -- BIL Loans" for a description of the terms of the Credit Facility
and the BIL Senior Loan. The Company used the remaining proceeds of
approximately $37.8 million for general corporate purposes, including funding
for acquisitions, the opening of additional Graham-Field Express facilities and
strategic alliances.
RECENT DEVELOPMENTS
On September 5, 1997, the Company entered into an Agreement and Plan of
Merger (the "Fuqua Merger Agreement") to acquire Fuqua. The acquisition was
completed on December 30, 1997. Fuqua,
20
<PAGE> 21
through its subsidiaries, is a manufacturer of a variety of medical products for
the acute, long-term and home healthcare markets (the "Medical Products
Operations"). The Medical Products Operations were formed through the
acquisition of three businesses: Basic American Medical Products, Inc., a
leading manufacturer and supplier of beds and patient room furnishings to the
long-term care industry; the medical products operations of Lumex Medical
Products, Inc., a leading manufacturer and supplier of patient aids, specialty
seating products, bathroom safety products and durable medical products to the
home healthcare industry; and Prism Enterprises, Inc., which produces heat and
cold packs as well as obstetrical vacuum pumps. Fuqua also produces a broad line
of leathers that are sold to manufacturers of shoes, handbags, personal leather
goods and furniture in both the United States and foreign markets (the "Leather
Operations"). Although the Company considers the Leather Operations an asset, it
intends to dispose of the Leather Operations as soon as reasonably practicable.
See "Pro Forma Combined Condensed Financial Information".
Pursuant to the Fuqua Merger Agreement, a wholly-owned subsidiary of the
Company was merged with and into Fuqua with Fuqua continuing as the surviving
corporation wholly owned by the Company (the "Merger"). In the Merger,
stockholders of Fuqua received 2.1 shares (the "Exchange Ratio") of the
Company's common stock, par value $.025 per share ("Common Stock") in a tax-free
exchange for each share of common stock of Fuqua ("Fuqua Common Stock"). At the
effective time of the Merger, there were 4,482,709 shares of Fuqua Common Stock
outstanding. The Company also assumed approximately $64 million of debt in the
Merger. The Company will account for the transaction as a purchase. See "Pro
Forma Combined Condensed Financial Information" and "Index to Financial
Statements -- Fuqua Enterprises, Inc."
Fuqua's business, operations, properties and management were described in
detail under the heading "Certain Information Concerning Fuqua" in the Proxy
Statement/Consent Solicitation Statement/Prospectus dated December 19, 1997
furnished to stockholders of Graham-Field and Fuqua in connection with their
approval of the Merger and forming a part of Graham-Field's Registration
Statement on Form S-4/A (Reg. No. 333-42561), which description is hereby
incorporated by reference herein and made a part hereof. With respect to the
Medical Products Operations, the Company intends to integrate and consolidate
certain of the combined entity's manufacturing operations. Fuqua's Prism
Enterprises, Inc. and Basic American Medical Products, Inc. operations will
continue to operate as stand-alone entities. The home healthcare and
medical/surgical business units of Fuqua will become fully-integrated with the
Company's business units, and the long-term care medical products business will
continue to operate at a separate business unit through Fuqua's Basic
operations. It is anticipated that each of the manufacturing facilities of the
combined entity will operate through the Company's distribution network. In
connection with the Merger, Fuqua's name was changed to "Lumex/Basic American
Holdings, Inc."
The Company believes that the Merger will position the Company as one of
the leading suppliers of durable medical products in the healthcare industry.
The Company's distribution network and advanced technology systems will provide
significant growth opportunities for Fuqua's proven manufacturing capabilities
and well-established product lines. With a long history of providing customers
with quality healthcare products, the Basic American, Lumex and Prism names are
established brands representing leading names to long-term, home health and
acute care customers. Fuqua is among the leading suppliers of many of its
product lines, including long-term care medical beds, specialty seating
products, bathroom safety products, vacuum pumps and heat and cold packs. Basic
American is one of the leading single source providers of patient room
furnishings in the United States. Integration and cross-selling opportunities
between the companies will present significant growth opportunities for the
Company. Moreover, the Company will be able to use existing relationships of
Fuqua to cross-sell products to nursing home care customers, a virtually
untapped marketplace for the Company.
Prior to the consummation of the Merger, Fuqua was subject to the
informational requirements of the Exchange Act and in accordance therewith,
filed reports and other information with the Commission. Such reports and other
information can be inspected and copied or obtained at the addresses of the
Commission set forth under "Available Information" above.
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<PAGE> 22
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company at September 30, 1997, and as adjusted to give effect to the
Merger. This table should be read in conjunction with the Company's consolidated
financial statements and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
PRO FORMA
ACTUAL COMBINED(1)
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents............................................. $ 5,682 $ 7,650
======== ========
Short-term debt:
Current maturities of long-term debt................................ 2,054 2,434
Total short-term debt....................................... $ 2,054 $ 2,434
======== ========
Long-term debt, less current maturities:
Long-term debt...................................................... $ 8,440 $ 61,906
Senior Subordinated Notes........................................... 100,000 100,000
-------- --------
Total long-term debt........................................ $108,440 $ 161,906
======== ========
Stockholders' equity:
Series A preferred stock, par value $.01 per share: authorized
shares 300,000, none issued...................................... $ -- $ --
Series B preferred stock, par value $.01 per share: authorized
shares 6,100, issued and outstanding 6,100....................... 28,200 28,200
Series C preferred stock, par value $.01 per share: authorized
shares 1,000, issued and outstanding 1,000....................... 3,400 3,400
Common stock, par value $.025 per share: authorized shares
60,000,000, issued and outstanding 21,155,691 and 30,569,380..... 530 777
Additional paid-in capital.......................................... 115,702 280,145
(Deficit)........................................................... (11,548) (11,548)
Unrealized gain on marketable securities............................ 72 72
Cumulative translation adjustment................................... 61 61
-------- --------
Subtotal............................................................ 136,417 301,107
Notes receivable from sale of shares................................ (159) (159)
-------- --------
Total stockholders' equity....................................... 136,258 300,948
-------- --------
Total capitalization........................................ $244,698 $ 462,854
======== ========
</TABLE>
- ---------------
(1) See "Unaudited Pro Forma Combined Condensed Financial Information -- Pro
Forma Combined Condensed Balance Sheet."
22
<PAGE> 23
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
As a condition to the purchase of the Old Notes by the Initial Purchaser,
the Company entered into the Registration Rights Agreement with the Initial
Purchaser pursuant to which the Company agreed (i) to file, no later than
October 3, 1997, a registration statement (the "Exchange Offer Registration
Statement") with respect to an offer to exchange the Old Notes for New Notes of
the Company with terms substantially identical to the Old Notes, (ii) to use
best efforts to cause the Exchange Offer Registration Statement to become
effective under the Securities Act no later than December 2, 1997 and (iii) to
consummate the Exchange Offer no later than 30 days following the date on which
the Exchange Offer Registration Statement becomes effective. In the event that
applicable law or interpretations of the staff of the Commission do not permit
the Company to file the registration statement containing this Prospectus or to
effect the Exchange Offer, or if certain holders of the Old Notes notify the
Company that they are not permitted to participate in, or would not receive
freely tradeable New Notes pursuant to, the Exchange Offer, the Company will use
its best efforts to cause to become effective a Shelf Registration Statement
with respect to the resale of the Old Notes and to keep the Shelf Registration
Statement effective until two years after the effective date thereof. The Old
Notes are subject to the payment of Liquidated Damages (as defined herein) under
certain circumstances if the Company is not in compliance with its obligations
under the Registration Rights Agreement. See "Old Notes; Registration Rights."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company
or, if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. See "Old
Notes; Registration Rights."
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer with the
intention or for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K under the
Securities Act. This Prospectus may be used for an offer to resell, resale or
other retransfer of New Notes only as specifically set forth herein. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not withdrawn prior to
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<PAGE> 24
5:00 p.m., New York City time, on the Expiration Date. The Company will issue
$1,000 principal amount of New Notes in exchange for each $1,000 principal
amount of outstanding Old Notes surrendered pursuant to the Exchange Offer. Old
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the New Notes will be registered under the Securities
Act and hence will not bear legends restricting the transfer thereof. The New
Notes will evidence the same debt as the Old Notes. The New Notes will be issued
under and entitled to the benefits of the Indenture, which also authorized the
issuance of the Old Notes, such that both series will be treated as a single
class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $100 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will be
no fixed record date for determining registered holders of Old Notes entitled to
participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Old Notes which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Old Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the New Notes from the Company.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions specified below under
"-- Certain Conditions to the Exchange Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on
February 9, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"-- Certain Conditions to the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of Old Notes. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the
24
<PAGE> 25
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 9 3/4% per annum, payable
semi-annually, on each February 15 and August 15, commencing February 15, 1998.
Holders of New Notes will receive interest on February 15, 1998 from the date of
initial issuance of the New Notes, plus an amount equal to the accrued interest
on the Old Notes from the date of initial issuance thereof to the date of
exchange thereof for New Notes. Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Exchange Agent. During any such
extensions, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above. The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the Old Notes as
promptly as practicable, such notice in the case of any extension to be issued
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time or
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time or from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA").
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such
25
<PAGE> 26
Letter of Transmittal or such facsimile to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. In addition, either (i) Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at the Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below must be received by the Exchange Agent on or prior to the Expiration Date,
or (iii) the holder must comply with the guaranteed delivery procedures
described below. To be tendered effectively, the Letter of Transmittal and other
required documents must be received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on
the Expiration Date.
The tender by a holder which is not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Old Notes to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder of Old Notes. The transfer of registered
ownership may take considerable time and may not be able to be completed prior
to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
below) unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter Transmittal or a notice of withdrawal, as the case may be, are required
to be guaranteed, such guarantor must be a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
26
<PAGE> 27
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Old Notes or a timely Book-Entry Confirmation of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility,
a properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Old Notes are not accepted for exchange for
any reason set forth in the terms and conditions of the Exchange offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of the Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the address
set forth below under " -- Exchange Agent" on or prior to 5:00 p.m., New York
City time, on the Expiration Date or, if the guaranteed delivery procedures
described below are to be complied with, within the time period provided under
such procedures. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and
27
<PAGE> 28
guaranteeing that, within three (3) New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the Old Notes or a Book-Entry Confirmation, as the case may
be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except an otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
" -- Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes were registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the BookEntry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
28
<PAGE> 29
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Facsimile By Hand:
American Stock Transfer Transmission: American Stock Transfer
& Trust Company (718)234-5001 & Trust Company
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005
To Confirm Receipt of
Facsimile and For General
Information:
(212) 936-5100
(718) 921-8200
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone or in person by officers and regular employees of the
Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Old Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of Notes tendered, or if tendered Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws.
29
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following selected consolidated financial information with respect to
the Company's financial position as of December 31, 1995 and 1996, and its
results of operations for the years ended December 31, 1994, 1995 and 1996, has
been derived from the audited consolidated financial statements of the Company
appearing elsewhere in this Prospectus. The selected consolidated financial
information with respect to the Company's financial position as of December 31,
1992, 1993 and 1994 and with respect to the Company's results of operations for
the years ended December 31, 1992 and 1993, has been derived from audited
consolidated financial statements of the Company that are not included in this
Prospectus. The selected financial information for the nine months ended
September 30, 1996 and 1997 has been derived from the unaudited condensed
consolidated financial statements of the Company appearing elsewhere in this
Prospectus, which in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
information set forth therein. The results for the nine months ended September
30, 1997 are not necessarily indicative of results that may be expected for the
full year. The selected consolidated financial information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Medical equipment and supplies.... $91,626 $101,526 $105,951 $112,113 $143,083 $100,674 $189,515
Interest and other income......... 771 81 75 301 559 537 759
------- ------- ------- -------- -------- ------- --------
92,397 101,607 106,026 112,414 143,642 101,211 190,274
Costs and expenses:
Cost of revenues.................. 61,334 72,537 74,079 78,525 99,641 69,203 128,100
Selling, general and
administrative.................. 24,799 31,078 31,964 29,428 34,578 25,678 43,976
Interest expense.................. 1,727 2,447 2,697 2,720 2,578 1,962 4,557
Purchased in-process research &
development costs(1)............ -- -- -- -- 12,800 -- --
Merger related charges(1)......... -- -- -- -- 3,000 -- --
Reorganization charge(2).......... 1,640 -- -- -- -- -- --
------- ------- ------- -------- -------- ------- --------
89,500 106,062 108,740 110,673 152,597 96,843 176,633
------- ------- ------- -------- -------- ------- --------
Income (loss) before income taxes
(benefit), extraordinary item and
cumulative effect of change in
accounting principle.............. 2,897 (4,455) (2,714) 1,741 (8,955) 4,368 13,641
Income taxes (benefit).............. 1,092 (1,418) (735) 694 2,918 1,943 5,395
------- ------- ------- -------- -------- ------- --------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle.... 1,805 (3,037) (1,979) 1,047 (11,873) 2,425 8,246
Extraordinary loss on early
retirement of debt (net of tax
benefit of $383)(3)............... -- -- -- -- (736) -- --
Cumulative effect of change in
accounting principle.............. -- 530 -- -- -- -- --
------- ------- ------- -------- -------- ------- --------
Net income (loss)................... 1,805 (2,507) (1,979) 1,047 (12,609) 2,425 8,246
Preferred stock dividends........... -- -- -- -- -- -- 799
------- ------- ------- -------- -------- ------- --------
Net income (loss) available to
common stockholders............... $ 1,805 $ (2,507) $ (1,979) $ 1,047 $(12,609) $ 2,425 $ 7,447
======= ======= ======= ======== ======== ======= ========
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Gross margin(4)..................... 33.1% 28.6% 30.1% 29.9% 30.4% 31.3% 32.4%
Depreciation and amortization....... $ 2,327 $ 3,136 $ 3,531 $ 3,347 $ 3,539 $ 2,487 $ 4,700
EBITDA(5)........................... $ 7,820 $ 1,047 $ 3,439 $ 7,507 $ 12,403 $ 8,280 $ 22,139
Capital expenditures................ $ 1,821 $ 762 $ 1,123 $ 709 $ 1,085 $ 762 $ 3,637
Ratio of EBITDA to interest
expense(5)........................ 4.5x .4x 1.3x 2.8x 4.8x 4.2x 4.9x
Ratio of earnings to fixed
charges(6)........................ 3.2x N/A N/A 1.6x 3.3x 3.0x 3.8x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 2,777 $ 388 $ 104 $ 226 $ 1,241 $ 596 $ 5,682
Working capital..................... 33,988 29,997 29,389 35,061 14,064 36,600 115,172
Total assets........................ 100,043 99,891 102,454 103,011 207,194 112,694 293,048
Long-term debt (including capital
leases due after one year)........ 21,950 22,719 22,107 20,462 6,535 18,067 108,440
Stockholders' equity................ 59,636 57,697 56,152 60,970 114,503 62,431 136,258
</TABLE>
- ---------------
(1) During 1996, the Company recorded charges of $15,800,000 related to the
acquisition of Everest & Jennings. The charges included $12,800,000
associated with the write-off of purchased in-process research and
development costs and $3,000,000 of merger expenses. See Note 2 of Notes to
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
(2) The results of operations for 1992 include a reorganization charge relating
primarily to the implementation and opening of the Company's distribution
center located in St. Louis, Missouri (the "St. Louis Facility").
(3) The extraordinary item is related to the early retirement of the John
Hancock Indebtedness and represents a "make-whole" payment and the write-off
of unamortized deferred financing costs associated with this indebtedness.
See Note 8 of Notes to Consolidated Financial Statements of the Company
included elsewhere in this Prospectus.
(4) Represents (i) net revenue from medical equipment and supplies net revenue
minus cost of revenues as a percentage of (ii) net revenue from medical
equipment and supplies net revenue.
(5) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges, interest and other
income and extraordinary items. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring a
company's ability to service its debt; however, EBITDA does not represent
cash flow from operations, as defined by generally accepted accounting
principles, and should not be considered as a substitute for net earnings as
an indicator of the Company's operating performance or cash flow as a
measure of liquidity.
(6) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from operations before income taxes, non-recurring items and
extraordinary items plus fixed charges. Fixed charges include interest
expense, amortization of debt issuance costs and the estimated interest
component of rent expense. Earnings did not cover fixed charges during the
following periods by the following amounts: 1993 -- $4,455,000 and
1994 -- $2,714,000.
31
<PAGE> 32
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF
GRAHAM-FIELD HEALTH PRODUCTS, INC.
The following unaudited pro forma combined condensed financial information
reflects financial information with respect to (1) the merger (the "Merger") of
a wholly-owned subsidiary of Graham-Field with and into Fuqua Enterprises, Inc.
("Fuqua") on December 30, 1997, (2) Graham-Field's acquisitions of (i) Everest &
Jennings International Ltd. ("Everest & Jennings") on November 27, 1996 (the
"Everest & Jennings Acquisition"), (ii) V.C. Medical Distributors, Inc. ("V.C.
Medical") on September 4, 1996 (the "V.C. Medical Acquisition"), (iii) Motion
2000 Inc. ("Motion 2000") and Motion 2000 Quebec Inc. ("Motion Quebec" and,
together with Motion 2000, the "Motion 2000 Companies") on February 28, 1997,
(iv) Kuschall of America, Inc. ("Kuschall") on March 7, 1997, (v) LaBac Systems,
Inc. ("LaBac") on June 25, 1997, and (vi) Medi-Source, Inc. ("Medi-Source") on
August 21, 1997 (the acquisitions, other than the Everest & Jennings Acquisition
and the V.C. Medical Acquisition, in this clause (2) are collectively referred
to as the "Other Recent 1997 Acquisitions"; the Other Recent 1997 Acquisitions
and the V.C. Medical Acquisition are collectively referred to as the "Other
Recent Acquisitions"; and the Other Recent Acquisitions, the Merger and the
Everest & Jennings Acquisition are collectively referred to as the
"Acquisitions"), and (3) the sale by Graham-Field of its Senior Subordinated
Note's due 2007 (the "Old Notes") completed on August 4, 1997 and application of
the net proceeds therefrom. See "-- Unaudited Pro Forma Combined Condensed
Financial Information of Fuqua Enterprises, Inc." for financial information with
respect to recent acquisitions completed by Fuqua.
The unaudited pro forma combined condensed financial information gives
effect to the adjustments described in the notes attached thereto. The
accompanying unaudited pro forma combined condensed balance sheet combines the
historical consolidated balance sheet of Graham-Field as of September 30, 1997
and the historical consolidated balance sheet of Fuqua, as if the Merger had
occurred on September 30, 1997. The accompanying unaudited pro forma combined
condensed statement of operations for the nine months ended September 30, 1997
combines the historical consolidated statements of operations of Graham-Field on
a pro forma basis with those of the Motion 2000 Companies, Kuschall, LaBac,
Medi-Source and Fuqua as if the Other Recent 1997 Acquisitions and the Merger
had occurred at January 1, 1997. The accompanying unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1996 combines
the historical consolidated statements of operations of Graham-Field on a pro
forma basis with those of V.C. Medical, Everest & Jennings, the Motion 2000
Companies, Kuschall, LaBac, Medi-Source and Fuqua as if the Acquisitions had
occurred at January 1, 1996. The historical consolidated statements of
operations of Graham-Field have been restated to reflect the acquisition of
Medical Supplies of America, Inc. ("Medapex") on August 28, 1997, which was
accounted for as a pooling of interests. The unaudited pro forma combined
condensed financial information, as adjusted, also gives effect to the
completion of the sale of the Old Notes and the use of proceeds therefrom.
As a result of the Merger, the management of Graham-Field anticipates that
the combined entity will achieve significant cost savings and economies of
scale. Graham-Field has plans to eliminate certain duplicate distribution and
manufacturing centers and make reductions in general and administrative expenses
where duplicate functions are being performed. In addition, Graham-Field
anticipates that certain enhancements will be achieved as a result of the
Merger, including an improvement in the gross profit margin associated with the
combined entities' sale of patient aids and bathroom accessories, and
cross-selling opportunities between the companies which may present growth
opportunities for Graham-Field. Furthermore, the management of Graham-Field
believes that it will be able to eliminate a significant amount of the
indebtedness of Fuqua through cash available to Graham-Field and the proceeds to
be derived from the contemplated disposition of the Leather Operations.
The unaudited pro forma combined condensed statements of operations do not
reflect potential (i) cost savings associated with Fuqua's on-going
rationalization of its production and distribution facilities, (ii) synergistic
benefits and enhancements relating to the elimination of duplicate distribution
and manufacturing centers, (iii) reduction of general and administrative
expenses of the combined entity anticipated by
32
<PAGE> 33
Graham-Field's management, (iv) enhancements including an improvement in the
gross profit margin associated with the combined entities' sale of patient aids
and bathroom accessories, (iv) cross-selling opportunities between the companies
which may present growth opportunities for Graham-Field, and (v) interest
savings from the elimination of a significant amount of Fuqua indebtedness
through cash available to Graham-Field and proceeds to be derived from the
contemplated disposition of the Leather Operations. In addition, the unaudited
pro forma combined condensed statement of operations for the year ended December
31, 1996 does not reflect any cost savings, synergistic benefits and
enhancements realized by (i) Graham-Field in connection with the Everest &
Jennings Acquisition for the period prior to November 27, 1996 and (ii) Fuqua in
connection with its acquisition of the Lumex Division for the period prior to
its acquisition on April 3, 1996.
The unaudited pro forma combined condensed financial information is not
necessarily indicative of Graham-Field's financial position or the results of
operations that actually would have occurred if the transactions described above
had occurred on the dates indicated or for any future period or date. The
unaudited pro forma adjustments give effect to available information and
assumptions that Graham-Field believes are reasonable. The unaudited pro forma
combined condensed financial information should be read in conjunction with
Graham-Field's and Fuqua's historical consolidated financial statements and the
notes thereto appearing elsewhere herein. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Index to
Financial Statements."
33
<PAGE> 34
GRAHAM-FIELD HEALTH PRODUCTS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA PRO FORMA
GRAHAM-FIELD FUQUA ADJUSTMENTS COMBINED
------------ -------- ----------- ---------
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents.............. $ 5,682 $ 2,072 $ (104)[a] $ 7,650
Marketable securities.................. 12,832 -- -- 12,832
Accounts receivable -- net............. 74,770 42,419 (24,766)[a] 92,423
Inventories............................ 60,314 46,433 (29,558)[a] 77,189
Other current assets................... 8,146 3,594 (689)[a] 11,051
Recoverable and prepaid income taxes... 256 -- -- 256
Deferred tax asset..................... -- 4,802 460[a] 5,262
-------- -------- -------- --------
Total Current Assets................ 162,000 99,320 (54,657) 206,663
Property, plant and equipment -- net... 14,801 34,164 (12,831)[a] 36,134
Excess of cost over net assets
acquired -- net..................... 103,232 37,655 86,026[b] 226,913
Other Assets........................... 13,015 1,746 (1,547)[a] 13,214
Discontinued operations................ -- 3,637 (3,637)[a] --
Assets held for sale................... -- -- 75,652[a] 75,652
-------- -------- -------- --------
Total Assets................... $293,048 $176,522 $ 89,006 $ 558,576
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt... $ 2,054 $ 589 $ (209)[a] $ 2,434
Accounts payable....................... 22,945 26,905 (7,913)[a] 41,937
Accrued expenses....................... 21,829 -- 28,000[c] 49,829
-------- -------- -------- --------
Total Current Liabilities........... 46,828 27,494 19,878 94,200
Long-term debt......................... 8,440 54,444 (978)[a] 61,906
Senior subordinated notes.............. 100,000 -- -- 100,000
Other long-term liabilities............ 1,522 -- -- 1,522
-------- -------- -------- --------
Total Liabilities.............. 156,790 81,938 18,900 257,628
STOCKHOLDERS' EQUITY
Series A preferred stock............... -- -- -- --
Series B preferred stock............... 28,200 -- -- 28,200
Series C preferred stock............... 3,400 -- -- 3,400
Common stock........................... 530 11,322 (11,075)[d] 777
Additional paid-in capital............. 115,702 24,902 139,541[d] 280,145
(Deficit) retained earnings............ (11,548) 59,233 (59,233)[d] (11,548)
Unrealized gain on marketable
securities.......................... 72 -- -- 72
Cumulative translation adjustment...... 61 -- -- 61
-------- -------- -------- --------
Subtotal............................... 136,417 95,457 69,233 301,107
Treasury stock......................... -- (873) 873[d] --
Notes receivable from sale of shares... (159) -- -- (159)
-------- -------- -------- --------
Total Stockholders' Equity..... 136,258 94,584 70,106 300,948
-------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $293,048 $176,522 $ 89,006 $ 558,576
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed financial statements.
34
<PAGE> 35
NOTE 1: PURCHASE PRICE SUMMARY AND RELATED ALLOCATION OF MERGER
A summary of the estimated purchase price and related allocation, which
reflects the estimated proceeds from the disposal of the Leather Operations is
set forth below (amounts in thousands):
<TABLE>
<S> <C>
Estimated Purchase Price:
Issuance of 2.1 shares of Common Stock for each share of Fuqua Common
Stock(a)................................................................ $164,690
Estimated fees and expenses related to the Merger......................... 8,000
--------
Total Estimated Purchase Price............................................ $172,690
========
</TABLE>
<TABLE>
<CAPTION>
SALE OF
TOTAL LEATHER NET
FUQUA(c) OPERATIONS(b) ALLOCATION(d)
-------- ------------- -------------
<S> <C> <C> <C>
Allocation (based on estimated fair values):
Cash................................................. $ 2,072 $ (104) $ 1,968
Accounts and notes receivable, net................... 42,419 (24,766) 17,653
Inventory............................................ 46,433 (29,558) 16,875
Property, Plant & Equipment, net..................... 34,164 (12,831) 21,333
Previous excess of cost over net assets acquired..... 37,655 -- 37,655
Discontinued operations.............................. 3,637 (3,637) --
Other assets......................................... 10,142 (1,776) 8,366
Debt and capital leases.............................. 55,033 (1,187) 53,846
Accounts payable and accrued expenses................ 46,905 (7,913) 38,992
Excess of Purchase Price over net assets acquired.... 98,106 (12,080) 86,026
-------- -------- -------
$172,690 $ 75,652 $97,038
======== ======== =======
</TABLE>
- ---------------
a. As of September 30, 1997, there were 4,482,709 shares of Fuqua Common Stock
outstanding (not including shares underlying vested stock options), which
are to be exchanged into shares of Common Stock at the Exchange Ratio or a
total of approximately 9,413,689 shares of Common Stock. In addition, as of
September 30, 1997, there were 521,400 vested stock options (the "Fuqua
Stock Options") outstanding to purchase shares of Fuqua Common Stock. In
accordance with the terms of the Fuqua Merger Agreement, shares of Common
Stock will be issued in substitution for shares of Fuqua Common Stock upon
the exercise of the Fuqua Stock Options. The equivalent number of shares of
Common Stock to be issued, after giving effect to the option price of the
Fuqua Stock Options as adjusted for the Exchange Ratio in accordance with
the Fuqua Merger Agreement, is approximately 454,000 shares of Common Stock.
For purposes of calculating the purchase price, the Common Stock is valued
at $16.69 per share, which represents the average closing sales price of the
Common Stock for the period three business days immediately prior to and
three business days immediately after the announcement on September 8, 1997
of the execution of the Fuqua Merger Agreement.
b. It is Graham-Field's intention to dispose of the Leather Operations as soon
as reasonably practicable following the consummation of the Merger.
Accordingly, the net assets of the Leather Operations have been reflected as
"Assets Held for Sale" in the unaudited pro forma balance sheet. The net
asset value of the Leather Operations includes a portion of the excess of
the purchase price over the net assets acquired in connection with the
Merger, based upon the net proceeds of $73,000,000 expected to be realized
from the sale of the Leather Operations and the estimated net after tax
income of $2,652,000 expected to be earned by the Leather Operations for the
period between the consummation of the Merger and the anticipated date of
the disposal of the Leather Operations.
It is the expectation of the management of Graham-Field that the Leather
Operations will be disposed of within six months following the consummation
of the Merger. This expectation is based upon the advice of Graham-Field's
financial advisors. In calculating the portion of the excess of the purchase
price over the net assets acquired in connection with the Merger
attributable to the Leather Operations, manage-
35
<PAGE> 36
ment estimated the net proceeds to be received on the sale, based on a range
of sale prices provided by Graham-Field's financial advisors. The after tax
income expected to be earned by the Leather Operations for the six months
following the consummation of the Merger is based on internal budgets of
Fuqua.
c. Includes an accrual of $20,000,000 for the estimated income tax liability
related to the anticipated sale of the Leather Operations.
d. The net allocation is preliminary and does not reflect the fair value
adjustments to the Fuqua assets and liabilities, the potential charges for
the write-off of purchased in-process research and development costs and
merger-related costs, since such amounts are not able to be estimated at
this time. Graham-Field will determine the fair value of Fuqua's assets and
liabilities following the Effective Time of the Merger through independent
appraisals, which will include appraisals of real estate, patents and
trademarks and research and development projects of Fuqua. Graham-Field
intends to complete the valuation process prior to the filing of its Annual
Report on Form 10-K for the year ended December 31, 1997. These adjustments
could result in a material variation from the preliminary net allocation
presented in these pro forma financial statements.
NOTE 2: PRO FORMA ADJUSTMENTS
a. Adjustment to eliminate the assets of the Leather Operations and reflect the
operations as "Assets Held for Sale." See Note 1 to the pro forma combined
condensed balance sheet.
b. Adjustment to record the excess of the estimated purchase price over the net
assets acquired in connection with the Merger of $86,026,000, after the
elimination of the net assets of the Leather Operations.
c. Adjustment for accrued costs, including, but not limited to, investment
banking fees, legal fees, accounting and tax fees, due diligence expenses
and severance arrangements of approximately $8,000,000 related to the
Merger. Adjustment for the estimated income tax liability of approximately
$20,000,000 related to the sale of the Leather Operations by Graham-Field.
d. Adjustment to record the elimination of the equity of Fuqua of $94,584,000.
Adjustment to record the issuance of shares of Common Stock in connection
with the Merger valued at $164,690,000.
36
<PAGE> 37
GRAHAM-FIELD HEALTH PRODUCTS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (NOTE 3)
-------------------------- --------------------------------------------------------------------------
OTHER RECENT FUQUA
GRAHAM- 1997 PRO FORMA GRAHAM-FIELD FUQUA PRO FORMA PRO FORMA
FIELD ACQUISITIONS ADJUSTMENTS PRO FORMA PRO FORMA ADJUSTMENTS COMBINED
-------- -------------- ----------- ------------ --------- ----------- ---------
(NOTE 4) (NOTE 1) (NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Medical equipment and
supplies and product
revenue............. $189,515 $ 11,258 $ -- $200,773 $180,575 $(101,438)(a) $279,910
Interest and other
income.............. 759 -- -- 759 187 -- 946
-------- ------- ------- -------- -------- --------- --------
190,274 11,258 -- 201,532 180,762 (101,438) 280,856
-------- ------- ------- -------- -------- --------- --------
Costs and expenses:
Cost of revenues...... 128,100 6,124 -- 134,224 142,433 (89,766)(a) 186,891
Selling, general and
administrative...... 43,976 5,124 (264)(b,c,f) 48,836 27,702 (3,972)(a,b) 72,566
Interest expense...... 4,557 119 3,067(d,f) 7,743 2,627 10,370
-------- ------- ------- -------- -------- --------- --------
176,633 11,367 2,803 190,803 172,762 (93,738) 269,827
-------- ------- ------- -------- -------- --------- --------
Income (loss) from
continuing
operations before
income taxes........ 13,641 (109) (2,803) 10,729 8,000 (7,700) 11,029
Income taxes
(benefit)........... 5,395 -- (1,121)(e) 4,274 2,722 (2,159)(c) 4,837
-------- ------- ------- -------- -------- --------- --------
Income (loss) from
continuing
operations.......... 8,246 (109) (1,682) 6,455 5,278 (5,541) 6,192
Preferred stock
dividends........... 799 -- -- 799 -- -- 799
-------- ------- ------- -------- -------- --------- --------
Income (loss) from
continuing
operations available
to common
stockholders........ $ 7,447 $ (109) $(1,682) $ 5,656 $ 5,278 $ (5,541) $ 5,393
======== ======= ======= ======== ======== ========= ========
Per share data:
Income from continuing
operations per
common share
outstanding (Note
4g)................. $ .32 $ .24 $ 1.17 $ .17
======== ======== ======== ========
Weighted average
number of common and
common equivalent
shares
outstanding......... 25,888 566 26,454 4,530 5,338 36,322
======== ======= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed financial statements.
37
<PAGE> 38
GRAHAM-FIELD HEALTH PRODUCTS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (NOTE 3)
---------------------------------- --------------------------------------------------------------
OTHER FUQUA
GRAHAM- EVEREST & RECENT PRO FORMA GRAHAM-FIELD FUQUA PRO FORMA PRO FORMA
FIELD JENNINGS ACQUISITIONS ADJUSTMENTS PRO FORMA PRO FORMA ADJUSTMENTS COMBINED
-------- --------- ------------ ----------- ------------ --------- ----------- ---------
(NOTE 2) (NOTE 4) (NOTE 1) (NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Medical equipment and
supplies and product
revenue..................... $143,083 $ 61,403 $ 29,063 $(5,579)(a) $227,970 $208,252 $(107,832)(a) $328,390
Interest and other income.... 559 -- -- -- 559 1,815 (5)(a) 2,369
-------- ------- ------- ------- -------- -------- --------- --------
143,642 61,403 29,063 (5,579) 228,529 210,067 (107,837) 330,759
-------- ------- ------- ------- -------- -------- --------- --------
Costs and expenses:
Cost of revenues............. 99,641 51,992 17,837 (5,379)(a) 164,091 157,575 (89,092)(a) 232,574
Selling, general and
administrative.............. 34,578 19,879 10,463 1,621(b c,f) 66,541 43,066 (4,963) a,b) 104,644
Interest expense............. 2,578 4,250 281 3,848(d,f) 10,957 4,966 -- 15,923
Purchased in-process research
and development costs....... 12,800 -- -- -- 12,800 -- -- 12,800
Merger related charges....... 3,000 -- -- -- 3,000 -- -- 3,000
-------- ------- ------- ------- -------- -------- --------- --------
152,597 76,121 28,581 90 257,389 205,607 (94,055) 368,941
-------- ------- ------- ------- -------- -------- --------- --------
Income (loss) from continuing
operations before income
taxes (benefit)............. (8,955) (14,718) 482 (5,669) (28,860) 4,460 (13,782) (38,182)
Income taxes (benefit)....... 2,918 26 410 (6,221)(e) (2,867) 1,484 (5,306)(c) (6,689)
-------- ------- ------- ------- -------- -------- --------- --------
Income (loss) from continuing
operations.................. (11,873) (14,744) 72 552 (25,993) 2,976 (8,476) (31,493)
Preferred stock dividends.... -- -- -- 1,065 1,065 -- -- 1,065
-------- ------- ------- ------- -------- -------- --------- --------
Income (loss) from continuing
operations available to
common stockholders......... $(11,873) $(14,744) $ 72 $ (513) (27,058) $ 2,976 $ (8,476) $(32,558)
======== ======= ======= ======= ======== ======== ========= ========
Per share data:
Income (loss) from continuing
operations per common share
outstanding (Note 4g)....... $ (.76) $ (1.31) $ .65 $ (1.07)
======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding.......... 15,557 5,134 20,691 4,554 5,314 30,559
======== ======= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed financial statements.
38
<PAGE> 39
NOTE 1: PRIOR ACQUISITIONS OF FUQUA
See the unaudited pro forma combined condensed statements of operations of
Fuqua reflecting the acquisitions of the Lumex Division and Prism under
"-- Unaudited Pro Forma Combined Condensed Financial Information of Fuqua
Enterprises, Inc."
On February 26, 1997, Fuqua acquired 100% of the common stock and warrants
of Prism Enterprises, Inc. ("Prism") for approximately $19,500,000. The
acquisition was accounted for as a purchase and accordingly, the results of
operations are included subsequent to that date. The unaudited pro forma
combined condensed statement of operations reflect the results of Prism prior to
the date of acquisition as if the acquisition occurred on January 1, 1996.
On April 3, 1996, Fuqua acquired the medical products operations of Lumex,
Inc. (the "Lumex Division") for approximately $40,750,000. The purchase price
relating to the acquisition of the Lumex Division is subject to a final
adjustment, the amount of which is in dispute and is being resolved by
arbitration. The acquisition was accounted for as a purchase and accordingly,
the results of operations are included subsequent to that date. The 1996
unaudited pro forma combined condensed statement of operations reflects the
results of the Lumex Division prior to the date of acquisition as if the
acquisition occurred on January 1, 1996 and includes $6,300,000 of non-recurring
charges, primarily related to the adoption of FAS 121 and the recoverability of
lease receivables. The 1996 unaudited pro forma combined condensed statement of
operations for the year ended December 31, 1996 has not been adjusted to
eliminate the effect of these charges.
NOTE 2: ACQUISITION OF EVEREST & JENNINGS
On November 27, 1996, Graham-Field acquired Everest & Jennings in a merger
transaction pursuant to which Graham-Field issued 2,522,691 shares of Common
Stock in exchange for the common stock of Everest & Jennings. Simultaneously
with the Everest & Jennings Acquisition, (i) BIL was issued 1,922,242 shares of
Common Stock in consideration of the repayment of indebtedness owing by Everest
& Jennings in the amount of $24,989,151, (ii) Graham-Field issued $61 million
stated value of Graham-Field Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock") to BIL in exchange for certain indebtedness of
Everest & Jennings owing to BIL and shares of Everest & Jennings preferred stock
owned by BIL, (iii) BIL was issued $10 million stated value of Graham-Field
Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock")
and (iv) certain indebtedness in the amount of $4,000,000 owing by Graham-Field
to BIL was exchanged for an equal amount of unsecured subordinated indebtedness
of Graham-Field.
Prior to the Everest & Jennings Acquisition, Everest & Jennings's 1996
revenues and operating results were negatively impacted by ongoing price
competition. Long lead times and shipping delays due to start-up inefficiencies
in manufacturing operations adversely impacted customer confidence. The
unaudited pro forma combined condensed statement of operations for the year
ended December 31, 1996 does not reflect any cost savings, synergistic benefits
and enhancements realized by Graham-Field in connection with the Everest &
Jennings Acquisition for the period prior to November 27, 1996. The historical
financial statements of Everest & Jennings for the year ended December 31, 1996
include approximately $5.7 million of additional reserves relating to the
accounts receivable and inventory of Everest & Jennings. The reserves were
increased primarily due to the impairment of such assets during the later part
of 1996 following the execution of the Everest & Jennings merger agreement.
NOTE 3: SYNERGIES AND ENHANCEMENTS RELATED TO THE MERGER
As a result of the Merger, the management of Graham-Field anticipates that
the combined entity will achieve significant cost savings and economies of
scale. Graham-Field has plans to eliminate certain duplicate distribution and
manufacturing centers and make reductions in general and administrative expenses
where duplicate functions are being performed. In addition, Graham-Field
anticipates that certain enhancements will be achieved as a result of the
Merger, including an improvement in the gross profit margin associated with the
sale of patient aids and bathroom accessories, and cross-selling opportunities
between the companies which may present growth opportunities for Graham-Field.
Furthermore, the management of Graham-Field believes
39
<PAGE> 40
that it will be able to eliminate a significant amount of the indebtedness of
Fuqua through cash available to Graham-Field and proceeds to be derived from the
contemplated disposition of the Leather Operations. The unaudited pro forma
combined condensed statements of operations does not give effect to any
potential synergistic benefits and enhancements relating to the elimination of
duplicate distribution and manufacturing centers and the reduction of general
and administrative expenses of the combined entity anticipated by Graham-Field
management. There is no assurance that such cost savings and enhancements will
be achieved and, accordingly, such costs savings and enhancements are not
included in the pro forma statements of operations for the nine months ended
September 30, 1997 and year ended December 31, 1996.
NOTE 4: PRO FORMA ADJUSTMENTS
(a) Adjustment to reflect the elimination of intercompany sales by Everest &
Jennings and Kuschall of $5,579,000, and cost of revenue of $5,379,000 in
1996.
(b) Adjustment to record additional amortization (assuming a 30 year life) of
the excess of the cost over net assets acquired in connection with the
following acquisitions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ------------
<S> <C> <C>
Everest & Jennings(i)................................. $ -- $1,613,000
LaBac................................................. 84,000 167,000
Motion 2000........................................... 8,000 49,000
V.C. Medical.......................................... -- 16,000
Medi-Source........................................... 62,000 107,000
-------- ----------
$ 154,000 $1,952,000
======== ==========
</TABLE>
Amortization of the excess of cost over net assets acquired included in the
historical consolidated statements of operations of Graham-Field, without
giving effect to the above adjustments, is $2,440,000 and $1,029,000 for the
nine months ended September 30, 1997 and the twelve months ended December
31, 1996, respectively.
--------------------
(i) Net of a reduction in goodwill previously recorded by Everest &
Jennings, which was eliminated.
(c) Adjustment to reflect the elimination of certain expenses, partially offset
by additional consulting and non-competition fees related to the following
acquisitions. These adjustments are expected to have a continuing impact on
the statements of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ------------
<S> <C> <C>
LaBac:
Elimination of expenses associated with an operation
of LaBac that was disposed of immediately preceding
the acquisition..................................... $(654,000) $ (995,000)
Additional fees related to a three (3) year consulting
agreement entered into as part of the acquisition... 138,000 275,000
Medi-Source:
Elimination of executive salaries directly related to
the acquisition..................................... (71,000) (121,000)
Additional fees related to a five (5) year
non-competition agreement entered into as part of
the acquisition..................................... 35,000 60,000
Motion 2000:
Elimination of expenses directly related to the
acquisition......................................... (171,000) --
--------- ---------
$(723,000) $ (781,000)
========= =========
</TABLE>
40
<PAGE> 41
(d) Adjustment to (i) reduce interest expense relating to the indebtedness
eliminated in connection with the Everest & Jennings Acquisition and
acquisition of Medi-Source, and (ii) reflect the incurrence of interest
expense to fund the cash purchase price of $1,704,000 with an assumed
interest rate of 8% for the acquisition of V.C. Medical, as set forth below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ------------
<S> <C> <C>
Everest & Jennings.................................... -- $ (3,452,000)
Medi-Source........................................... $ (62,000) (96,000)
V.C. Medical.......................................... -- 34,000
-------- -----------
$ (62,000) $ (3,514,000)
======== ===========
</TABLE>
In connection with the acquisition of Everest & Jennings, BIL purchased
1,922,242 shares of Common Stock for $24,989,151, representing an amount
equal to the outstanding principal and interest on Everest & Jennings'
indebtedness to Hong Kong and Shanghai Banking Corporation Limited, which
indebtedness (the "HSBC Indebtedness") was guaranteed by BIL. The proceeds
of such stock purchase were contributed by Graham-Field to Everest &
Jennings immediately following the acquisition and was used to retire the
HSBC Indebtedness. In addition, Graham-Field issued $61 million stated
value of Series B Preferred Stock to BIL in exchange for indebtedness of
Everest & Jennings owing to BIL in the amount of $21,100,000, bearing
interest at the rate of 8%.
With respect to the acquisition of Medi-Source, Graham-Field did not assume
the indebtedness of $1,393,000 (bearing interest at the rate of 6%) owing
to the former principal stockholder. All interest expense associated with
this debt was eliminated.
(e) Adjustment to reflect the income tax provision that would be more
appropriate and required based upon the pro forma results of the combined
entity. This takes into consideration Graham-Field's significant permanent
differences which would have an effect on the effective tax rate based on
the amount of pre-tax income.
(f) Adjusted to give effect to the sale on August 4, 1997 of the Old Notes
(bearing interest at the rate of 9.75% per annum) and the application of the
estimated net proceeds to eliminate certain Graham-Field indebtedness to its
bank (bearing interest at the bank's prime rate or LIBOR plus 2.25% or 1.5%
above the bank's bankers' acceptance rate, at the option of Graham-Field)
and long-term debt to BIL (bearing interest at the rate of 8.5% per annum),
as if the sale of the Old Notes was completed on January 1, 1996. The
aggregate average outstanding indebtedness eliminated was $42,271,000 and
$30,161,000 for the nine months ended September 30, 1997 and the twelve
months ended December 31, 1996, respectively. The aggregate average
outstanding indebtedness eliminated was calculated on a month-by-month basis
during each of the applicable periods. The following summarizes the
adjustments to reflect the amortization of the issuance costs and the
additional net interest expense of the Old Notes:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ------------
<S> <C> <C>
Amortization of Notes issuance cost................... $ 305,000 $ 450,000
========== ==========
Additional interest on the Notes...................... 5,768,000 9,750,000
Elimination of interest on indebtedness replaced...... (2,639,000) (2,388,000)
---------- ----------
$ 3,129,000 $ 7,362,000
========== ==========
</TABLE>
(g) The pro forma net income (loss) per share of Common Stock for the nine
months ended September 30, 1997 and the year ended December 31, 1996 has
been calculated using the Exchange Ratio of 2.1 shares of Common Stock for
each share of Fuqua Common Stock.
The pro forma net income per share of Common Stock for the nine months
ended September 30, 1997 was calculated assuming the conversion of the
Series B and Series C Preferred Stock into an aggregate of
41
<PAGE> 42
4,435,484 shares of Common Stock and the elimination of a dividend of 1.5%
on the Series B and Series C Preferred Stock in the aggregate amount of
$799,000 for the nine month period ended September 30, 1997.
The pro forma net loss per share in 1996 has been calculated assuming the
payment of a cash dividend of 1.5% on the Series B and Series C Preferred
Stock in the aggregate amount of $1,065,000 for the twelve month period
ended December 31, 1996. Conversion of the preferred stock was not assumed
since the result would have been antidilutive.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Weighted average number of Graham-Field common and common
equivalent shares, excluding preferred stock............... 22,019 20,691
Series B and Series C Preferred Stock assumed to be
dilutive................................................... 4,435 --
------ ------
26,454 20,691
Fuqua shares to be issued.................................... 9,868 9,868
------ ------
36,322 30,559
====== ======
</TABLE>
NOTE 5. FUQUA PRO FORMA ADJUSTMENTS
(a) It is the intention of the management of Graham-Field to dispose of the
Leather Operations within six months following the consummation of the
Merger. Accordingly, the results of operations of the Leather Operations
have been eliminated from the historical results of operations as set forth
below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Revenues:
Product revenue........................................... $ 101,438,000 $107,832,000
Interest and other income................................. -- 5,000
---------- ----------
101,438,000 107,837,000
Cost and expenses:
Cost of Revenue........................................... 89,766,000 89,092,000
Selling, general & administrative......................... 6,123,000 7,831,000
---------- ----------
95,889,000 96,923,000
---------- ----------
Income before income taxes................................ 5,549,000 10,914,000
Income taxes.............................................. 2,159,000 4,344,000
---------- ----------
Net income................................................ $ 3,390,000 $ 6,570,000
========== ==========
</TABLE>
Income tax expense for the Leather Operations is based on Fuqua's corporate
tax policy whereby the Leather Operations calculates its federal and state
tax provision at the statutory rates as if the Leather Operations were on a
stand-alone basis and remits such amounts to Fuqua for Fuqua to use in
paying its consolidated Federal and state income taxes.
(b) Adjustment to record additional amortization (assuming a 30 year life) of
the excess of the cost over net assets acquired in connection with the
Merger of $2,151,000 and $2,868,000 for the nine months ended September 30,
1997 and the twelve months ended December 31, 1996, respectively.
(c) Adjustment to reflect the income tax provision that would be more
appropriate and required based upon the pro forma results of the combined
entity. This takes into consideration Graham-Field's significant permanent
differences which would have an effect on the effective tax rate based on
the amount of pre-tax income.
42
<PAGE> 43
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF
FUQUA ENTERPRISES, INC.
The following unaudited pro forma combined condensed financial statements
of operations of Fuqua reflect (1) the historical financial information of Fuqua
and (2) Fuqua's acquisition of (i) the Lumex Division on April 3, 1996 and (ii)
Prism on February 26, 1997.
The unaudited pro forma combined condensed financial statements of
operations give effect to the adjustments described in the notes attached
thereto.
The accompanying unaudited pro forma combined condensed statement of
operations for the nine months ended September 30, 1997 combine the historical
consolidated statement of operations of Fuqua on a pro forma basis as if the
Prism acquisition had occurred at January 1, 1997. The accompanying unaudited
pro forma combined condensed financial statement of operations for the year
ended December 31, 1996 combines the historical consolidated financial statement
of operations of Fuqua on a pro forma basis as if the Lumex Division and Prism
acquisitions had occurred at January 1, 1996.
The unaudited pro forma combined condensed statement of operations for the
year ended December 31, 1996 does not reflect any cost savings, synergistic
benefits and enhancements realized by Fuqua in connection with its acquisition
of the Lumex Division for the period prior to the consummation of the
acquisition on April 3, 1996. In addition, the unaudited pro forma combined
condensed financial statement of operations for the year ended December 31, 1996
has not been adjusted to eliminate $6,300,000 of non-recurring charges primarily
related to the adoption of FAS 121 and the recoverability of lease receivables.
The unaudited pro forma combined condensed statements of operations are not
necessarily indicative of Fuqua's results of operations that actually would have
occurred if the transactions described above had occurred on the dates indicated
or for any future period or date. The unaudited pro forma adjustments give
effect to available information and assumptions that Fuqua believes are
reasonable. The unaudited pro forma combined condensed statements of operations
should be read in conjunction with Fuqua's historical consolidated financial
statements and the notes thereto included herein. See "Index to Financial
Statements."
43
<PAGE> 44
FUQUA ENTERPRISES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------- PRO FORMA PRO FORM
FUQUA(1) PRISM(1) ADJUSTMENTS COMBINED
-------- ------ ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Net sales........................................ $178,701 $1,874 $ -- $180,575
Investment income................................ 187 -- -- 187
-------- ------ ----- --------
178,888 1,874 -- 180,762
-------- ------ ----- --------
Costs and expenses:
Cost of revenues................................. 141,655 778 -- 142,433
Selling, general and administrative.............. 26,982 760 (40)(2) 27,702
Interest expense................................. 2,307 116 204(3) 2,627
-------- ------ ----- --------
170,944 1,654 164 172,762
-------- ------ ----- --------
Income (loss) before income taxes................ 7,944 220 (164) 8,000
Income taxes (benefit)........................... 2,682 115 (75)(4) 2,722
-------- ------ ----- --------
Net income (loss)................................ $ 5,262 $ 105 $ (89) $ 5,278
======== ====== ===== ========
Net income per share............................. $ 1.16 $ 1.17
======== ========
Weighted average number of common and common
equivalent shares.............................. 4,530 4,530
======== ========
</TABLE>
- ---------------
1. The historical amounts for Prism include the results for the period January
1, 1997 to February 24, 1997 (the date Prism was acquired by Fuqua) and the
historical amounts for Fuqua include the operations of Prism for the period
from February 24, 1997 through September 30, 1997.
2. Adjustment represents the reduction in amortization of intangibles arising
principally from Fuqua assigning no value to certain intangibles that were
amortized over shorter periods of less than five years in the historical
financial statements of Prism. The adjustment reflects a substitution of
Prism's historical intangibles amortization of $191,000 with revised pro
forma goodwill amortization over a period of 30 years of $151,000.
3. Adjustment represents interest on $19,500,000 of debt used to purchase Prism.
The interest rate used to calculate this interest expense is the rate that
would have been in effect had the transaction occurred at the beginning of
the periods presented.
4. Adjustment represents income taxes related to the pro forma adjustments. The
pro forma income tax expense adjustment is based on applying the applicable
statutory income tax rates to the taxable or deductible pro forma
adjustments.
44
<PAGE> 45
FUQUA ENTERPRISES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO
--------------------------------------- PRO FORMA FORMA
FUQUA(1) LUMEX DIVISION(1) PRISM(1) ADJUSTMENTS COMBINED
-------- ------------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales......................... $181,543 $ 13,570 $13,139 $ -- $208,252
Investment income................. 1,939 -- -- (124)(2) 1,815
-------- ------- ------- -------- --------
183,482 13,570 13,139 (124) 210,067
-------- ------- ------- -------- --------
Costs and expenses:
Cost of revenues.................. 140,773 11,207 5,595 -- 157,575
Selling, general and
administrative.................. 28,757 9,987 4,697 (375)(3) 43,066
Interest expense.................. 2,470 -- 821 1,675(4) 4,966
-------- ------- ------- -------- --------
172,000 21,194 11,113 1,300 205,607
-------- ------- ------- -------- --------
Income (loss) before income
taxes........................... 11,482 (7,624) 2,026 (1,424) 4,460
Income taxes (benefit)............ 4,209 (3,049) 926 (602)(5) 1,484
-------- ------- ------- -------- --------
Net (loss) income................. $ 7,273 $ (4,575) $ 1,100 $ (822) $ 2,976
======== ======= ======= ======== ========
Net income per share.............. $ 1.60 $ .65
======== ========
Weighted average number of common
and common equivalent shares.... 4,554 4,554
======== ========
</TABLE>
- ---------------
1. The historical results for the Lumex Division are for the period January 1,
1996 to April 3, 1996 (the date the Lumex Division was acquired by Fuqua) and
the historical results for Prism are for the year ended December 31, 1996.
The historical results for Fuqua include the operations for the Lumex
Division for the period April 3, 1996 to December 31, 1996.
2. Adjustment represents the reduction in investment income arising from the use
of $8,750,000 cash related to the purchase price of the Lumex Division.
3. Adjustment represents the reduction in amortization arising from intangibles
which are being amortized over 30 years. Such reduction arises as a result of
(i) ascribing no value to certain intangibles which were amortized over
shorter periods of less than 5 years in the financial statements for the
Lumex Division (resulted in historical amortization of $301,000 being
replaced with pro forma amortization of $128,000) and (ii) substituting
Prism's intangibles amortization previously recorded of $790,000 with revised
pro forma intangibles amortization of $588,000.
4. Adjustment represents interest at Fuqua's borrowing rate with respect to (i)
$33,000,000 of borrowings related to Fuqua's acquisition of the Lumex
Division and (ii) $19,500,000 of borrowings related to Fuqua's acquisition of
Prism, as if both acquisitions occurred on January 1, 1996. The interest rate
used to calculate this interest expense is the rate that would have been in
effect had the transaction occurred at the beginning of the periods
presented.
5. Adjustment represents income taxes related to the pro forma adjustments. The
pro forma income tax adjustment is based on applying the applicable statutory
income tax rates to the taxable or deductible pro forma adjustments.
45
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Graham-Field's consolidated
financial condition and consolidated results of operations should be read in
conjunction with Graham-Field's consolidated financial statements and notes
thereto included elsewhere in this Prospectus. On August 25, 1997, Graham-Field
acquired all of the issued and outstanding shares of Medapex in exchange for
983,147 shares of Common Stock. In conjunction with the acquisition,
Graham-Field acquired Medapex's principal corporate headquarters and
distribution facility. This transaction was accounted for as a pooling of
interests and the historical financial statement and information of Graham-Field
included elsewhere in this Prospectus have been restated to reflect this
transaction.
GENERAL
Graham-Field manufactures, markets and distributes medical, surgical and a
broad range of other healthcare products targeting the home healthcare and
medical/surgical markets through a network of approximately 18,500 dealers and
other customers in North America. Graham-Field also markets and distributes its
products throughout Europe, Central and South America, and Asia.
From 1989 to the date of its acquisition by Graham-Field, Everest &
Jennings incurred significant financial and operating losses in a continuing
effort to restructure its operations with the objective of improving its
competitive position within the durable medical equipment industry.
Restructuring activities included asset sales, significant reductions in
headcount, plant closures and consolidations, product line rationalization, debt
to equity conversion and outsourcing of manufacturing operations.
Since the acquisition, Graham-Field has reduced the interest expense of
Everest & Jennings by approximately $3,500,000 on an annualized basis,
eliminated overlapping distribution and manufacturing facilities and the
corporate headquarters of Everest & Jennings, combined sales and marketing
efforts of both companies and reduced selling, general and administrative
expenses of Everest & Jennings by approximately $7,200,000 on an annualized
basis. In addition, Graham-Field has continued the rationalization and
streamlining of Everest & Jennings' manufacturing facilities in the United
States, Canada and Mexico by shifting certain manufacturing operations of
Everest & Jennings overseas. As a result of the acquisition of Everest &
Jennings, Graham-Field has realized additional cost savings and economies of
scale which include the elimination of certain personnel functions and an
improvement in Graham-Field's gross profit margin associated with the
manufacture and sale of the Everest & Jennings wheelchair product line.
RESULTS OF OPERATIONS
Operating Revenues
Third quarter 1997 compared to third quarter 1996. Operating revenues were
$189,515,000 for the nine months ended September 30, 1997, representing an
increase of 88% from the same period in the prior year. Operating revenues,
without Everest & Jennings, increased in excess of 50% from the same period in
the prior year. The increase in operating revenues, excluding the revenues
attributable to Everest & Jennings, was primarily attributable to the continued
"roll-out" of Graham-Field's innovative "Graham-Field Express" program, the
expansion of the C.A.P. program, the "roll-out" of Graham-Field's seamless
distribution program, the acquisitions of LaBac on June 28, 1997 and Medi-Source
on August 21, 1997, and the incremental revenue growth of Medapex over the 1996
period.
In March 1996, Graham-Field Express was introduced to offer "same-day" and
"next-day" service to home healthcare dealers of certain strategic home
healthcare products, including Temco patient aids, adult incontinence products,
Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional
supplements and other freight and time sensitive products. As of September 30,
1997, Graham-Field had opened five Graham-Field Express facilities operating in
the Bronx, New York; Puerto Rico; Dallas, Texas; Baltimore, Maryland and
Cleveland, Ohio. Graham-Field is actively pursuing additional sites for its
Graham-Field Express Program. On September 4, 1996, Graham-Field acquired V.C.
Medical, a regional home healthcare
46
<PAGE> 47
wholesaler located in Puerto Rico. V.C. Medical currently operates as
Graham-Field Express (Puerto Rico). Revenues attributable to Graham-Field
Express were approximately $35,510,000 and $9,679,000 for the nine months ended
September 30, 1997, and 1996, respectively. On January 29, 1997, Graham-Field
acquired Bobeck Medical Distributors ("Bobeck Medical"), a wholesale distributor
of medical products. Bobeck Medical currently operates as Graham-Field Express
(Dallas). Revenue attributable to Graham-Field Express (Dallas) was
approximately $1,393,000 for the nine months ended September 30, 1997.
1996 compared to 1995. Operating revenues were $143,083,000 for the year
ended December 31, 1996, or 28% higher than the year ended December 31, 1995.
The increase in operating revenues was primarily attributable to Graham-Field's
expansion of its C.A.P. program, the introduction of the Graham-Field Express
program, the addition of new product lines and the acquisition of Everest &
Jennings on November 27, 1996.
Revenues attributable to Graham-Field Express were approximately
$14,431,000 for the year ended December 31, 1996. Revenues attributable to
Graham-Field Express (Puerto Rico) were approximately $1,766,000 for the year
ended December 31, 1996. Revenues attributable to Everest & Jennings for the
period from the date of acquisition to December 31, 1996 were approximately
$3,634,000.
The increase in operating revenues was achieved despite the decline in
sales to Apria Healthcare Group, Inc. ("Apria") of approximately $5,905,000 for
the year ended December 31, 1996 as compared to the prior year. Graham-Field's
supply agreement with Apria expired on December 31, 1995.
1995 compared to 1994. Operating revenues were $112,113,000 for the year
ended December 31, 1995, or 6% higher than the year ended December 31, 1994. The
increase in operating revenues was primarily attributable to improved service
levels, including improved turn-around time to customers and fewer back orders,
improvements in Graham-Field's distribution network, the development of new
sales and marketing programs and the expansion of Graham-Field's product lines.
During 1995, Graham-Field introduced over 100 new products including the Temco
deluxe four-wheel walkabout, the John Bunn Nebulite II medication compressor and
the Labtron automatic wrist blood pressure monitor. In addition, 1995 revenues
also included approximately $935,000, net of elimination of intercompany sales,
attributable to the acquisition of National Medical Excess Corp., effective as
of July 1, 1995.
The revenue increase was achieved despite the decline in sales to Apria of
21% for the year ended December 31, 1995 as compared to the prior year. During
1995 and 1994, Graham-Field's product sales to Apria were approximately
$8,100,000 and $10,300,000, respectively, which represented approximately 8% and
11%, respectively, of Graham-Field's product sales. Graham-Field's sales to
Apria generated gross profit margins of approximately 20%, which is
significantly lower than Graham-Field's sales to its other customers which
generated gross profit margins of over 30%.
Interest and Other Income
Third quarter 1997 compared to third quarter 1996. Interest and other
income for the nine months ended September 30, 1997 was $759,000, as compared to
$537,000 for the same period in the prior year. The increase is primarily due to
interest earned on the unused proceeds from Graham-Field's sale of the Old Notes
on August 4, 1997 and interest earned on customer financing programs.
1996 compared to 1995. Interest and other income increased from $301,000
in 1995 to $559,000 in 1996. The increase is primarily due to the gain
recognized by Graham-Field and royalties received by Graham-Field in connection
with the sale of the Gentle Expressions(R) breast pump product line, and
interest income on certain notes receivable.
1995 compared to 1994. Interest and other income increased from $75,000 in
1994 to $301,000 in 1995. The increase is primarily due to the receipt of
approximately $200,000 relating to an insurance recovery and a favorable
settlement of a contractual dispute.
47
<PAGE> 48
Cost of Revenues
Third quarter 1997 compared to third quarter 1996. Cost of revenues as a
percentage of operating revenues decreased for the nine months ended September
30, 1997 to 67.6%, as compared to 68.7% for the same period in the prior year.
The decrease is primarily attributable to the improved operational efficiencies
associated with the manufacture and distribution of Graham-Field's product lines
and improved purchasing activities.
1996 compared to 1995. Cost of revenues as a percentage of operating
revenue for 1996 remained relatively unchanged from the prior year, at 70%. Due
to manufacturing efficiencies and improved purchasing activities, Graham-Field
maintained its gross profit margin despite increased competition.
1995 compared to 1994. Cost of revenues as a percentage of operating
revenue for 1995 remained relatively unchanged from the prior year, at 70%. Due
to manufacturing efficiencies and improved purchasing activities, Graham-Field
maintained its gross profit margin despite increased competition.
Selling, General and Administrative Expenses
Third quarter 1997 compared to third quarter 1996. Selling, general and
administrative expenses as a percentage of operating revenues for the nine
months ended September 30, 1997 decreased to 23.2%, as compared to 25.5% in the
same period in the prior year. The decrease is attributable to a number of
factors, including the expansion of the Graham-Field Express program in 1997,
which contributes revenue with a lower percentage of selling, general and
administrative expenses, as well as continued efficiencies generated by
Graham-Field's distribution network.
Graham-Field is currently in the process of evaluating its computer
software and databases to ensure that any modifications required to be year 2000
compliant are made in a timely manner. Management does not expect the financial
impact of such modifications to be material to Graham-Field's financial position
or results of operations in any given year.
1996 compared to 1995. Selling, general and administrative expenses as a
percentage of operating revenues decreased to 24% in 1996 from 26% in 1995. The
decrease is attributable to a number of factors, including the expansion of the
Graham-Field Express program in 1996, which contributes revenue with a lower
percentage of selling, general and administrative expenses, as well as continued
efficiencies generated by Graham-Field's distribution network.
1995 compared to 1994. Selling, general and administrative expenses as a
percentage of operating revenues decreased to 26% in 1995 from 30% in 1994. The
decrease was primarily due to cost reduction programs, the continued
efficiencies generated by Graham-Field's distribution network, investments in
new business systems, and the non-recurring expense of approximately $1,321,000
recorded in the fourth quarter of 1994 associated with the opening of the St.
Louis Facility.
Interest Expense
Third quarter 1997 compared to third quarter 1996. Interest expense for
the nine months ended September 30, 1997 increased to $4,557,000 as compared to
$1,962,000 for the same period in the prior year. The increase is primarily due
to increased borrowings attributable to Graham-Field's growth and expansion of
the Graham-Field Express program and from Graham-Field's sale of the Old Notes
on August 4, 1997.
1996 compared to 1995. Interest expense for 1996 decreased by $142,000 or
5% as compared to 1995. The decrease is primarily due to lower interest rates
combined with reduced average borrowings.
1995 compared to 1994. Interest expense for 1995 increased by $23,000 or
1%, principally due to an increase in interest rates from the prior year.
Interest expense for the last six months of 1995 decreased compared to the same
period in the prior year due to a decrease in borrowings during the period.
Graham-Field reduced its borrowings as a result of increased earnings, and the
net proceeds of $3,471,000 realized from an offshore private placement of
1,071,655 shares of Common Stock, completed in September 1995.
48
<PAGE> 49
Merger and Other Related Charges
1996 compared to 1995. During the fourth quarter of 1996, Graham-Field
recorded charges of $15,800,000 related to the acquisition of Everest &
Jennings. The charges included $12,800,000 associated with the write-off of
purchased in-process research and development costs and $3,000,000 of merger
expenses related to severance payments, the write-off of certain unamortized
catalog and software costs with no future value, the accrual of costs to vacate
certain of Graham-Field's facilities, and the cost of certain insurance
policies.
Net Income or Loss
Third quarter 1997 compared to third quarter 1996. Income before income
taxes for the nine months ended September 30, 1997 was $13,641,000, as compared
to $4,368,000 for the same period in the prior year, an increase of $9,273,000,
or 212%. The increase is primarily due to the increase in revenues, the increase
in the gross profit margin, and the decrease in selling, general and
administrative expenses as a percentage of operating revenue.
Net income for the nine months ended September 30, 1997 was $8,246,000, as
compared to $2,425,000 for the same period last year, an increase of $5,821,000
or 240%. Graham-Field recorded income tax expense of $5,395,000 for the nine
months ended September 30, 1997, as compared to $1,943,000 for the same period
last year. The effective tax rate for the nine months ended September 30, 1997
was 39.5% as compared to 44.5% for the same period last year. The decrease is
primarily attributable to the percentage of income earned by foreign entities
which are taxed at a lower rate and the relative decrease in permanent
differences in relation to pre-tax income. Deferred taxes have not been provided
on the undistributed earnings of the foreign entities as it is management's
intention to invest such earnings in the entities indefinitely. As of September
30, 1997, Graham-Field had net deferred tax assets primarily comprised of net
operating loss carryforwards acquired in connection with an acquisition. A full
valuation allowance has been recognized to offset the net deferred asset related
to the acquired tax attributes. If realized, the tax benefit for those items
will be recorded as a reduction of goodwill.
1996 compared to 1995. Loss before income taxes and extraordinary item was
$8,955,000 for 1996, as compared to income before income taxes of $1,741,000 for
the prior year. The loss before income taxes and extraordinary item for 1996
includes certain charges of $15,800,000 relating to the acquisition of Everest &
Jennings. The charges include $12,800,000 associated with the write-off of
purchased in-process research and development costs and $3,000,000 related to
merger expenses.
Net loss after the charge for the extraordinary item related to the early
retirement of the John Hancock Indebtedness was $12,609,000 in 1996, as compared
to net income of $1,047,000 for 1995. The extraordinary item of $736,000 (net of
tax benefit of $383,000) relates to the "make-whole" payment and write-off of
unamortized deferred financing costs associated with the early retirement of the
John Hancock Indebtedness.
Graham-Field recorded income tax expense of $2,918,000 for the year ended
December 31, 1996, as compared to $694,000 for the prior year. As of December
31, 1996, Graham-Field had a deferred tax asset of $938,000, primarily comprised
of net operating loss carryforwards (including those acquired in connection with
an acquisition) and investment, research and development, jobs tax and
alternative minimum tax credits.
1995 compared to 1994. Income before income taxes was $1,741,000 for 1995,
as compared to a loss before income taxes of $2,714,000 for the prior year. The
increase in income before income taxes is primarily due to the increase in
revenues and the decrease in selling, general and administrative expenses.
Net income was $1,047,000 for 1995, as compared to a net loss of $1,979,000
for the prior year. Graham-Field recorded income tax expense of $694,000 for the
year ended December 31, 1995, as compared to an income tax benefit of $735,000
for the prior year. As of December 31, 1995, Graham-Field had recorded a
deferred tax asset of $3,084,000, primarily comprised of net operating loss
carryforwards and investment, research and development, jobs tax and alternative
minimum tax credits.
Graham-Field's business has not been materially affected by inflation.
49
<PAGE> 50
Liquidity and Capital Resources
Graham-Field had working capital of $115,172,000 at September 30, 1997, as
compared to $14,064,000 at December 31, 1996. The increase in working capital is
primarily attributable to the cash provided by Graham-Field's net income of
$8,246,000, which reflects $4,700,000 of depreciation and amortization expense
and the net current assets acquired in connection with Graham-Field's
acquisitions during the nine months ended September 30, 1997 and from
Graham-Field's sale of the Old Notes on August 4, 1997.
Cash used in operations for the nine months ended September 30, 1997 was
$29,013,000, as compared to cash provided by operations of $1,433,000 in the
same period of the prior year. The principal reasons for the decrease in cash
provided by operations were increases in accounts receivable and inventory
levels related to increased revenues and the reduction in accrued expenses,
partially offset by net income of $8,246,000 and depreciation and amortization
expense of $4,700,000 for the period.
Graham-Field anticipates that its cash flow from operations, together with
its current cash balance and the proceeds from its Credit Facility and Notes
will be sufficient to meet its working capital requirements in the foreseeable
future. See "Description of Credit Facility" and "Description of New Notes."
50
<PAGE> 51
BUSINESS
GENERAL
The information set forth below under "Business" does not give effect to
Graham-Field's acquisition of Fuqua in the Merger on December 30, 1997. See
"Recent Developments."
Graham-Field manufactures, markets and distributes medical, surgical and a
broad range of other healthcare products targeting the home healthcare and
medical/surgical markets through a network of approximately 18,500 dealers and
other customers in North America. Graham-Field also markets and distributes
products throughout Europe, Central and South America, and Asia.
Graham-Field markets and distributes approximately 30,000 products under
its own brand names and under suppliers' names throughout the world.
Graham-Field maintains manufacturing and distribution facilities in the United
States, Canada, Mexico and Puerto Rico. Graham-Field continuously seeks to
expand its product lines by increasing the number of distributorship agreements
with suppliers, forming strategic alliances and acquiring other companies and
product lines. Graham-Field's products are marketed to approximately 18,500
customers, principally hospital, nursing home, physician and home healthcare
dealers, healthcare product wholesalers and retailers, including drug stores,
catalog companies and pharmacies, and home-shopping related businesses.
Graham-Field's principal products and product lines include durable medical
equipment (such as wheelchairs, homecare beds, ambulatory aids, bathroom and
safety equipment, and power wheelchair seating systems), sphygmomanometers
(blood pressure measuring devices), stethoscopes, ECG instruments, electronic
thermometers, infrared heat treatment devices, adult incontinence products,
nutritional supplements, specialty cushions and mattresses for the treatment and
prevention of pressure sores, medicated and rubber elastic bandages, respiratory
equipment and supplies, urologicals, ostomy products, wound care products,
infection control products, first aid supplies, laboratory supplies,
antiseptics, topical anesthetics and sterile disposable medical products. By
offering a wide range of products from a single source, Graham-Field enables its
customers to reduce purchasing costs associated with the purchasing process,
including transaction, freight and inventory expenses.
INDUSTRY OVERVIEW
Graham-Field distributes its medical, surgical and other healthcare
products into the home healthcare and medical/surgical markets.
Home Healthcare. Graham-Field believes that the home healthcare market is
growing rapidly due to the shift in the provision of healthcare away from more
expensive acute care settings into lower cost home care settings. The rising
cost of healthcare has caused many payors of healthcare expenses to look for
ways to contain costs. Healthcare payors have, in many cases, altered their
reimbursement patterns to encourage home healthcare whenever appropriate.
The over 65 age group represents the vast majority of home healthcare
patients and continues to grow. In 1993, the U.S. Census Bureau estimated that
by the year 2000 approximately 35 million people, or 13% of the population in
the United States, will be over 65. Graham-Field believes that growth of the
home healthcare market will exceed that of institutional care, as many medical
professionals and patients prefer home healthcare because it allows greater
patient independence, increased patient responsibility and improved
responsiveness to treatment due to the enhanced psychological benefits of
receiving treatment in comfortable and familiar surroundings. Home healthcare is
more cost effective than facility-based care and, in many cases, more desirable
to the patient.
Medical/Surgical. Graham-Field believes that rapid growth in the
medical/surgical supply distribution industry has resulted primarily from
medical/surgical supply and equipment manufacturers increasing the number and
volume of products sold through distributors and an overall increase in the
volume of medical/ surgical supplies being consumed. This overall increase in
consumption is due primarily to the aging of the
51
<PAGE> 52
U.S. population and the development of new medical procedures which have
necessitated an increase in the number and volume of medical supplies consumed
each year.
Historically, the medical/surgical supply distribution industry has been
highly fragmented. During the past ten years, the overall healthcare market has
been characterized by the consolidation of healthcare providers into larger and
more sophisticated entities which are seeking to lower their total costs. These
providers have been increasingly seeking lower total product costs and
incremental services from their medical/surgical supply distributors. These
trends have led to a significant and ongoing consolidation of the distribution
industry and the formation of a small number of industry participants with
national capabilities.
Graham-Field believes that the major healthcare industry trends impacting
the home healthcare and medical/surgical supply industry are as follows:
Consolidation Within the Industry. Continued growth in managed care and
capitated plans have pressured independent home medical equipment suppliers to
find ways of becoming more cost competitive with national providers. This has
also led to consolidations among manufacturers and distributors as smaller
companies with limited product lines seek out partners with potential for
significant synergies. In addition, certain healthcare product suppliers are
consolidating in order to promote better utilization of resources and improve
service to customers, thereby maintaining margin and market share. Graham-Field
believes most successful healthcare supply companies use size and economies of
scale to their advantage.
In recent years, concern over the rising cost of healthcare has sparked a
marked shift toward lower priced products and services in the industry. This
shift has resulted in the substitution of simpler and more generic products, as
well as price concessions to payors from healthcare providers. As healthcare
moves from largely fee-for-service reimbursement to prepaid and capitated
payment systems, this trend is expected to intensify. Graham-Field believes that
high-volume, full-line providers will have a competitive advantage over those
servicing only niche markets. These trends are causing significant consolidation
of healthcare providers. Graham-Field believes that future sales growth will be
driven predominantly by unit volume growth, product innovation, contract sales
to increasingly larger customers and buying groups, and by international
expansion.
Increasing Emphasis on Value-Added Services Oriented Towards Total Cost
Reduction. Graham-Field believes that the administrative costs associated with
purchasing, tracking and carrying inventory and distributing medical products
are often greater than the cost of the supplies. As a result, customers are
increasingly evaluating distributors not only on the basis of product cost and
timely and accurate delivery, but also on their ability to provide value-added
services that lower the administrative and other overhead costs associated with
medical and surgical supplies. For example, customers increasingly seek
distributors that can deliver inventory on a "just-in-time" basis. In addition,
certain customers are seeking distributors that can provide programs to assist
in inventory management.
Shift of Healthcare Delivery to Home Healthcare Markets. Graham-Field
believes that the delivery of healthcare is shifting from acute care settings to
alternate sites, such as physician offices and extended care facilities, due to
cost containment pressures from government and private reimbursement sources.
The growth of managed care has resulted in (i) more procedures being performed
in outpatient settings, (ii) the length of stay for inpatient procedures
continuing to fall and (iii) hospitals sharing financial risk as they take on
capitated contracts from managed care entities. These trends have led to a
general increase in the level of care required by alternate-site patients as
well as the emergence of specialized long-term care facilities, leading to
increased demand for home healthcare products. As a result of the foregoing,
industry sources believe that demand for home healthcare and medical and
surgical supplies in the alternate-site markets will increase at a faster rate
than the overall industry.
52
<PAGE> 53
RECENT ACQUISITIONS
Graham-Field pursues acquisitions on an opportunistic basis in order to
increase its market share, expand its product offerings, consolidate
manufacturing and distribution facilities and enter new markets. Graham-Field
has recently completed the following acquisitions:
<TABLE>
<CAPTION>
DATE COMPANY LINE OF BUSINESS
- ----------------------- --------------------------------- ---------------------------------
<S> <C> <C>
September 1996......... V.C. Medical Distributors, Inc. Medical products distributor in
Puerto Rico.
November 1996.......... Everest & Jennings International Manufacturer & distributor of
Ltd. wheelchairs and home care beds.
February 1997.......... Motion 2000 Inc. and Motion 2000 Independent wholesalers of
Quebec Inc. rehabilitation medical products
in Canada.
March 1997............. Kuschall of America, Inc. Manufacturer of pediatric
wheelchairs, high performance
adult wheelchairs and other
rehabilitation products.
June 1997.............. LaBac Systems, Inc. Manufacturer of custom power
wheelchair seating systems and
manual wheelchairs.
August 1997............ Medi-Source, Inc. Wholesaler of medical sundry
products.
August 1997............ Medical Supplies of America, Inc. Distributor of home healthcare
products.
</TABLE>
V.C. Medical. In September 1996, Graham-Field acquired substantially all
of the assets of V.C. Medical, a wholesale distributor of medical products in
Puerto Rico, for $1,953,830 in stock and cash, and assumed certain liabilities
of V.C. Medical in the amount of $296,721. V.C. Medical currently operates under
the name "GF Express (Puerto Rico)," and provides "same-day" and "next-day"
service to home healthcare dealers of certain strategic home healthcare
products, including Temco patient aids, Everest & Jennings wheelchairs and
homecare beds, adult incontinence products and nutritional supplements. Through
GF Express (Puerto Rico), Graham-Field has significantly increased its presence
in Puerto Rico.
Everest & Jennings. In November 1996, Graham-Field acquired Everest &
Jennings in a transaction pursuant to which Graham-Field issued 2,522,691 shares
of Common Stock in exchange for the common stock of Everest & Jennings.
Simultaneously with the acquisition, (i) BIL was issued 1,922,242 shares of
Common Stock in consideration of the repayment of indebtedness owing by Everest
& Jennings in the amount of $24,989,151, (ii) Graham-Field issued $61 million
stated value of Series B Preferred Stock to BIL in exchange for certain
indebtedness of Everest & Jennings owing to BIL and shares of Everest & Jennings
preferred stock owned by BIL, (iii) BIL was issued $10 million stated value of
Series C Preferred Stock and (iv) certain indebtedness in the amount of
$4,000,000 owing by Graham-Field to BIL was exchanged for an equal amount of
unsecured subordinated indebtedness of Graham-Field.
Through its subsidiaries, Everest & Jennings manufactures a broad line of
wheelchairs and distributes homecare beds. Everest & Jennings' principal
manufacturing and distribution facilities are located in Earth City, Missouri,
Toronto, Canada and Guadalajara, Mexico.
Motion 2000 and Motion Quebec. In February 1997, Graham-Field acquired
substantially all of the assets and certain liabilities of Motion 2000 and its
wholly-owned subsidiary, Motion Quebec, for approximately $2,150,000 in shares
of Common Stock. Motion 2000 and Motion Quebec currently operate under the name
Graham-Field (Canada), as a division of Everest & Jennings Canadian Limited, a
wholly-owned subsidiary of the Company ("Everest & Jennings Canada"). Graham
Field (Canada) distributes a line of rehabilitation products, including walkers,
rollators, cushion products and pediatric wheelchair products, and manufactures
seating products, and has become the primary distribution company for the
Company and Everest & Jennings in Canada. Graham-Field believes that the
strategic combination of Graham-Field (Canada) with Everest & Jennings'
operations, along with Graham-Field's broad product lines, will position
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Graham-Field as one of the suppliers of the broadest range of products available
from a single source in Canada, and as a leading supplier of rehabilitation
products, including high performance adult and pediatric wheelchairs, home care
wheelchairs, patient aids and other wheelchair products. In addition, the
business combination has enabled Graham-Field to expand its C.A.P. program in
the Canadian marketplace. Graham-Field believes that the acquisition will enable
Graham-Field to increase significantly its revenue base in the Canadian
marketplace.
Kuschall. In March 1997, Graham-Field acquired Kuschall, a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for $1,510,000, which was paid in shares of Common
Stock. The acquisition of Kuschall has provided Graham-Field with additional
manufacturing capabilities and has expanded Graham-Field's presence in the
rehabilitation and pediatric wheelchair market. The pediatric wheelchair product
line of Kuschall has broadened Everest & Jennings' rehabilitation product lines.
In addition, Graham-Field's acquisition of Kuschall has provided Graham-Field
with the ability to market and distribute its products into Japan, New Zealand
and Australia through Kuschall's established distributor relationships.
Graham-Field believes that the combination will enable Graham-Field to
strengthen its manufacturing operations on a company-wide basis and enhance its
C.A.P. program.
LaBac. In June 1997, Graham-Field acquired LaBac, a manufacturer and
distributor of custom power wheelchair seating systems and manual wheelchairs,
for $9,103,000, which was paid in shares of Common Stock. Graham-Field believes
that the acquisition of LaBac will provide Graham-Field with the premier custom
power wheelchair seating product line in the healthcare industry, expand the
Everest & Jennings power wheelchair product line and enhance the manufacturing
and research and development capabilities of Graham-Field. The LaBac products,
which have a reputation for excellence and quality, will broaden the Everest &
Jennings and Kuschall product lines and provide additional support and expertise
to Graham-Field in the rehabilitation market.
Medi-Source. In August 1997, Graham-Field acquired substantially all of
the assets and certain liabilities of Medi-Source, a wholesale distributor of
medical sundry products to the medical/surgical market for $4,500,000. The
acquisition of Medi-Source has expanded Graham-Field's presence in the medical/
surgical market.
Medapex. In August 1997, Graham-Field acquired Medapex, a wholesale
distributor of home healthcare products, for $12,900,000, which was paid in
shares of Common Stock. Graham-Field believes that Medapex will provide
Graham-Field with additional distribution capabilities in the Southeast region
of the United States, and enable Graham-Field to take advantage of Medapex's
telemarketing operations, which will provide increased customer service to the
combined customer base.
PRODUCTS
Graham-Field markets and distributes approximately 30,000 healthcare
products under its own brand names and under suppliers' names. Graham-Field's
products are marketed to approximately 18,500 dealers and other customers,
principally hospital, nursing home, physician and home healthcare dealers,
healthcare product wholesalers and retailers, including drug stores, catalog
companies, pharmacies and home-shopping related businesses.
Product lines marketed by Graham-Field include durable medical equipment
(such as wheelchairs, homecare beds, ambulatory aids, bathroom and safety
equipment and power wheelchair seating systems), sphygmomanometers (blood
pressure measuring devices), stethoscopes, ECG instruments, electronic
thermometers, infrared heat treatment devices, adult incontinence products,
nutritional supplements, specialty cushions and mattresses for the treatment and
prevention of pressure sores, medicated and rubber elastic bandages, respiratory
equipment and supplies, urologicals, ostomy products, wound care products,
infection control products, first aid supplies, laboratory supplies,
antiseptics, topical anesthetics and sterile disposable medical products.
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Graham-Field's principal manufactured and proprietary products include the
following:
<TABLE>
<CAPTION>
PRODUCT LINE PRIMARY PRODUCTS
------------------ --------------------------------------
<S> <C>
Everest & Jennings Wheelchairs
Smith & Davis Homecare beds
Labtron Blood pressure and diagnostic products
Temco Patient aids and bathroom accessories
John Bunn Respiratory products
Medicopaste Medicated bandages
Survalent Thermometry systems
Grafco Various sundries
Diamond Incontinence products
Kuschall Pediatric wheelchairs
LaBac Power wheelchair seating systems
</TABLE>
Sales of Graham-Field's line of sphygmomanometers accounted for 14%, 11%
and 7% of Graham-Field's annual revenues during the years ended December 31,
1994, 1995 and 1996, respectively. Graham-Field's lines of incontinence
products; wound care and ostomy products; bathroom safety equipment;
wheelchairs; and ambulatory aids accounted for approximately 8%, 7%, 6%, 6% and
5%, respectively, of Graham-Field's annual revenues in 1996. No other product
line or product accounted for more than 5% of annual revenues in 1994, 1995 or
1996. During the nine month period ended September 30, 1997, sales of
Graham-Field's wheelchairs; incontinence products; ambulatory aids; medical
disposables; wound care and ostomy products; nutritionals; bathroom safety
equipment; and sphygmomanometers accounted for approximately 29%, 13%, 11%, 10%,
9%, 7%, 6% and 6%, respectively, of Graham-Field's revenues in such period.
Approximately 4% of all products offered by Graham-Field during each of the
years ended December 31, 1994, 1995 and 1996, respectively, accounted for
approximately 80% of annual revenues in each such year. The number of products
marketed by Graham-Field has increased from approximately 19,000 in 1991 to
approximately 30,000 in 1997.
During the year ended December 31, 1996, approximately 28% of
Graham-Field's revenues were derived from products manufactured by Graham-Field,
approximately 18% were derived from imported products, and approximately 54%
were derived from products purchased from domestic sources, which includes
products purchased from Everest & Jennings prior to the acquisition. As a result
of recent acquisitions, including the acquisition of Everest & Jennings, the
revenues of Graham-Field derived from self-manufactured products accounted for
approximately 24% of all revenues for the nine months ended September 30, 1997.
VALUE-ADDED SERVICES
Consolidation Advantage Program (C.A.P.). The C.A.P. program is the
cornerstone of Graham-Field's sales and marketing strategy. Through C.A.P.,
Graham-Field strives to become the most efficient and reliable low-cost provider
of medical products. Graham-Field's sales and marketing representatives consult
with Graham-Field's customers to identify the purchasing efficiencies and cost
savings that can be derived from consolidating their purchases of medical
products with Graham-Field. By consolidating the purchase of multiple product
lines through a single source, Graham-Field's customers can significantly reduce
their operating costs. Graham-Field believes that C.A.P. significantly improves
the level of service to Graham-Field customers by streamlining the purchasing
process, decreasing order turnaround time, reducing delivery expenses, and
providing inventory on demand.
Graham-Field Express. As part of Graham-Field's commitment to providing
superior customer service, in 1996 Graham-Field introduced its Graham-Field
Express Program in the Bronx, New York. This program enables Graham-Field to
provide "same-day" and "next-day" service to home healthcare dealers of
strategic home healthcare products, including Temco patient aids, adult
incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare
beds, nutritional supplements, and other freight intensive and time sensitive
products through its Graham-Field Express satellite facilities. The Graham-Field
Express Program differs from Graham-Field's standard distribution model in that
the Graham-Field Express Program focuses on "same-day" and "next-day" service to
home healthcare dealers of a limited number of strategic home
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<PAGE> 56
healthcare products. Graham-Field's principal distribution centers offer
approximately 30,000 SKU's to all Graham-Field customers, including, but not
limited, to home healthcare and medical/surgical dealers. As of September 30,
1997, Graham-Field had opened five Graham-Field Express facilities operating in
the Bronx, New York; Puerto Rico; Dallas, Texas; Baltimore, Maryland and
Cleveland, Ohio.
Seamless Distribution Program. Graham-Field has recently developed a
seamless distribution program which enables Graham-Field to ship orders directly
from its distribution facilities to home healthcare end-users on behalf of
Graham-Field's customers. The Seamless Distribution Program enables customers to
realize significant reductions in their operating costs by eliminating costs
associated with receiving, shipping and inventory management, while reducing the
product delivery time to end-users. This program currently operates from the St.
Louis Facility. Graham-Field intends to continue to expand the Seamless
Distribution Program.
SALES AND MARKETING
Graham-Field markets its products to approximately 18,500 customers,
principally medical/surgical supply dealers and home healthcare retailers and
wholesalers, which include drug store chains and home-shopping related
businesses. Graham-Field's products are marketed and distributed throughout the
world.
Graham-Field's sales and marketing sales force is directed by a sales
management team consisting of an Executive Vice President of Sales and
Marketing, a Vice President of the Medical/Surgical business unit, a Vice
President of the Home Healthcare business unit, a Corporate Vice President of
Graham-Field Express, a Vice President of Sales of Everest & Jennings, a Vice
President of International Sales, and a President of Graham-Field (Canada), a
newly-formed division of Everest & Jennings Canada. The Vice Presidents of the
Home Healthcare and Medical/Surgical business units direct the sales and
marketing strategy of the business units and oversee Graham-Field's five
regional sales Vice Presidents. Graham-Field's five regional sales Vice
Presidents oversee the day-to-day operations of the domestic sales force. The
Corporate Vice President of Graham-Field Express oversees the sales and
marketing strategy of each Graham-Field Express satellite facility.
Graham-Field's domestic sales and marketing strategies are developed on a
market-by-market basis through two primary business units: Home Healthcare and
Medical/Surgical. While Graham-Field's sales and marketing strategies are
developed and conducted on a business unit basis, the sale of Graham-Field's
products overlap all business units. The domestic sales force consists of
approximately 15 direct, full-time sales employees and 50 independent
manufacturers representatives. Graham-Field's specialty rehabilitation sales
force, consisting of approximately 40 sales persons, is directed by the Vice
President of Sales of Everest & Jennings. Everest & Jennings' specialty
rehabilitation sales force conducts training activities for the benefit of
dealers and their personnel, physical and occupational therapists, and other
healthcare professionals. This training is primarily concerned with the features
and benefits of Everest & Jennings' rehabilitation products and also covers the
proper fitting and use of wheelchairs and related equipment. The full-time sales
employees receive both salary and commission, while the independent
manufacturers representatives work solely on commission.
The international sales group consists of several in-house sales employees,
as well as one representative in Taiwan. Graham-Field's Canadian sales and
marketing activities are directed by the President of Graham-Field (Canada), who
oversees three regional sales managers, 14 direct, full-time sales employees and
two independent manufacturers representatives.
Graham-Field markets its products using a variety of programs and materials
including print advertising, product brochures, an extensive library of product
line video tapes, cooperative advertising programs and sales promotions to
reinforce Graham-Field's ongoing commitment to satisfying the needs of its
customers. A CD-ROM version of Graham-Field's catalog and an Internet
interactive website are currently being developed.
In April 1997, Graham-Field entered into two-year distributorship
agreements with each of Baxter Healthcare Corporation and Allegiance Healthcare
Corporation. Under these arrangements, Graham-Field
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<PAGE> 57
has become a wholesale distributor in the home healthcare market of Baxter and
Allegiance urological, respiratory, glove and intravenous solution products.
In September 1997, Graham-Field entered into a five-year European
distribution agreement for a wide range of its products with Thuasne, a
manufacturer and supplier of medical products in Western and Eastern Europe.
CUSTOMERS
Graham-Field's products are marketed principally to hospital, nursing home,
physician and home healthcare dealers, healthcare product wholesalers and
retailers, including drug stores, catalog companies and pharmacies and home
shopping related businesses. No single customer or buying group accounted for
more than 10% of Graham-Field's revenues in 1996. Since January 1, 1997,
Graham-Field has new supply arrangements with a number of customers, including
General Medical (a subsidiary of McKesson), Owens & Minor, Healthcare Partners,
Inc. and Homecare & Hospital Management, The Med Group, Homecare Providers
Co-Op, Physician Sales and Services, Med-Quick, Sysco Corporation, Option Care,
U.S. Rehab., Henry Schein, Inc, Equipnet, Inc., and VGM of Associates, Inc.
The Home Healthcare business unit markets and sells its products to
approximately 14,500 customers, which consist of durable medical equipment
suppliers, home healthcare equipment suppliers, respiratory supply dealers,
specialty retailers and independent pharmacies. Graham-Field believes that it
transacts business with substantially all significant home healthcare dealers in
the United States. The Home Healthcare business unit also markets and sells its
products to the consumer market consisting of drug store chains, mass
merchandisers, department stores and home shopping related businesses. Consumers
who purchase from such customers of Graham-Field usually do so upon the advice
of physicians, hospital discharge planners, nurses or other professionals.
Graham-Field's Medical/Surgical business unit markets and sells its products to
approximately 4,000 medical and surgical supply dealers. Graham-Field believes
that it sells to substantially all significant medical and surgical supply
dealers in the United States. The dealers in turn sell Graham-Field's products
principally to physicians, hospitals, nursing homes and other healthcare
facilities. In general, the dealers, wholesalers and retailers to whom
Graham-Field markets its products also sell other medical products, some of
which compete with Graham-Field's products.
DISTRIBUTION NETWORK
Graham-Field provides same-day and next-day services to its customers
through its distribution network. Graham-Field believes that its ability to
continue to grow its revenue base depends in part upon its ability to provide
its customers with efficient and reliable service. As a means of providing such
service, Graham-Field distributes its products through primary points of
distribution located in Hauppauge, New York; St. Louis, Missouri; Jacksonville,
Florida; Santa Fe Springs, California; Toronto, Canada; and Guadalajara, Mexico.
Secondary points of distribution include Graham-Field Express satellite
facilities located in the Bronx, New York; Dallas, Texas; San Juan, Puerto Rico;
Baltimore, Maryland; and Cleveland, Ohio. Graham-Field also distributes its
products from distribution centers located in Atlanta, Georgia and Bowling
Green, Kentucky, as well as from its manufacturing facilities located in
Passaic, New Jersey; Earth City, Missouri; Clay Falls, Rhode Island;
Guadalajara, Mexico; Camarillo, California; Denver, Colorado; and Toronto,
Canada.
Graham-Field utilizes emerging technology to improve its product delivery
systems. In 1993, Graham-Field opened the St. Louis Facility, which was designed
with IBM to include "state-of-the-art" technology in order to improve
delivery-cycles, inventory turnover and distribution efficiency.
MANUFACTURING AND PRODUCT SOURCING
During the nine months ended September 30, 1997, approximately 24% of
Graham-Field's revenues was derived from the sale of products manufactured by
Graham-Field, with the balance relating to products sourced from third parties.
Principal manufactured and proprietary products (designed by Graham-Field and
manufactured to its specifications) include EVEREST & JENNINGS(R) wheelchairs,
SMITH & DAVIS(R) homecare beds, LABTRON(R) stethoscopes and blood pressure
instruments, JOHN BUNN(R) respiratory aid
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<PAGE> 58
products, MEDICOPASTE(R) medicated bandages, rubber elastic bandages,
SURVALENT(R) electronic thermometry systems, silver nitrate applicators,
examination lamps and sterile packages under the MSP(R) label, GRAFCO(R) medical
supplies, including silver nitrate applicators and examination lamps, the
TEMCO(R) product line of patient aids, bathroom safety equipment and patient
room equipment, and Aquatherm specialty cushions and mattresses for the
treatment and prevention of pressure sores. Graham-Field's primary manufacturing
facilities are located in Passaic, New Jersey; Earth City, Missouri; Clay Falls,
Rhode Island; Guadalajara, Mexico; Camarillo, California; Denver, Colorado; and
Toronto, Canada.
Graham-Field purchases products from approximately 1,200 domestic and
foreign suppliers. Graham-Field has entered into exclusive and non-exclusive
distribution agreements with a number of its domestic and foreign suppliers.
Under such agreements, suppliers may designate the markets into which
Graham-Field can sell the products and may stipulate minimum annual sales
volumes which are to be achieved by Graham-Field. Most of the distribution
agreements are cancelable by either party upon one to six months' notice. Except
as is described in the following paragraph, Graham-Field does not believe that
cancellation of any such agreements would have a material adverse effect on
Graham-Field, because comparable products are obtainable from alternative
sources upon acceptable terms.
Graham-Field is heavily dependent on its maintenance of two key supply
contracts. Everest & Jennings obtains the majority of its homecare wheelchairs
and wheelchair components under the Wheelchair Supply Agreement with P.T.
Dharma. If the Wheelchair Supply Agreement is terminated, there can be no
assurance that Everest & Jennings will be able to enter into a suitable supply
agreement with another manufacturer. The termination of this agreement in
combination with the failure to secure an alternative source of supply on
acceptable terms would result in a material adverse effect on Graham-Field's
business and financial condition. Everest & Jennings obtains homecare beds for
distribution solely pursuant to a supply agreement with a third-party supplier,
which expires on October 15, 1997 without provision for renewal. To source
homecare beds from an alternative supplier, in April 1997 Everest & Jennings
entered into the Bed Supply Agreement. Under the terms of the Bed Supply
Agreement, the supplier commenced supplying homecare beds to Everest & Jennings
on August 1, 1997. The agreement contains an initial term of two years, and
provides for the supply of a minimum and maximum number of homecare beds during
the term of the agreement. If the Bed Supply Agreement is terminated, there can
be no assurance that Everest & Jennings will be able to enter into a suitable
supply agreement with another manufacturer. The termination of this agreement in
combination with the failure to secure an alternative source of supply on
acceptable terms would result in a material adverse effect on Graham-Field's
business and financial condition. See "Risk Factors -- Dependence on Key Supply
Contracts."
Graham-Field currently purchases a substantial portion of its
sphygmomanometers and stethoscopes from a limited number of suppliers in the Far
East. In addition, Graham-Field sources component parts for sphygmomanometers
and stethoscopes and assembles such products in its facility located in
Hauppauge, New York.
PATENTS AND TRADEMARKS
Graham-Field believes that its business is dependent in part on its ability
to establish and maintain patent protection for its proprietary technologies,
products and processes, and the preservation of its trade secrets. Graham-Field
currently holds a number of United States patents relating to the EVEREST &
JENNINGS(R) and TEMCO(R) product lines. In addition, Graham-Field holds certain
international patents relating to the components of its SURVALENT(R) electronic
thermometry system. Other companies may provide similar products which may not
be covered by Graham-Field's issued patents. Graham-Field must operate without
infringing upon the proprietary rights of other parties. There can be no
assurance that any United States or international patents issued or licensed to
Graham-Field will provide any significant competitive advantages to Graham-Field
or will not be successfully challenged, invalidated or circumvented or that
patents will be issued in respect of patent applications to which Graham-Field
currently holds rights. In addition, Graham-Field distributes certain patented
products pursuant to licensing arrangements. In the event a licensing
arrangement is terminated, Graham-Field may not be able to continue to
distribute the patented product.
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<PAGE> 59
Graham-Field is involved in the ordinary course of business in
patent-related lawsuits or other actions, none of which Graham-Field believes is
material. However, defense and prosecution of patent claims is costly and time
consuming, regardless of an outcome favorable to Graham-Field, and can result in
the diversion of substantial financial and managerial resources from
Graham-Field's primary business activities. Additionally, adverse outcomes of
such claims could have a material adverse effect on Graham-Field's business and
financial condition. See "Risk Factors Relating to Graham-Field -- Reliance on
Patents and Proprietary Technology."
Graham-Field has registered a significant number of trademarks in the
United States, including "GRAHAM-FIELD," "EVEREST & JENNINGS," "SMITH & DAVIS,"
"JOHN BUNN," "BRISTOLINE," "SURVALENT," "MEDICOPASTE," "BANDAGE," "HEALTHTEAM,"
"LABTRON," "GRAFCO," "TEMCO" and "TENDERCLOUD". The registered trademarks are
significant to Graham-Field because they provide Graham-Field with name and
market recognition for its products and distinguish Graham-Field's proprietary
products from its competitors' products.
PRODUCT LIABILITY
The sale, manufacture and distribution of healthcare products involve an
inherent risk of product liability claims and related adverse publicity.
Although Graham-Field maintains product liability insurance, there can be no
assurance that such coverage will be adequate to protect Graham-Field from
liabilities it may incur. Product liability insurance is expensive, and there
can be no assurance that Graham-Field will be able to continue to obtain and
maintain insurance at acceptable rates. Potential losses from liability claims
and the effect which product liability litigation may have on the reputation and
marketability of Graham-Field's products could have a material adverse effect on
Graham-Field's business and financial condition.
GOVERNMENTAL REGULATION
The healthcare industry is affected by extensive government regulation at
the Federal and state levels. In addition, through the Medicare, Medicaid and
other programs the federal and state governments are responsible for the payment
of a substantial portion of U.S. healthcare expenditures. Changes in regulations
and healthcare policy occur frequently and may impact the current results of,
the growth potential for and the profitability of products sold by Graham-Field
in each market. Although Graham-Field is not a direct provider under Medicare
and Medicaid, many of Graham-Field's customers are providers under these
programs and depend upon Medicare and/or Medicaid reimbursement for a portion of
their revenue. Changes in Medicare and Medicaid regulations may adversely impact
Graham-Field's revenues and collections indirectly by reducing the reimbursement
rate received by Graham-Field's customers and consequently placing downward
pressure on prices charged for Graham-Field's products. Graham-Field's C.A.P.
program is designed in part to enable customers to respond to the reduction in
reimbursement rates by consolidating the purchase of multiple product lines
through Graham-Field. There can be no assurance, however, that this program will
offset any such reduction in reimbursement rates.
The Federal Food, Drug and Cosmetic Act, the Safe Medical Devices Act and
regulations issued or proposed thereunder provide for regulation by the FDA of
the marketing, manufacturing, labeling, packaging and distribution of medical
devices and drugs, including Graham-Field's products. Among these regulations
are requirements that medical device manufacturers register with the FDA, list
devices manufactured by them and file various kinds of reports. Graham-Field is
also required to comply with the FDA's GMP regulations, which set forth
requirements for, among other things, Graham-Field's manufacturing process and
associated record creation and maintenance, including tests and sterility.
Graham-Field uses the services of an unaffiliated outside firm to sterilize
its GRAFCO(R) tampons and MSP(R) product line, and sterility testing is
conducted by an unaffiliated laboratory. Records of sterilization and related
tests are kept by Graham-Field. Graham-Field has also engaged the services of an
outside consulting firm to monitor the quality control program in force to
ensure that all manufactured products and supplier products comply with FDA
requirements. Graham-Field's outside consultants are in the process of imple-
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menting ISO 9001 certification on a company-wide basis, which will enhance
Graham-Field's overall standard quality systems and enable Graham-Field to
comply with European regulatory requirements.
Certain requirements must be met prior to the initial marketing of medical
devices. These range from a minimum obligation of waiting to receive a
determination of substantial equivalence from the FDA before the introduction of
a medical device which Graham-Field has determined is substantially similar to
devices already on the market, to a maximum obligation of complying with the
potentially expensive and time-consuming testing process necessary to obtain FDA
approval prior to the commercial marketing of new medical devices. In addition,
the FDA has the authority to issue performance standards for devices
manufactured by Graham-Field. Should such standards be issued, Graham-Field's
products would be required to conform to them. Unscheduled FDA inspections of
Graham-Field's facilities may occur from time to time to determine compliance
with FDA regulations.
The impact of FDA regulation on Graham-Field has increased in recent years
as Graham-Field has increased its manufacturing operations. To date,
Graham-Field has not experienced any significant difficulty in complying with
the requirements imposed on it by the FDA or other government agencies.
Graham-Field believes that the manufacturing and quality control procedures it
employs conform to requirements of the GMP regulation and does not anticipate
having to make any material expenditures as a result of these requirements. See
"Risk Factors -- Government Regulation."
COMPETITION
Graham-Field competes with many other manufacturers and distributors who
offer one or more products competitive with Graham-Field's products; however,
Graham-Field believes that no single competitor serving the Graham-Field's
markets offers as broad a product range as Graham-Field. Graham-Field's
principal means of competition are the breadth of its product range, quality,
price and speed of delivery. The C.A.P. program enables Graham-Field to compete
by offering customers reduced operating costs associated with purchasing by
consolidating purchases of multiple products. With respect to Graham-Field's
wheelchairs and homecare beds, Graham-Field's primary competitors include
Invacare Corporation, Sunrise Medical Corporation and Fuqua Enterprises.
Competition for the sale of wheelchairs and homecare beds is intense and is
based on a number of factors, including quality, reliability, price, financing
programs, delivery and service. Graham-Field believes that the quality,
reputation and technological advances relating to its Everest & Jennings
wheelchairs and Smith & Davis homecare beds are favorable factors in competing
with other manufacturers. Graham-Field purchases certain products from its
competitors and supplies certain of its products to its competitors. Many of
Graham-Field's competitors have substantially greater financial and other
resources than Graham-Field. There can be no assurance that Graham-Field will be
able to compete effectively in its industry or that competitive pressures will
not adversely affect Graham-Field's financial position or results of operations.
See "Risk Factors -- Competition."
EMPLOYEES
As of September 30, 1997, Graham-Field had 1,529 employees, of which eight
were executive officers, 355 were administrative and clerical personnel (of
which 11 were part-time employees), 235 were sales, marketing and customer
service personnel (of which two were part-time employees) and 891 were
manufacturing and warehousing personnel (of which 27 were part-time employees).
Graham-Field is a party to five collective bargaining agreements covering
Graham-Field's facilities located in Hauppauge, New York; Passaic, New Jersey;
Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico. The collective
bargaining agreements cover approximately 618 employees. The collective
bargaining agreements for Hauppauge, New York; Passaic, New Jersey; Earth City,
Missouri; Ontario, Canada; and Guadalajara, Mexico are scheduled to expire on
October 18, 2000, July 27, 1999, September 13, 1999, July 24, 1998 and December
31, 1997, respectively.
Graham-Field has never experienced an interruption or curtailment of
operations due to labor controversy that had a material adverse effect on
Graham-Field's operations. Graham-Field considers its employee relations to be
satisfactory.
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PROPERTIES
The Company's principal executive offices are located in Hauppauge, New
York.
The Company's primary domestic distribution centers are located in
Hauppauge, New York; St. Louis, Missouri; Santa Fe Springs, California; and
Jacksonville, Florida. Additional points of distribution include Graham-Field
Express satellite locations in the Bronx, New York; Dallas, Texas; Baltimore,
Maryland; Cleveland, Ohio; and San Juan, Puerto Rico. The Company also
distributes its products from distribution centers located in Atlanta, Georgia
and Bowling Green, Kentucky, as well as from its primary manufacturing
facilities which are located in Passaic, New Jersey; Earth City, Missouri; Clay
Falls, Rhode Island; Guadalajara, Mexico; Camarillo, California; Denver,
Colorado; and Toronto, Canada. The manufacturing facilities located in Toronto,
Canada and Guadalajara, Mexico are owned by the Company.
The Company believes that its facilities are in good repair and provide
adequate capacity for the near term growth of the Company's business.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to lawsuits and other
proceedings, including those relating to product liability and the sale and
distribution of its products. While the results of such lawsuits and other
proceedings cannot be predicted with certainty, management does not expect that
the ultimate liabilities, if any, will have a material adverse effect on the
consolidated financial position, or results of operations or cash flows of the
Company. See Note 13 of Notes to the Consolidated Financial Statements of
Graham-Field and Note 7 of Notes to the Condensed Consolidated Financial
Statements of Graham-Field included elsewhere in this Prospectus.
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<PAGE> 62
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of Graham-Field.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ----------------------------------- ---- -----------------------------------------------
<S> <C> <C>
Irwin Selinger(1).................. 57 Chairman of the Board and Chief Executive
Officer
Gary M. Jacobs..................... 40 Vice President -- Finance and Chief Financial
Officer
Richard S. Kolodny................. 38 Vice President, General Counsel, and Secretary
Peter Winocur...................... 42 Executive Vice President of Sales and Marketing
Jeffrey Schwartz................... 37 Corporate Vice President, Graham-Field Express
Ralph Liguori...................... 52 Executive Vice President of Operations
Beatrice Scherer................... 58 Vice President -- Administration
Donald D. Cantwell................. 48 Vice President of Information Systems
David P. Delaney, Jr.(2)(3)........ 45 Director
Andrew A. Giordano(1)(2)........... 65 Director
Peter Handal(4).................... 55 Director
Bevil J. Hogg...................... 49 Director
Dr. Harold Lazarus(3).............. 70 Director
Steven D. Levkoff(3)(4)............ 49 Director
Louis A. Lubrano(4)................ 64 Director
Donald Press(2).................... 64 Director
Rodney F. Price(1)................. 54 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
(4) Member of the Audit Committee
Mr. Selinger, a founder of Graham-Field, has been the Chairman of the Board
and Chief Executive Officer of Graham-Field since April 1981. Mr. Selinger was a
founder and the Chief Executive Officer of Surgicot, Inc., a manufacturer of
sterilization indicators, and its predecessor from 1968 to April 1980. In 1979,
Surgicot, Inc. was acquired by E.R. Squibb & Sons, Inc., a subsidiary of Squibb
Corporation. From April 1980 to June 1984, Mr. Selinger was a consultant to E.R.
Squibb & Sons, Inc.
Mr. Jacobs has been Vice President -- Finance and the Chief Financial
Officer of Graham-Field since August 1992. From 1979 to 1992, Mr. Jacobs was
employed by the accounting firm of Ernst & Young LLP.
Mr. Kolodny has been Vice President, General Counsel and Secretary of
Graham-Field since August 1993. From 1990 to 1993, Mr. Kolodny was associated
with the law firm of Carro, Spanbock, Kaster & Cuiffo. Prior to such time, Mr.
Kolodny was associated with the law firm of Shea & Gould.
Mr. Winocur has held various positions with Graham-Field since May 1992,
and has been the Executive Vice President of Sales and Marketing of Graham-Field
since January 1996. Prior to 1992, Mr. Winocur was the founder and President of
National Health Care Equipment, Inc., which was acquired by Graham-Field in May
1992.
Mr. Schwartz has been Vice President of Graham-Field Express since March
1996. Effective June 18, 1997, Mr. Schwartz became the Corporate Vice
President -- Graham-Field Express. From 1994 to 1996, Mr. Schwartz was the
President of a home healthcare distribution company based in the metropolitan
New York area. From 1992 to 1994, Mr. Schwartz held various sales positions with
Graham-Field.
62
<PAGE> 63
Mr. Liguori has been the Executive Vice President of Operations of
Graham-Field since July 1995. From 1990 to 1995, Mr. Liguori was the Group Vice
President of Operations of Del Laboratories, Inc. Prior to such time, Mr.
Liguori was the Senior Vice President of U.S. Operations of Coleco Industries,
Inc.
Ms. Scherer has been Vice President -- Administration of Graham-Field since
1985. From 1981 to 1985, Ms. Scherer was Vice -- President -- Finance for
Graham-Field.
Mr. Cantwell has been the Vice President of Information Systems of
Graham-Field since May 1996, and became an executive officer of Graham-Field as
of January 1, 1997. From 1995 to 1996, Mr. Cantwell was the Chief Information
Officer of Dial-A-Mattress, Inc. Prior to such time, Mr. Cantwell held various
management positions with Grumman Corporation for over ten years.
Mr. Delaney has been the President and Chief Executive Officer of Lancer
Financial Group and its principal operating subsidiary, Lancer Insurance
Company, since 1985. Mr. Delaney founded the Lancer Financial Group, which
currently provides insurance coverage and specialized services to the United
States passenger transportation industry. In addition, Mr. Delaney has served as
the Chairman of the Long Island Chapter of the Young President's Organization,
and serves as the Chairperson of the Community Campaign at Mercy Medical Center
and is a member of the Advisory Board of the Alliance of American Insurers.
Mr. Giordano has been a principal of The Giordano Group, Limited, a
diversified consulting firm, since its founding in February 1993. From May 1987
to February 1993, Mr. Giordano was Executive Vice President of Lamonts Apparel,
Inc. Mr. Giordano also currently serves as a director of Cherry & Webb Inc., a
ladies specialty apparel company, Joseph A. Bank Clothiers, Inc., a manufacturer
and retailer of men's clothing, and Nomos Corporation, a conformal radiation
therapy provider. In 1984, Mr. Giordano retired from his position as CEO, Naval
Supply Systems Command and Chief of the Supply Corps., with the rank of Rear
Admiral.
Mr. Handal has been the President of COWI International Group, a management
consulting firm which provides strategic planning and other consulting services
for companies located in the United States and Eastern Europe, since 1990. In
addition, Mr. Handal is the President of J4P Associates, a real estate concern
in Baltimore, and the President of Fillmore Leasing Company, Inc., which leases
automobiles, computers and warehouse equipment. Mr. Handal serves on the Board
of Directors of Cole National Corporation, Joseph A. Bank Clothiers, Inc., Perry
Ellis International and Family Bargain Corp.
Mr. Hogg was the President and Chief Executive Officer of Everest &
Jennings from January 1994 to March 31, 1997. From December 1992 to January
1994, Mr. Hogg was the Chief Executive Officer of Medical Composite Technology,
Inc., a wheelchair designer and manufacturer. Prior to such time, Mr. Hogg was
the Chief Executive Officer of Cycle Composite, Inc., a bicycle manufacturer,
from 1986 to December 1992. Mr. Hogg currently serves as a consultant to
Graham-Field.
Dr. Lazarus was the Dean of the School of Business at Hofstra University
for seven years, and is now its Mel Weitz Distinguished Professor of Business.
Currently, Dr. Lazarus serves on the Boards of Directors of Stage II Apparel
Corporation and Facelifters Home Systems, Incorporated. He served as president
of the North American Management Council, the Eastern Academy of Management, the
Middle Atlantic Association of Colleges of Business Administration, and on the
Boards of Directors of Ideal Toy Corporation, Superior Surgical Manufacturing
Company, the Academy of Management, and the World Management Council.
Mr. Levkoff has been the Chief Executive Officer and President of Standard
Folding Cartons, Inc., a manufacturer of paperboard packaging for the private
label, over-the-counter and food industries, since 1982. Mr. Levkoff is also a
member of the National Industry Association and the Paperboard Packaging
Council.
Mr. Lubrano has been an investment banker with Herzog, Heine, Geduld Inc.,
members of the New York Stock Exchange, since December 1996. From 1991 to 1996,
Mr. Lubrano was a managing director of Stires & Company, Inc., an investment
banking firm. From March 1990 to February 1991, Mr. Lubrano was a director of
the Nasdaq Forum. Prior to such time, Mr. Lubrano was a managing director of
Home Group Capital Markets, Inc., an investment banking firm. From April 1986 to
March 1989, he was President of
63
<PAGE> 64
Gabelli & Company, Inc., an investment banking firm. He is also a director of
Andersen Group, Inc., a diversified manufacturing company.
Mr. Press is an attorney and has been a principal of Donald Press, P.C., a
law firm located in New York, New York, since 1979. Mr. Press has served as an
Executive Vice President of Broadway Management Co., Inc., an owner and manager
of commercial office buildings since 1981, and serves as a director of The
Cooper Companies, Inc., Component Specialties, Inc. and Branford Savings Bank.
Mr. Price was the Chairman of the Board of Everest & Jennings from May 23,
1994 to November 27, 1996. Mr. Price has been a Director of Brierley Investments
Limited, a New Zealand investment holding company since, 1993. Mr. Price has
been the Chairman of the Board of Thistle Hotels Plc since October 1996. From
1990 to 1993, Mr. Price was the Managing Director and Chief Executive Officer of
Pioneer International Ltd., a producer of building construction materials. Prior
to such time, Mr. Price was a Managing Director and the Chief Executive Officer
of Industrial Equity Limited (IEL) from 1986 to 1989.
Each member of Graham-Field's Board of Directors holds office for the term
for which he was elected and until his successor shall have been elected and
qualified, or until the earlier of his resignation, removal from office or
death. Graham-Field's Board of Directors is composed of three classes consisting
of the following members: Class I Directors with a term expiring in
2000 -- Irwin Selinger, Donald Press, and Peter Handal; Class II Directors with
a term expiring in 1998 -- Andrew A. Giordano, David P. Delaney, Jr., and Bevil
J. Hogg; and Class III Directors with a term expiring in 1999 -- Louis A.
Lubrano, Dr. Harold Lazarus, Steven D. Levkoff, and Rodney F. Price.
64
<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock, Series B Preferred Stock and Series C Preferred Stock
with respect to the persons who, to the knowledge of the Company, owned
beneficially more than five percent of each class of stock as of October 31,
1997.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(5) OWNED(6)
--------------------- ------------------ ------------------
NUMBER NUMBER NUMBER
NAME AND ADDRESS OF OF OF OF
BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ----------------------------------- --------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Irwin Selinger(2).................. 1,124,884 5.2% -0- -0- -0- -0-
c/o Graham-Field
Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
Shufro, Rose & Ehrman(3)........... 1,302,350 6.2% -0- -0- -0- -0-
745 Fifth Avenue
New York, New York
10151-2600
BIL................................ 4,061,578(4) 19.2% 6,100 100% 1,000 100%
c/o Brierley Investments Ltd.
3rd Floor
10 Eastcheap
London EC3M1AJ
United Kingdom
</TABLE>
- ---------------
(1) All shares are beneficially owned and the sole voting and investment power
is held by the person or entities named, except as otherwise specified
herein.
(2) Includes 127,444 shares currently issuable upon the exercise of stock
options issued pursuant to the Company's Incentive Program, 5,500 shares
owned by Mr. Selinger's wife as to which shares Mr. Selinger disclaims any
beneficial interest and 50,000 shares underlying stock options which are
exercisable within 60 days of October 31, 1997.
(3) According to information contained in a Schedule 13G filing dated as of
February 14, 1997, Shufro, Rose & Ehrman, a registered investment advisor
and broker-dealer, beneficially owns 1,302,350 shares, and has the sole
power to vote or to direct the vote of 91,850 shares.
(4) Does not include 6,100 shares of Series B Preferred Stock and 1,000 shares
of Series C Preferred Stock owned by BIL (see Notes (5) and (6) below). The
shares of Common Stock, Series B Preferred Stock and Series C Preferred
Stock beneficially owned by BIL represent in the aggregate approximately 34%
of the voting power of the Company's outstanding capital stock as of August
31, 1997.
(5) The Series B Preferred Stock is convertible into shares of Common Stock (x)
at the option of BIL, at a conversion price of $20 per share (or, in the
case of certain dividend payment defaults, at a conversion price of $15.50
per share), (y) at the option of the Company, at a conversion price equal to
current trading prices (subject to a minimum conversion price of $15.50 and
a maximum conversion price of $20 per share) and (z) automatically on
November 27, 2001 at a conversion price of $15.50 per share. The conversion
prices are subject to customary antidilution adjustments. The shares of the
Series B Preferred Stock are entitled to 3,935,483 votes, and vote as a
single class with the Common Stock and the Series C Preferred Stock.
(6) The Series C Preferred Stock is subject to a redemption as a whole at the
option of Graham-Field on the fifth anniversary of the date of issuance at a
stated value plus accrued and unpaid dividends and, if not redeemed will be
convertible into shares of the Common Stock automatically at a conversion
price of $20 per share, subject to customary antidilution adjustments. The
shares of the Series C Preferred Stock are entitled to 500,000 votes, and
vote as a single class with the Common Stock and the Series B Preferred
Stock.
65
<PAGE> 66
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Common Stock, Series B Preferred Stock and Series C Preferred Stock
with respect to the Company's directors and the Company's "named executive
officers" within the meaning of Item 402(a)(3) of Regulation S-K promulgated by
the Commission, and by all of the Company's directors and executive officers as
a group as of October 31, 1997:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(11) OWNED(12)
------------------- ------------------- -------------------
NUMBER NUMBER NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT OF SHARES PERCENT OF SHARES PERCENT
- ------------------------------------------- ---------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS
Irwin Selinger(2).......................... 1,124,884 5.2% -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Louis A. Lubrano(3)........................ 56,200 * -0 - -0 - -0 - -0 -
Herzog, Heine, Geduld, Inc. 26 Broadway
New York, New York 10004
Dr. Harold Lazarus(4)...................... 20,194 * -0 - -0 - -0 - -0 -
c/o Hofstra University Management
Department Weller Hall 228 Hempstead, New
York 11550
Andrew A. Giordano(5)...................... 23,500 * -0 - -0 - -0 - -0 -
c/o The Giordano Group, Limited 1811
South 24th Street Arlington, Virginia
22202-1534
Donald Press(6)............................ 25,400 * -0 - -0 - -0 - -0 -
c/o Donald Press, P.C. 39 Broadway New
York, New York 10006
David P. Delaney, Jr.(7)................... 14,000 * -0 - -0 - -0 - -0 -
c/o Lancer Financial Group, Inc. 370 West
Park Avenue Long Beach, New York 11561
Steven D. Levkoff(8)....................... 11,000 * -0 - -0 - -0 - -0 -
c/o Standard Folding Cartons, Inc. 85th &
24th Avenue Jackson Heights, New York
11370
Bevil J. Hogg(9)........................... 31,911 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Rodney F. Price(10)........................ 4,061,578 19.2% 6,100 100% 1,000 100%
c/o Brierley Investments Ltd. 3rd Floor
10 Eastcheap London EC3M1AJ United
Kingdom
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(11) OWNED(12)
------------------- ------------------- -------------------
NUMBER NUMBER NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT OF SHARES PERCENT OF SHARES PERCENT
- ------------------------------------------- ---------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Peter Handal............................... 2,000 * -0 - -0 - -0 - -0 -
c/o COWI International Group 280 Park
Avenue 5th Floor-East Building New York,
New York 10017
NAMED EXECUTIVE OFFICERS:
Irwin Selinger(2).......................... 1,124,884 5.2% -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Peter Winocur(13).......................... 91,050 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Gary M. Jacobs(14)......................... 68,500 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Richard S. Kolodny(15)..................... 79,000 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Ralph Liguori(16).......................... 48,500 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Jeffrey Schwartz(17)....................... 9,500 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Beatrice Scherer(18)....................... 56,177 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East Hauppauge, New York
11788
Donald D. Cantwell(19)..................... 7,500 * -0 - -0 - -0 - -0 -
c/o Graham-Field Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
All directors and executive officers as a
group (17 persons)(20)................... 5,730,894 26.5% 6,100 100% 1,000 100%
</TABLE>
- ---------------
* Less than 1%
(1) All shares are beneficially owned and the sole voting power and investment
power is held by the persons named, except as otherwise specified herein.
(2) See Note (2) under the heading "Principal Stockholders."
(3) Includes 200 shares owned by the Virginia Lubrano Trust, and 55,000 shares
currently issuable upon the exercise of directors' stock options issued
pursuant to the Incentive Program.
(4) Includes 20,000 shares currently issuable upon the exercise of directors'
stock options issued pursuant to the Incentive Program.
67
<PAGE> 68
(5) Includes 20,000 shares currently issuable upon the exercise of directors'
stock options issued pursuant to the Incentive Program.
(6) Includes 3,000 shares owned by Donald Press, P.C. Profit Sharing Plan and
1,000 shares owned by Donald Press, P.C. Employees Pension Plan. Also
includes 10,000 shares currently issuable upon the exercise of directors'
stock options issued pursuant to the Incentive Program.
(7) Includes 10,000 shares currently issuable upon the exercise of directors'
stock options issued pursuant to the Incentive Program.
(8) Includes 1,000 shares owned by Mr. Levkoff's daughter, 10,000 shares
currently issuable upon the exercise of director's stock options issued
pursuant to the Incentive Program.
(9) Includes 17,500 shares underlying stock options which are exercisable
within 60 days of October 31, 1997.
(10) Consists of shares of Common Stock owned by BIL, which Mr. Price, one of
BIL's nominees on the Graham-Field Board, may be deemed to own beneficially
in his capacity as a director of BIL. Does not include up to 3,935,483
shares of Common Stock issuable upon the conversion of the shares of Series
B Preferred Stock owned by BIL and up to 500,000 shares of Common Stock
issuable upon the conversion of the shares of Series C Preferred Stock
owned by BIL.
(11) See Note (5) under the heading "Principal Stockholders."
(12) See Note (6) under the heading "Principal Stockholders."
(13) Includes 43,500 currently issuable upon the exercise of stock options
issued pursuant to the Incentive Program and 37,500 shares underlying stock
options which are exercisable within 60 days of October 31, 1997.
(14) Includes 75,000 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program and 7,500 shares
underlying stock options which are exercisable within 60 days of October
31, 1997.
(15) Includes 50,267 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program and 7,500 shares
underlying stock options which are exercisable within 60 days of October
31, 1997.
(16) Includes 18,215 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program and 7,500 shares
underlying stock options which are exercisable within 60 days of October
31, 1997.
(17) Represents 9,500 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program.
(18) Includes 35,466 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program and 5,000 shares
underlying stock options which are exercisable within 60 days of October
31, 1997.
(19) Represents 7,500 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program.
(20) Includes 333,492 shares currently issuable upon the exercise of stock
options issued pursuant to the Incentive Program and 132,500 shares
underlying stock options which are exercisable within 60 days of October
31, 1997.
68
<PAGE> 69
CERTAIN TRANSACTIONS
BIL STOCKHOLDER AGREEMENT
Simultaneous with the execution of the E&J Merger Agreement, the Company,
BIL and Irwin Selinger, the Chairman of the Board and Chief Executive Officer of
the Company, entered into the BIL Stockholder Agreement.
Board Representation. Pursuant to the BIL Stockholder Agreement, BIL has
the right to designate two members of the Company's Board of Directors (subject
to reduction if BIL reduces its ownership of Common Stock below specified
levels). For so long as BIL has one director on the Company's Board of
Directors, one BIL director shall be designated as a member of the Executive
Committee of the Company's Board of Directors.
Right of First Refusal. So long as BIL and its affiliates own securities
representing at least 5% of the voting power of the outstanding capital stock of
the Company, BIL has agreed to grant the Company a right of first refusal with
respect to sales of any Company securities other than: (i) a transfer of any
Company securities to any BIL affiliate who simultaneously with such transfer
agrees in writing to be bound by the provisions of the BIL Stockholder Agreement
as though an original signatory thereto, (ii) a sale through an underwritten
public offering registered under the Securities Act effected in accordance with
the provisions of the BIL Registration Rights Agreement (as defined below),
(iii) a sale pursuant to Rule 144(f) promulgated under the Securities Act
provided that, until such time as BIL beneficially owns voting securities of the
Company representing less than 5% of the voting power of all voting securities
of the Company, any Rule 144(f) sales shall be subject to the volume limitations
set forth in Rule 144(e) (regardless of whether such volume limitations are
applicable to such sale), (iv) pursuant to a merger or consolidation of the
Company or a recapitalization of any Company securities, (v) pursuant to a
self-tender or exchange offer by the Company or a third-party tender offer
recommended by the Company's Board of Directors, or (vi) a cash sale effected in
accordance with the Company's right of first refusal; provided that in the case
of and as a condition to any cash sale to a person who, after giving effect to
such purchase, would own at least 5% of the voting power of the outstanding
capital stock of the Company, such person shall simultaneously with such
purchase and sale agree in writing to be bound by the right of first refusal,
the limitations on acquisitions of Company securities and the standstill
provisions described below contained in the BIL Stockholder Agreement. The
Company may not assign its right of first refusal without the consent of BIL,
which consent shall not be unreasonably withheld or delayed; provided that any
such assignees agree in writing to purchase any of the offered securities not
being purchased by the Company in accordance with its right of first refusal.
Limitation on Right to Purchase Additional Company Securities. So long as
BIL and its affiliates own securities representing at least 5% of the voting
power of the outstanding capital stock of the Company, BIL has agreed that
neither BIL nor any of its affiliates will acquire additional shares of Common
Stock which, together with the Common Stock, Series B Preferred and Series C
Preferred Stock then owned by BIL and its affiliates, represent more than 49% of
the voting power of the outstanding capital stock of the Company, except
pursuant to (i) stock dividends on the Series B Preferred Stock and the Series C
Preferred Stock, or (ii) plans established by the Company for members of the
Board of Directors of the Company.
Preemptive Right. So long as BIL and its affiliates own securities
representing at least 15% of the voting power of the outstanding capital stock
of the Company, the Company has agreed not to issue any equity securities before
offering BIL the right to participate proportionately in such issuance.
Notwithstanding the foregoing, BIL's preemptive right set forth above shall not
apply to any securities issued (i) pursuant to the Warrant, dated as of March
12, 1992, as amended, by and between the Company and John Hancock Mutual Life
Insurance Company, (ii) in connection with a merger, acquisition or other
business combination transaction approved by the Board of Directors of the
Company, (iii) in connection with any stock option or other employee benefit
plans and programs of the Company approved by the Board of Directors of the
Company, or (iv) in connection with any private debt financing in which
securities to be issued represent less than 2% of the voting power of the
outstanding capital stock of the Company.
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<PAGE> 70
Standstill Provisions. BIL has agreed that following the Effective Time
and thereafter until such time as BIL and its affiliates own securities
representing less than 5% of the voting power of the outstanding capital stock
of the Company, neither BIL nor any of its affiliates will directly or
indirectly seek to acquire ownership of the Company, engage in any solicitation
of proxies with respect to the Company or otherwise seek or propose to acquire
control of the Board of Directors of the Company.
Termination. The BIL Stockholder Agreement will automatically terminate
upon a change of control of the Board of Directors of the Company.
Amendment. Pursuant to the BIL Stockholder Agreement, in the event that
(i) any person becomes the owner of securities representing more than 15% but
less than 100% of the voting power of the outstanding capital stock of the
Company with the approval of the Board of Directors of the Company and (ii) the
restrictions imposed by the Company on the activities of such person are less
onerous than those imposed on BIL and its affiliates under the BIL Stockholder
Agreement, then the BIL Stockholder Agreement will be revised to provide
comparable restrictions which are identical to the restrictions imposed on such
person.
Registration Rights Agreement. Simultaneous with the execution of the E&J
Merger Agreement, the Company entered into a registration rights agreement with
BIL (the "BIL Registration Rights Agreement") pursuant to which BIL and certain
of its transferees have the right, under certain circumstances, to require the
Company to register under the Securities Act certain shares of Common Stock held
by them.
BIL LOANS
In July 1996, an affiliate of BIL provided the Company with a loan in the
amount of $4,000,000, at an effective interest rate of 8.8%. The loan was used
to fund the acquisition of V.C. Medical and for general corporate purposes. In
December 1996, the loan was converted into a subordinated loan (the "BIL
Subordinated Loan"), maturing on April 1, 2001 and bearing interest payable
quarterly at an effective rate of 7.7% per year. Under the terms of the BIL
Subordinated Loan, the Company has the right to set off the principal amount
against punitive damages awarded against the Company or any of its subsidiaries
relating to any product liability claims of Everest & Jennings and/or its
subsidiaries existing on the date of acquisition and involving a death prior to
September 3, 1996. The BIL Subordinated Loan is subordinated to the Notes.
In May 1997, an affiliate of BIL provided the Company with a loan in the
amount of $5,000,000 at an effective interest rate of 8.5% (the "BIL Senior
Loan"). The proceeds of the BIL Senior Loan were used for general corporate
purposes. The Company repaid the BIL Senior Loan in full from the proceeds of
the Initial Offering.
DESCRIPTION OF CREDIT FACILITY
The Credit Facility provides for up to $75 million (increased to $100
million on December 30, 1997) of borrowings on a revolving credit basis,
including letters of credit and banker's acceptances, arranged by IBJ, as agent.
The revolving credit facility terminates on December 10, 1999. Under the terms
of the Credit Facility, borrowings bear interest at IBJ's prime rate (in
connection with domestic rate loans) or 1.625% above LIBOR (in connection with
Eurodollar rate loans). The Credit Facility is secured by a pledge of all of
Graham-Field's assets. As of September 30, 1997, the Company had unused
availability of approximately $71.8 million of direct borrowings outstanding
under the Credit Facility.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Notes, the incurrence of additional debt,
liens, transactions with affiliates, consolidations, mergers and acquisitions
and sales of assets. In addition, the Company is prohibited from declaring,
paying any dividend or making any distribution on any shares of Common Stock or
preferred stock of the Company (other than dividends or distributions payable in
its stock, or split-ups or reclassifications of its stock) or applying any of
its funds, property or assets to the purchase, redemption or other retirement of
any common or preferred stock, or of any options to purchase or acquire any such
shares of Common Stock or preferred stock of the Company. Notwithstanding the
foregoing restrictions, the Company is permitted to pay cash dividends in any
fiscal year in an amount not to exceed the
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greater of (i) the amount of dividends due BIL under the terms of the Series B
and Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income
of the Company on a consolidated basis, provided that no event of default shall
have occurred and be continuing or would exist after giving effect to the
payment of the dividends. Finally, the Credit Facility contains certain
financial covenants, including a cash flow coverage and leverage ratio, and an
earnings before interest and taxes covenant, as well as the requirement that the
Company reduce outstanding borrowings with the net cash proceeds of certain
asset sales.
DESCRIPTION OF NEW NOTES
The New Notes will be issued, and the Old Notes were issued, pursuant to
the Indenture (the "Indenture") dated as of August 4, 1997 between the Company,
the Guaranteeing Subsidiaries and American Stock Transfer & Trust Company, as
trustee (the "Trustee"). For purposes of the following summary, the Old Notes
and the New Notes shall be collectively referred to as the "Notes". The terms of
the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the TIA. The Notes are subject to all such terms, and
Holders of Notes are referred to the Indenture and the TIA for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below.
Capitalized terms that are used but not otherwise defined below under the
caption "Certain Definitions" have the meaning assigned to them in the Indenture
and such definitions are incorporated herein by reference. A copy of the
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, and is available as set forth under "Additional
Information." The definitions of certain terms used in the following summary are
set forth below under "Certain Definitions."
GENERAL
The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt of the
Company. See "Subordination." The Notes will be guaranteed, jointly and
severally, on a senior subordinated basis by the Guaranteeing Subsidiaries. The
Subsidiary Guarantees will be subordinated in right of payment to all existing
and future Senior Debt of the Guaranteeing Subsidiaries, including the
obligations of the Guaranteeing Subsidiaries under the Credit Facility. See
"Subsidiary Guarantees." As of September 30, 1997, on a pro forma basis after
giving effect to the Initial Offering and the application of the net proceeds
therefrom, the Company had no Senior Debt outstanding and the Guaranteeing
Subsidiaries had approximately $10.5 million of Senior Debt outstanding
(excluding guarantees by the Guaranteeing Subsidiaries of the Company's
obligations under the Credit Facility).
Restrictions in the Indenture on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to make Asset Sales,
to enter into transactions with Affiliates and to enter into mergers,
consolidations or sales of all or substantially all of its assets, may make more
difficult or discourage a takeover of the Company, whether favored or opposed by
the management of the Company. Although such restrictions cover a wide variety
of arrangements which traditionally have been used to effect highly leveraged
transactions, the Indenture may not afford holders of Notes protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100 million and
will mature on August 15, 2007. Interest on the Notes will accrue at the rate of
3/4% per annum and will be payable semi-annually in arrears on February 15 and
August 15, commencing on February 15, 1998, to Holders of record on the
immediately preceding February 1 and August 1. Holders of the New Notes will
receive interest on February 15, 1998 from the date of initial issuance of the
New Notes, plus an amount equal to the accrued interest on the Old Notes
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from the date of initial issuance thereof to the date of exchange thereof
pursuant to the Exchange Offer. Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of New Notes in exchange therefor. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal of, premium, if any, and interest and Liquidated Damages (as
defined in "Old Notes; Registration Rights"), if any, on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Notes will be
issued in denominations of $1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Guaranteeing
Subsidiaries. The Subsidiary Guarantee of each Guaranteeing Subsidiary will be
subordinated to the prior payment in full of all existing and future Senior Debt
of such Guaranteeing Subsidiary on substantially the same terms as the Notes are
subordinated to the Senior Debt of the Company. The obligations of each
Guaranteeing Subsidiary under its Subsidiary Guarantee will provide that they
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See "Risk Factors -- Fraudulent Conveyance; Preferential Transfer."
The Indenture provides that no Guaranteeing Subsidiary may consolidate with
or merge with or into (whether or not such Guaranteeing Subsidiary is the
surviving Person), another corporation, Person or entity, whether or not
affiliated with such Guaranteeing Subsidiary, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its assets to another
corporation, Person or entity, unless: (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation or
merger (if other than such Guaranteeing Subsidiary) assumes all the obligations
of such Guaranteeing Subsidiary under the Notes and the Indenture pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee; (ii) immediately after giving effect to such transaction, no Default or
Event of Default exists; (iii) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Consolidated Net Worth of the Guaranteeing Subsidiary or the surviving
entity, as the case may be, is at least equal to the Consolidated Net Worth of
the Guaranteeing Subsidiary immediately before such transaction or series of
transactions; and (iv) the Company would be permitted by virtue of the Company's
pro forma Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio set forth in the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock." The foregoing will not prohibit a
merger between a Guaranteeing Subsidiary and another Guaranteeing Subsidiary or
a merger between a Guaranteeing Subsidiary and the Company.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guaranteeing Subsidiary, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
Capital Stock of any Guaranteeing Subsidiary, then such Guaranteeing Subsidiary
(in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the Capital Stock of such Guaranteeing
Subsidiary) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Guaranteeing Subsidiary) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "Asset Sales."
SUBORDINATION
The payment of all Obligations on the Notes will be subordinated in right
of payment, as set forth in the Indenture, to the prior payment in full in cash
or Cash Equivalents of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
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Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company, or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, whether or not
such interest is in an allowed claim under applicable law) before the Holders of
Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Debt are paid in full in cash or
Cash Equivalents, any distribution to which the Holders of Notes would be
entitled shall be made to the holders of Senior Debt (except that Holders of
Notes may receive (i) Permitted Junior Securities and any other Permitted Junior
Securities issued in exchange for any Permitted Junior Securities and (ii)
payments made from the trust described under "Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such Permitted Junior Securities, Permitted Junior Securities issued
in exchange for such Permitted Junior Securities or from the trust described
under "Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Debt occurs and is continuing or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
holders of any Designated Senior Debt. Payments on the Notes may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received
unless the maturity of any Designated Senior Debt has been accelerated. No new
period of payment blockage may be commenced unless and until (i) 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage Notice
and (ii) all scheduled payments of principal of, premium, if any, and interest
on the Notes that have come due have been paid in full in cash. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of the Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. See "Risk
Factors -- Subordination."
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes will not be redeemable
at the Company's option prior to August 15, 2002. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on August 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------- ----------
<S> <C>
2002.............................................. 104.875%
2003.............................................. 103.250%
2004.............................................. 101.625%
2005 and thereafter............................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to August 15, 2000, the
Company on one or more occasions may redeem up to $25 million aggregate
principal amount of the Notes with the net proceeds of one or more public
offerings of common stock of the Company at a redemption price of 109.75% of the
principal
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amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable date of redemption; provided that at least $75 million
aggregate principal amount of the Notes remains outstanding immediately after
the occurrence of each such redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes pursuant to the procedures required by the Indenture and described in such
notice. The Company intends to comply with the requirements of Rule 14e-l under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to being required to comply with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Notes required by this covenant. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as whole. There is no
precisely established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group is uncertain.
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Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as determined in good faith by the Board of Directors of the Company and
set forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Notes or, in the case of liabilities of a Restricted Subsidiary, the Subsidiary
Guarantee of such Subsidiary) that are assumed by the transferee of any such
assets and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received) within 180 days after receipt shall be deemed to be cash
for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay Senior Debt
or Pari Passu Indebtedness (provided that if the Company shall so reduce Pari
Passu Indebtedness, it will equally and ratably make an Asset Sale Offer (in
accordance with the procedures set forth below for an Asset Sale Offer) to all
Holders) and/or (b) to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, product
distribution rights or intellectual property or rights thereto, in each case, in
a line of business permitted by the covenant described in "Line of Business."
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce borrowings under the Credit Facility or otherwise invest such
Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Indenture
provides that the Company will (i) make an offer to all Holders of Notes to
purchase and (ii) prepay, purchase or redeem (or make an offer to do so) any
other Pari Passu Indebtedness of the Company in accordance with provisions
requiring the Company to prepay, purchase or redeem such Indebtedness with the
proceeds from any asset sales (or offer to do so), the maximum principal amount
of Notes and of such indebtedness that may be purchased out of the Excess
Proceeds, pro rata in proportion to the respective principal amounts (or
accreted value, as applicable) of the Notes and such other Indebtedness required
to be prepaid, purchased or redeemed or tendered for pursuant to such offer (an
"Asset Sale Offer"), at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any to the date of purchase, in accordance with the procedures set
forth in the Indenture.
Restriction on Repurchase of the Notes
The Credit Facility prohibits the Company from purchasing any Notes and
also provides that certain change of control events with respect to the Company
and certain asset sales will constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs or the Company is required to make an Asset Sale Offer
at a time when the Company is prohibited from purchasing Notes, the Company
could seek the consent of its lenders to the purchase of Notes or could attempt
to refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under the Credit Facility. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of the Notes. See "Risk Factors --
Subordination."
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such other method as the Trustee deems fair and appropriate; provided that
no Notes with a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any distribution (including in connection with any merger
or consolidation) on account of any Equity Interests of the Company or any of
its Restricted Subsidiaries (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Restricted Subsidiary
of the Company); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company, any of its Restricted Subsidiaries or any
other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Wholly Owned Restricted Subsidiary of the Company); (iii)
make any principal payment on, or purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness that is subordinated in right of payment to
the Notes or a Subsidiary Guarantee, except at the original final maturity
thereof or in accordance with the scheduled mandatory redemption or repayment
provisions set forth in the original documentation governing such Indebtedness
(but not pursuant to any mandatory offer to repurchase upon the occurrence of
any event); or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would be able to incur at least $1.00 of additional
Indebtedness under the Fixed Charge Coverage Ratio in the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (v), (vi) and (viii) of the next succeeding
paragraph), is less than the sum of (1) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) beginning on
April 1, 1997 to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, minus 100% of such deficit), plus (2) 100% of the
aggregate net cash proceeds received by the Company from contributions of
capital or the issue or sale since the date of the Indenture of Equity
Interests of the Company or of debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (3) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any), provided
that no cash proceeds received by the Company from the issue or
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sale of any Equity Interests issued by the Company will be counted in
determining the amount available for Restricted Payments under this clause
(c) to the extent such proceeds were used to redeem, repurchase, retire or
acquire any Equity Interests of the Company pursuant to clause (ii) of the
next succeeding paragraph, to defease, redeem or repurchase any
subordinated Indebtedness pursuant to clause (iii) of the next succeeding
paragraph or to repurchase, redeem or acquire any Equity Interests of the
Company pursuant to clause (iv) of the next succeeding paragraph.
The foregoing provisions will not prohibit any or all of the following
(each and all of which: (1) constitutes an independent exception to the
foregoing provisions and (2) may occur in addition to any action permitted to
occur under any other exception): (i) the payment of any dividend within 60 days
after the date of declaration thereof, if at such date of declaration such
payment would have complied with the provisions of the Indenture; (ii) the
redemption, repurchase, retirement or other acquisition of any Equity Interests
of the Company in exchange for, or out of the net proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause (c)(2)
of the preceding paragraph; (iii) the defeasance, redemption or repurchase of
subordinated Indebtedness with the net proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(2) of the preceding paragraph;
(iv) the funding of loans (but not including the forgiveness of any such loan)
to executive officers, directors or shareholders for relocation loans, bonus
advances and other purposes consistent with past practices or the purchase,
redemption or other acquisition for value of shares of Capital Stock of the
Company (other than Disqualified Stock) or options on such shares held by the
Company's or the Restricted Subsidiaries' officers or employees or former
officers or employees (or their estates or trusts or beneficiaries under their
estates or trusts for the benefit of such beneficiaries) upon the death,
disability, retirement or termination of employment of such current or former
officers or employees pursuant to the terms of an employee benefit plan or any
other agreement pursuant to which such shares of Capital Stock or options were
issued or pursuant to a severance, buy-sell or right of first refusal agreement
with such current or former officers or employees provided that the aggregate
amount of any such loans funded and cash consideration paid, or distributions
made, pursuant to this clause (iv) does not in any one fiscal year exceed $1.0
million; (v) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if such dividend is paid pro rata to
all holders of such class of common stock; (vi) the repurchase of any class of
common stock of a Restricted Subsidiary if such repurchase is made pro rata with
respect to such class of common stock; (vii) any other Restricted Payment (other
than (A) a dividend or other distribution on account of any Equity Interests of
the Company or any of its Restricted Subsidiaries and (B) a purchase, redemption
or other acquisition of any Equity Interests of the Company, any of its
Restricted Subsidiaries or any Affiliate of the Company) if the amounts thereof,
together with all other Restricted Payments made pursuant to this clause since
the date of the Indenture shall not exceed $5.0 million and (viii) the
redemption, repurchase or other acquisition of Notes.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary; provided, however, that (i) no Default or Event of
Default shall have occurred and be continuing or would arise therefrom, (ii)
such designation, when considered as an Investment as described in the next
sentence, is at that time permitted under the covenant described under
"Restricted Payments" and (iii) immediately after giving effect to such
designation, the Company would be able to incur at least $1.00 of additional
Indebtedness under the Fixed Charge Coverage Ratio in the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant. All such outstanding
Investments will be deemed to constitute Restricted Investments in an amount
equal to the greater of (i) the net book value of such Investments at the time
of such designation and (ii) the fair market value of such Investments at the
time of such designation. Such designation will only be permitted if under the
terms of the Indenture such Restricted Investment would be permitted at such
time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
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Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
shall be based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Guaranteeing Subsidiaries to, directly or indirectly, Incur, contingently
or otherwise, any Indebtedness (including Acquired Debt) and that the Company
will not issue any Disqualified Stock and will not permit any of its
Guaranteeing Subsidiaries to issue any shares of preferred stock; provided,
however, that the Company and its Guaranteeing Subsidiaries may incur
Indebtedness (including Acquired Debt) and the Company may issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available (or where such incurrence or issuance occurs on or prior to March
31, 1998, the Fixed Charge Coverage Ratio shall be determined for the period
beginning on January 1, 1997 through the most recently ended fiscal quarter for
which internal financial statements are available) immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock issued would have been at least (x) 2.0 to 1 if such incurrence or
issuance occurs on or before June 30, 1999, or (y) 2.25 to 1 if such incurrence
or issuance occurs at any time thereafter, in each case, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Indebtedness had been incurred, or the Disqualified Stock
had been issued, as the case may be, at the beginning of such four-quarter
period; provided that, if such incurrence or issuance occurred on or prior to
March 31, 1998, the aforementioned pro forma calculations shall be made assuming
such incurrence or issuance occurred on January 1, 1997 rather than at the
beginning of such four-quarter period.
The foregoing provisions will not apply to any of the following (each and
all of which: (1) may be issued or incurred, (2) constitutes an independent
exception to the foregoing provisions and (3) may be incurred in addition to any
other Indebtedness permitted to be incurred under any other exception): (i) the
incurrence by the Company or any Guaranteeing Subsidiary of Indebtedness and
letters of credit pursuant to any Credit Facility (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability of
the Company or the relevant Guaranteeing Subsidiary thereunder) in an aggregate
principal amount outstanding at any one time not to exceed $75 million (A)(1)
less the aggregate amount of all mandatory repayments (a "Mandatory Repayment")
of the principal of any term Indebtedness under the Credit Facility that have
been made since the date of the Indenture pursuant to the amortization schedule
of any Credit Facility (other than any Mandatory Repayment made concurrently
with refinancing or refunding of the Credit Facility) and (2) plus the Excess
Amount and (B) less the aggregate amount of all Net Proceeds of Asset Sales
applied pursuant to clause (a) of the first sentence of the second paragraph
under the covenant entitled "Asset Sales" to permanently reduce Indebtedness
(and, in the case of revolving Indebtedness, the commitments) under the Credit
Facility or to cash collateralize letters of credit and permanently reduce
commitments with respect to revolving Indebtedness under the Credit Facility;
provided that the amount of Indebtedness permitted to be incurred pursuant to
the Credit Facility in accordance with this clause (i) shall be in addition to
any Indebtedness permitted to be incurred pursuant to the Credit Facility or
otherwise in reliance on, and in accordance with, clause (ix) below; (ii) the
incurrence by the Company and any Guaranteeing Subsidiary of Indebtedness
represented by the Notes and any Subsidiary Guarantee; (iii) the incurrence by
the Company or any of its Restricted Subsidiaries of Indebtedness represented by
Capital Lease Obligations, mortgage financings, purchase money obligations or
sale and leaseback transactions, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such Restricted
Subsidiary, in an aggregate principal amount not to exceed $15.0 million at any
time outstanding; provided that in no event shall the aggregate principal amount
of Indebtedness incurred in connection with sale and leaseback transactions
pursuant to this clause exceed $7.5 million at any time outstanding; (iv)
Existing Indebtedness; (v) the incurrence by the Company or any of its
Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for,
or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted by the Indenture; (vi) the
incurrence by the Company or any of its
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Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; provided, however, that (a) any
subsequent issuance or transfer (other than for security purposes) of Equity
Interests and (b) any subsequent sale or other transfer (including for security
purposes other than to secure Indebtedness permitted to be incurred pursuant to
clause (i) of this paragraph) of such Indebtedness, in each case, that results
in any such Indebtedness being held by a Person other than the Company or any of
its Restricted Subsidiaries shall be deemed to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging (a)
interest rate risk with respect to any floating rate Indebtedness of such Person
so long as such floating rate Indebtedness is permitted by the terms of the
Indenture to be outstanding or (b) exchange rate risk with respect to agreements
or indebtedness of such Person payable or denominated in a currency other than
U.S. dollars; (viii) the incurrence by the Company's Unrestricted Subsidiaries
of Non-Recourse Debt; provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed
to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company; (ix) the incurrence by the Company and any Guaranteeing Subsidiary of
Indebtedness in an aggregate principal amount at any time outstanding not to
exceed $10.0 million; (x) the incurrence by any Foreign Subsidiary of
Indebtedness and letters of credit to fund working capital and capital
expenditures requirements (with letters of credit being deemed to have a
principal amount equal to maximum potential liability of such Foreign Subsidiary
thereunder) in an aggregate maximum principal amount outstanding at any one time
not to exceed $5.0 million; (xi) Obligations in respect of performance and
surety bonds provided by the Company or any Guaranteeing Subsidiary in the
ordinary course of business and (xii) the incurrence or issuance by any
Restricted Subsidiary of the Company of Indebtedness (in addition to
Indebtedness that may be incurred or issued pursuant to any other clause of this
paragraph) in an aggregate principal amount not to exceed $1.0 million.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company and any Guaranteeing Subsidiary may enter
into a sale and leaseback transaction if (i) the Company or such Guaranteeing
Subsidiary could have incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
(a) the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant "Incurrence of Indebtedness and Issuance of Preferred Stock" and/or (b)
clause (iii) of the second paragraph of the covenant "Incurrence of Indebtedness
and Issuance of Preferred Stock" (as limited by the proviso to such clause),
(ii) the Lien to secure such Indebtedness does not extend to or cover any assets
of the Company or such Guaranteeing Subsidiary other than the assets which are
the subject of the sale and leaseback transaction, (iii) the gross cash proceeds
of such sale and leaseback transaction are at least equal to the fair market
value (as determined in good faith by the Board of Directors of the Company and
set forth in an Officers' Certificate delivered to the Trustee) of the property
that is the subject of such sale and leaseback transaction and (iv) the transfer
of assets in such sale and leaseback transaction is permitted by, and the
proceeds of such transaction are applied in compliance with, the covenant "Asset
Sales."
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien (other than Permitted Liens) securing any
Obligations on any property or asset now owned or hereafter acquired, or on any
income or profits therefrom or assign or convey any right to receive income
therefrom, unless the Notes, and the Subsidiary Guarantees, as applicable, are
either (i) secured by a Lien on such property, assets, income or profits that is
senior in priority to the Lien securing such other Obligations, if such other
Obligations are subordinated in right of payment to the Notes and/or the
Subsidiary Guarantees or (ii) equally and ratably secured by a Lien on such
property, assets, income or profits with the Lien securing such other
Obligations, if such other Obligations are pari passu in right of payment to the
Notes and/or the Subsidiary Guarantees.
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Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to: (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries on its Capital Stock or (b) pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries; (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries; or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness, as in effect on the date of the Indenture; (b) the Credit
Facility and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof; provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive in the aggregate
than those contained in the Credit Facility, as in effect on the date of the
Indenture; (c) the Indenture and the Notes; (d) applicable law; (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries, as in effect at the time of
acquisition (except to the extent such Indebtedness was incurred in connection
with, or in contemplation of, such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired; provided that in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred; (f) customary
non-assignment provisions in leases and other agreements entered into in the
ordinary course of business and consistent with past practices; (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired; (h) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive in the aggregate than those contained in
the agreements governing the Indebtedness being refinanced; (i) an agreement
that has been entered into for the sale or disposition of all or substantially
all of the Equity Interests or property or assets of a Restricted Subsidiary;
provided that such restrictions are limited to the Restricted Subsidiary that is
the subject of such agreement; or (j) restrictions applicable to any Foreign
Subsidiary pursuant to Indebtedness permitted to be incurred pursuant to clause
(x) of the second paragraph of the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock;" provided that such restrictions shall be
limited to customary net worth, leverage, cash flow and other financial ratios
applicable to such Foreign Subsidiary, customary restrictions on mergers and
consolidations involving such Foreign Subsidiary, customary restrictions on
transactions with affiliates of such Foreign Subsidiary and customary provisions
subordinating the payment of intercompany Indebtedness owed by such Foreign
Subsidiary to the Company or any of its Restricted Subsidiaries upon the
occurrence of a default in respect of Indebtedness of such Foreign Subsidiary or
its Subsidiaries and/or events of insolvency with respect to such Foreign
Subsidiary or its Subsidiaries; and provided further, that in no event shall any
Indebtedness incurred by a Foreign Subsidiary prohibit such Foreign Subsidiary
from making any dividend or other distribution to the Company or its Restricted
Subsidiaries or from otherwise making any loan to the Company or its Restricted
Subsidiaries in the absence of a breach by such Foreign Subsidiary of the
covenants contained in such Indebtedness.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), the Consolidated Net Worth of the Company or the
surviving entity, as the case may be, is at least equal to the Consolidated
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Net Worth of the Company immediately before such transaction or series of
transactions; (iii) the Person formed by or surviving any such consolidation or
merger (if other than the Company) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made assumes all
the obligations of the Company under the Notes and the Indenture pursuant to a
supplemental indenture in form reasonably satisfactory to the Trustee; (iv)
immediately after such transaction, no Default or Event of Default exists; and
(v) the Company or the Person formed by or surviving any such consolidation or
merger, or to which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made will, at the time of such transaction after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock." The foregoing will not prohibit a
consolidation or merger between the Company and a Wholly Owned Restricted
Subsidiary, the transfer of all or substantially all of the properties or assets
of the Company to a Wholly Owned Restricted Subsidiary or the transfer of all or
substantially all of the properties or assets of a Wholly Owned Restricted
Subsidiary to the Company; provided that if the Company is not the surviving
entity of such transaction or the Person to which such transfer is made, the
surviving entity or the Person to which such transfer is made shall comply with
clause (iii) of this paragraph.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
could have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person, (ii) if such Affiliate
Transaction involves aggregate consideration in excess of $2.0 million, the
Company delivers to the Trustee a resolution of the Board of Directors of the
Company set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and such Affiliate Transaction is
approved by a majority of the disinterested members of the Board of Directors of
the Company and (iii) if such Affiliate Transaction involves aggregate
consideration in excess of $5.0 million, the Company delivers to the Trustee an
opinion as to the fairness of such Affiliate Transaction from a financial
point-of-view issued by an investment bank or accounting firm of national
standing, provided, however, that (a) any employment, consulting or similar
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business of the Company or such Restricted Subsidiary,
(b) transactions between or among the Company and/or its Restricted
Subsidiaries, (c) payment of employee benefits, including wages, salary,
bonuses, retirement plans and stock options, and director fees in the ordinary
course of business and (d) Restricted Payments permitted by the provisions of
the Indenture described above under clauses (i), (iv), (v), (vi), (vii), (viii)
of the second paragraph of the covenant entitled "Restricted Payments," in each
case, shall not be deemed Affiliate Transactions.
Anti-Layering
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee, or otherwise become liable for any Indebtedness that is both
(a) subordinate or junior in right of payment to any Senior Debt and (b) senior
in any respect in right of payment to the Notes and (ii) no Guaranteeing
Subsidiary will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is both (a) subordinate or junior in right of
payment to its Senior Debt and (b) senior in any respect in right of payment to
its Subsidiary Guarantee.
Line of Business
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, engage to any
substantial extent in any line or lines of business activity other than that
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which, in the reasonable good faith judgment of the Board of Directors of the
Company, is a Related Business; provided that the Company shall not be deemed to
be in violation of this covenant if the Company acquires a business which
derives substantial revenues from a Related Business, regardless of whether such
acquired business includes a line or lines of business that are not a Related
Business.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its Restricted Subsidiaries and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, from and after the consummation of the Exchange Offer or the
effectiveness of the Shelf Registration Statement, the Company will file a copy
of all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Guaranteeing Subsidiaries have agreed that, for so
long as any Notes remain outstanding, they will furnish to Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest or
Liquidated Damages, if any, with respect to the Notes (whether or not
prohibited by the subordination provisions of the Indenture);
(ii) default in payment when due of principal or premium, if any, on
the Notes at maturity, upon redemption or otherwise (whether or not
prohibited by the subordination provisions of the Indenture);
(iii) failure by the Company or any Guaranteeing Subsidiary for 30
days after receipt of notice from the Trustee or Holders of at least 25% in
principal amount of the Notes then outstanding to comply with the
provisions described under the covenants entitled "Change of Control,"
"Asset Sales," "Sale and Leaseback Transactions," "Restricted Payments,"
"Incurrence of Indebtedness and Issuance of Preferred Stock" or "Merger,
Consolidation or Sale of Assets;"
(iv) failure by the Company or any Guaranteeing Subsidiary for 60 days
after notice from the Trustee or the Holders of at least 25% in principal
amount of the Notes then outstanding to comply with its other agreements in
the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, which default (A)(i)
is caused by a failure to pay when due at final stated maturity (giving
effect to any grace period related thereto) principal of such Indebtedness
(a "Payment Default") or (ii) results in the acceleration of such
Indebtedness prior to its express maturity and (B) in each case, the
principal amount of such Indebtedness, together with the principal amount
of any other such Indebtedness under which there has been a Payment Default
or the maturity of which has been accelerated as a result of any matter
contemplated in clause (v)(A)(i) or (v)(A)(ii), aggregates $7.5 million or
more;
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(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments (to the extent not covered by insurance or as to which
the insurer has not acknowledged coverage in writing) aggregating in excess
of $7.5 million, which judgments are not paid, fully bonded, discharged or
stayed within 60 days after their entry;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary of the Company that is a Significant
Subsidiary or group of Restricted Subsidiaries of the Company that
together, would constitute a Significant Subsidiary; and
(viii) the termination of the Subsidiary Guarantee(s) of either a
Guaranteeing Subsidiary that is a Significant Subsidiary or group of
Guaranteeing Subsidiaries that together constitute a Significant Subsidiary
for any reason not permitted by the Indenture, or the denial of any Person
acting on behalf of any such Guaranteeing Subsidiary or group of
Guaranteeing Subsidiaries of its Obligations under any such Subsidiary
Guarantee(s).
To the extent that the last day of the period referred to in clauses (i),
(iii), (iv) or (vi) of the immediately preceding paragraph is not a Business
Day, then the first Business Day following such day shall be deemed to be the
last day of the period referred to in such clauses. Any "day" will be deemed to
end as of 11:59 p.m., New York City time.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable by notice in writing to the Company
and the Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there are any amounts outstanding
under the Credit Facility, shall become immediately due and payable upon the
first to occur of an acceleration under the Credit Facility or five Business
Days after receipt by the Company and the Representative under the Credit
Facility of such Acceleration Notice but only if such Event of Default is then
continuing. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of, the Notes. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in such
Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guaranteeing Subsidiary, as such, shall have any liability for any
obligations of the Company under the Notes, any Subsidiary Guarantee or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes and the Subsidiary. Such waiver may not
be effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all
obligations of the Company and the Guaranteeing Subsidiaries discharged with
respect to the outstanding Notes and the Subsidiary Guarantees ("legal
defeasance"). Such legal defeasance means that the Company will be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (a) the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the Notes when such payments are due, or on the
redemption date, as the case may be, (b) the Company's obligations with respect
to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (c) the
rights, powers, trust, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (d) the legal defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and the Guaranteeing Subsidiaries
released with respect to certain covenants that are described in the Indenture
("covenant defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event covenant defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either legal defeasance or covenant defeasance, the
Company must, among other things, irrevocably deposit with the Trustee, in trust
for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants selected by the Trustee, to pay the principal of, premium, if any,
and interest on the outstanding Notes on the stated maturity or on the
applicable optional redemption date, as the case may be.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Notes or the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture, the Notes or the Subsidiary Guarantees may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, however, an amendment or
waiver may not (with respect to any Note held by a non-consenting Holder): (i)
reduce the principal amount of Notes; (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes or any Change of Control Offer; (iii) reduce the rate of
or change the time for payment of interest or Liquidated Damages on any Notes;
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest or Liquidated Damages, if any, on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration); (v) make any Note payable in money
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other than that stated in the Notes; (vi) waive a redemption or repurchase
payment with respect to any Note; or (vii) make any change in the foregoing
amendment and waiver provisions. Notwithstanding the foregoing, the provisions
with respect to Asset Sales may be amended or supplemented with the consent of
the Holders of at least two-thirds in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for the Notes). In addition, any amendment to the provisions of
Article 10 or Article 12 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate amount of Notes
then outstanding if such amendment would adversely affect the rights of Holders
of Notes. Without obtaining any necessary consents under the Credit Facility,
the Company may not amend or supplement the subordination provisions with
respect to the Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guaranteeing Subsidiaries and the Trustee may amend or
supplement the Indenture, the Subsidiary Guarantees or the Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's or a Guaranteeing Subsidiary's obligations to Holders of the Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA or to allow any Guaranteeing
Subsidiary to guarantee the Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee, in its individual or any other
capacity, may become the owner of Notes and may otherwise deal with the Company,
the Guaranteeing Subsidiaries or any Affiliate of the Company with the same
rights it would have if it were not Trustee; however, if the Trustee acquires
any conflicting interest, it must eliminate such conflict within 90 days, apply
to the Commission for permission to continue as Trustee or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company, 400
Rabro Drive East, Hauppauge, NY 11788, Attn: Richard S. Kolodny.
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the New Notes initially will be
represented by a single permanent global certificate in definitive, fully
registered form (the "Global Note"). The Global Note will be deposited on the
date of the issuance thereof with, or on behalf of, The Depository Trust
Company, New York, New York ("DTC") and registered in the name of a nominee of
DTC.
Notes (i) transferred to any Person who is not a "qualified institutional
buyer" as defined in Rule 144A promulgated under the Securities Act (a "QIB") or
(ii) held by QIBs who elect to take physical delivery of their certificates
instead of holding their interests through the Global Note (and which are thus
ineligible to trade through DTC) (collectively referred to herein as the
"Non-Global Purchasers") will be issued in
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registered form (the "Certificated Security"). Upon the transfer to a QIB of any
Certificated Security initially issued to a Non-Global Purchaser, such
Certificated Security will, unless the transferee requests otherwise or the
Global Note has previously been exchanged in whole for Certificated Securities,
be exchanged for an interest in the Global Note.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchaser and ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs may hold their interests in the Global
Note directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
New Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any), and interest (including
Liquidated Damages) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal of, premium, if any, and interest (including Liquidated Damages) on
the Global Note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a Holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such Holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of New Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the Global Note for Certificated Securities, which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act, DTC was created to hold
securities for its participants and facilitate the
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clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of making any determination of any amount under any single definition
set forth below, such determination shall be made without double counting of any
item; provided that, with respect to the definition of "Fixed Charge Coverage
Ratio" it shall not be deemed to be double counting if an item is included in
the calculation of each of "Consolidated EBITDA" and "Fixed Charges."
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance, or other disposition by
the Company or any of its Restricted Subsidiaries of any assets (including,
without limitation, by way of a sale and leaseback transaction) other than in
the ordinary course of business, and (ii) the issue or sale by the Company or
any of its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of clauses (i) and (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $3.0 million or (b) for net proceeds in excess of $3.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (ii) an issuance of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iii)
a Restricted Payment that is permitted by the covenant described above under the
covenant entitled "Restricted Payments," and (iv) the sale and leaseback of any
assets within 90 days of the acquisition of such assets will not be deemed to be
Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Capital Stock" means, (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participation, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership, partnership interests
(whether general or limited).
"Cash Equivalents" means (i) U.S. dollars, (ii) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than one year from the
date of acquisition, (iii) certificates of deposit and eurodollar time deposits
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank deposits,
in each case with any commercial bank or trust company having capital and
surplus in excess of $300 million, (iv) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution meeting
the qualifications specified in clause (iii) above, (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. ("Moody's")
or Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies,
Inc. ("S&P") and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness with a rating of "A" or
higher from S&P or "A2" or higher from Moody's.
"Change of Control" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as defined in Section 13(d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other
than a Permitted Holder; (ii) the adoption of a plan for the liquidation or
dissolution of the Company; (iii) the Company consolidates with, or merges with
or into, another "person" (as defined above) or "group" (as defined above) other
than a Permitted Holder, in a transaction or series of related transactions in
which the Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any transaction where (A) the
outstanding Voting Stock of the Company is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation and (B) either (1) the "beneficial owners" (as defined in Rule 13d-3
under the Exchange Act) of the outstanding Voting Stock of the Company
immediately prior to such transaction own beneficially, directly or indirectly
through one or more Subsidiaries, not less than a majority of the total
outstanding Voting Stock of the surviving or transferee corporation immediately
after such transaction or (2) if, immediately prior to such transaction the
Company is a direct or indirect Subsidiary of any other Person (each such other
Person, the "Holding Company"), the "beneficial owners" (as defined above) of
the outstanding Voting Stock of such Holding Company immediately prior to such
transaction own beneficially, directly or indirectly through one or more
Subsidiaries, not less than a majority of the outstanding Voting Stock of the
surviving or transferee corporation immediately after such transaction; (iv) the
consummation of any transaction or series of any related transactions
(including, without limitation, by way of merger or consolidation) the result of
which is that any "person" (as defined above) or "group" (as defined above)
other than a Permitted Holder, becomes the "beneficial owner" (as defined above)
of more than 50% of the voting power of the Voting Stock of the Company; or (v)
during any consecutive two-year period, the first day on which a majority of the
members of the Board of Directors of the Company who were members of the Board
of Directors at the beginning of such period are not Continuing Directors.
"Consolidated EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person and its Restricted Subsidiaries for such
period, plus, to the extent deducted in computing Consolidated Net Income, (i)
provision for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, (ii) Consolidated Interest Expense of such Person
for such period, (iii) depreciation and amortization (including amortization of
goodwill and other intangibles) and all other
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non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Restricted Subsidiaries for such period and (iv) any
extraordinary or non-recurring loss and any net loss realized in connection with
either any Asset Sale or the extinguishment of Indebtedness, in each case, on a
consolidated basis determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated EBITDA only to the extent (and in the same proportion) that the Net
Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the interest expense of such Person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP
(including amortization of original issue discount and deferred financing costs
(except as set forth in the proviso to this definition), non-cash interest
payments, the interest component of all payments associated with Capital Lease
Obligations, net payments, if any, pursuant to Hedging Obligations and imputed
interest with respect to Attributable Debt; provided, however, that in no event
shall any amortization of deferred financing costs incurred on or prior to the
date of the Indenture in connection with the Credit Facility or any amortization
of deferred financing costs incurred in connection with the issuance of the
Notes be included in Consolidated Interest Expense).
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (i) the Net Income (but not loss) of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to the referent Person or a Restricted Subsidiary thereof in
cash, (ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
included, (iii) the cumulative effect of a change in accounting principles shall
be excluded, (iv) the portion of net income of the Company and its Consolidated
Subsidiaries allocable to investments in unconsolidated Persons to the extent
that cash dividends or distributions have not actually been received by the
Company or one of its Consolidated Subsidiaries shall be excluded and (v) the
Net Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of Net Income is not, at the date of determination, permitted without
any prior governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary.
"Consolidated Net Worth" means, with respect to any Person at any date, the
consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to Redeemable Capital Stock of such Person and
its Subsidiaries, as determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the relevant Person who (i) was a member of such
Board of Directors on the date of the Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board of Directors at the
time of such nomination or election.
"Credit Facility" means that certain revolving credit and security
agreement, providing for up to $75 million aggregate principal amount of
borrowings, dated as of December 10, 1996 and as amended through the date of the
Indenture, by and among the Company, certain Subsidiaries and IBJ Schroder Bank
& Trust Company as lender and agent, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded, replaced or
refinanced from time to time (together with any amendment, modification,
renewal, refunding, replacement or refinancing to or of any of the foregoing
(collectively, a "Modification") or to any Modification, ad infinitum,
including, without limitation, any agreement modifying the maturity or
amortization schedule of or refinancing or refunding all or any portion of the
Indebtedness thereunder or increasing the
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amount that may be borrowed under such agreement or any successor agreement,
whether or not among the same parties.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) so long as any Indebtedness is
outstanding under the Credit Facility, such Indebtedness, and (ii) any other
Senior Debt permitted under the Indenture the principal amount of which is $10.0
million or more and that has been designated by the Company as "Designated
Senior Debt."
"Disqualified Stock" means that portion of any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event (other than an event
which would constitute a Change of Control), matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof (except, in each case, upon the
occurrence of a Change of Control) on or prior to the final maturity date of the
Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excess Amount" means, with respect to any Credit Facility, the amount by
which aggregate payments of principal thereunder exceed the aggregate payments
of principal required to be made through the date of determination, in respect
of any term indebtedness, under the amortization schedule of such Credit
Facility.
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Credit Facility) in
existence on the date of the Indenture until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the Consolidated Interest Expense of such Person for such period and (ii)
any interest expense on Indebtedness of another Person that is (A) Guaranteed by
the referent Person or one of its Restricted Subsidiaries (whether or not such
Guarantee is called upon) or (B) secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries (whether or not such Lien is called upon);
provided that with respect to clause (ii)(B), the amount of Indebtedness (and
attributable interest expense) shall be equal to the lesser of (I) the principal
amount of the Indebtedness secured by the assets of such Person or one of its
Restricted Subsidiaries and (II) the fair market value (as determined by the
Board of Directors of such Person and set forth in an Officers' Certificate
delivered to the Trustee) of the assets securing such Indebtedness and (iii) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) on any series of preferred stock of such
Person, times (b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Restricted
Subsidiaries for such period to the Fixed Charges of such Person and its
Restricted Subsidiaries for such period. In the event that the Company or any of
its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but on or prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable reference period.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the applicable reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the applicable reference period and shall give pro
forma effect to the Indebtedness and the Consolidated EBITDA of the Person which
is the subject of any such acquisition and (ii) the
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Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company
organized and existing under the laws of any jurisdiction outside of the United
States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, the Securities and Exchange Commission
or in such other statements by such other entity as may be approved by a
significant segment of the accounting profession of the United States, which are
in effect from time to time; provided, however, that all reports and other
financial information provided by the Company to the Holders, the Trustee and/or
the Commission shall be prepared in accordance with GAAP, as in effect on the
date of such report or other financial information.
"Government Securities" means direct obligations of, or obligations
guaranteed by the United States of America for the payment of which guarantee or
obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect hereof), of all or any part of any
Indebtedness.
"Guaranteeing Subsidiary" means each of (i) the Subsidiaries of the Company
in existence on the date of the Indenture and (ii) any future Restricted
Subsidiary and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates and (iii) indemnity agreements and arrangements
entered into in connection with the agreements and arrangements described in
clauses (i) and (ii).
"Incur or incur" means, with respect to any Indebtedness (including
Acquired Debt), to create, incur, issue, assume, guaranty or otherwise become
directly or indirectly liable for or with respect to, or become responsible for,
the payment of such Indebtedness (including Acquired Debt); provided that (i)
neither the accrual of interest nor the accretion of original issue discount
shall be considered an incurrence of Indebtedness and (ii) the assumption of
Indebtedness by the surviving entity of a transaction permitted by the last
sentence of the second paragraph under "Subsidiary Guarantees" or the last
sentence of the covenant entitled "Merger, Consolidation, or Sale of Assets" in
existence at the time of such transaction shall not be deemed to be an
incurrence of Indebtedness. The term "incurrence" has corresponding meaning.
"Indebtedness" means, with respect to any Person without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or representing
Capital Lease Obligations or the deferred and unpaid balance of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable, or representing any Hedging Obligations if and to the
extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person), the maximum fixed repurchase price of Disqualified
Stock issued by such Person and the liquidation preference of preferred stock
issued by such Person, in each case if held by any Person other than the Company
or a Wholly Owned Restricted Subsidiary of the Company, and, to the extent not
otherwise included, the Guarantee by such Person of any such indebtedness of any
other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
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business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary of the Company, or any
Restricted Subsidiary of the Company issues Equity Interests, such that, after
giving effect to any such sale or disposition, such Person is no longer a
Restricted Subsidiary of the Company, the Company shall be deemed to have made
an investment on the date of any such sale, disposition or issuance equal to the
fair market value of the Equity Interests of such Person held by the Company or
such Restricted Subsidiary immediately following any such sale, disposition or
issuance.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions or
(b) the extinguishment of any Indebtedness of such Person or any of its
Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, amounts
required to be applied to the repayment of Indebtedness (other than long-term
Indebtedness of a Restricted Subsidiary of such Person and Indebtedness under
the Credit Facility) secured by a Lien on the asset or assets that are the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity;
and (ii) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided in the documentation with respect thereto, whether or not such interest
is an allowed claim under applicable law), penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Pari Passu Indebtedness" means Indebtedness of the Company which ranks
pari passu in right of payment with the Notes.
"Permitted Holder" means BIL and its current, former and future employees,
members, stockholders, affiliates, directors and officers.
"Permitted Investments" means (i) Investments in the Company or in a
Restricted Subsidiary of the Company (including, without limitation, Guarantees
of the Indebtedness and/or other Obligations of the Company and/or any
Restricted Subsidiary of the Company, so long as such Indebtedness and/or other
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Obligations are permitted under the Indenture), (ii) Investments in Cash
Equivalents, (iii) Investments by the Company or any Restricted Subsidiary of
the Company in, or the purchase of the securities of, a Person if, as a result
of such Investment, (a) such person becomes a Restricted Subsidiary of the
Company or (b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Restricted Subsidiary of the Company, (iv) Investments in
accounts and notes receivable acquired in the ordinary course of business, (v)
any non-cash consideration received in connection with an Asset Sale that
complies with the covenant entitled "Asset Sales," (vi) Investments in
connection with Hedging Obligations permitted to be incurred under the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock."
"Permitted Junior Securities" means Equity Interests or debt securities of
the Company that are unsecured and subordinated at least to the same extent as
the Notes to Senior Debt of the Company and guarantees of any such debt by any
Guaranteeing Subsidiary that are unsecured and subordinated at least to the same
extent as the Subsidiary Guarantee of such Guaranteeing Subsidiary to the Senior
Debt of such Guaranteeing Subsidiary, as the case may be, and has a final
maturity date at least as late as the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Notes.
"Permitted Liens" means (i) Liens on property of the Company and any
Guaranteeing Subsidiary securing (a) Senior Debt and/or (b) Hedging Obligations
permitted to be incurred under the Indenture; (ii) Liens in favor of the Company
or any of its Restricted Subsidiaries; (iii) Liens on property of a Person
existing at the time such Person is merged with or into or consolidated with the
Company or any Restricted Subsidiary of the Company; provided, that such Liens
were not incurred in connection with, or in contemplation of, such merger or
consolidation and do not extend to any assets of the Company or any Restricted
Subsidiary of the Company other than the assets acquired in such merger or
consolidation; (iv) Liens on property of a Person existing at the time such
Person becomes a Restricted Subsidiary of the Company; provided that such Liens
were not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary and do not extend to any assets of the Company
or any other Restricted Subsidiary of the Company; (v) Liens on property
existing at the time of acquisition thereof by the Company or any Restricted
Subsidiary of the Company; provided that such Liens were not incurred in
connection with, or in contemplation of, such acquisition and do not extend to
any assets of the Company or any of its Restricted Subsidiaries other than the
property so acquired; (vi) Liens to secure the performance of statutory
obligations, surety or appeal bonds or performance bonds, or landlords',
carriers', warehousemen's, mechanics', suppliers', materialmen's, or other like
Liens, in any case incurred in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
process of law, if a reserve or other appropriate provision, if any, as is
required by GAAP shall have been made therefor; (vii) Liens existing on the date
of the Indenture; (viii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded; provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (ix) Liens to secure (A)
Indebtedness (including Capital Lease Obligations) permitted by clause (iii) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness or the assets which are the subject of the sale and leaseback
transaction, as the case may be and (B) Indebtedness of any Restricted
Subsidiary (other than a Guaranteeing Subsidiary) permitted to be incurred by
such Restricted Subsidiary pursuant to the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock;" (x) Liens incurred in the
ordinary course of business of the Company or any Restricted Subsidiary of the
Company with respect to obligations not constituting Indebtedness for borrowed
money that do not exceed $10.0 million in the aggregate at any one time
outstanding; (xi) Liens securing Indebtedness incurred to refinance Indebtedness
that has been secured by a Lien permitted under the Indenture; provided that (a)
any such Lien shall not extend to or cover any assets or property not securing
the Indebtedness so refinanced and (b) the refinancing Indebtedness secured by
such Lien shall have been permitted to be incurred under the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock;" (xii) Liens in
favor of the lessee on instruments which are the subject of leases entered into
in the ordinary course of business; provided that any such Lien shall not extend
to or cover any assets or property of
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the Company and its Restricted Subsidiaries that is not the subject of any such
lease; and (xiii) Liens to secure Attributable Debt and/or that is permitted to
be incurred pursuant to the covenant entitled "Sale and Leaseback Transactions;"
provided that any such Lien shall not extend to or cover any assets of the
Company or any Guaranteeing Subsidiary other than the assets which are the
subject of the sale leaseback transaction in which the Attributable Debt is
incurred.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at least as late as the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased, or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the Notes on terms at least
as favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded and (iv) such Indebtedness is incurred by the Company or by
the Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Redeemable Capital Stock" means any shares of any class or series of
Capital Stock, that, either by the terms thereof, by the terms of any security
into which it is convertible or exchangeable or by contract or otherwise, is or
upon the happening of an event or passage of time would be required to be
redeemed prior to the Stated Maturity with respect to the principal of any Note
or is redeemable at the option of the holder thereof at any time prior to any
such Stated Maturity, or is convertible into or exchangeable for debt securities
at any time prior to any such Stated Maturity.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the date of the Indenture
and any and all businesses that in the good faith judgment of the Board of
Directors of the Company are materially related businesses.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the referent Person that is
not an Unrestricted Subsidiary.
"Senior Debt" means (a) with respect to the Company, (i) all Obligations
permitted to be incurred pursuant to the Indenture under or in respect of the
Credit Facility and (ii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Indenture and any Hedging Obligation permitted to
be incurred under the terms of the Indenture, unless the instrument under which
the foregoing is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes and (b) with respect to any
Guaranteeing Subsidiary, (i) all Obligations permitted to be incurred pursuant
to the Indenture under or in respect of the Credit Facility and (ii) any other
Indebtedness permitted to be incurred by such Guaranteeing Subsidiary under the
terms of the Indenture and any Hedging Obligation permitted to be incurred under
the terms of the Indenture, unless the instrument under which the foregoing is
incurred expressly provided that such Indebtedness is on parity with or
subordinated in right of payment to the Subsidiary Guarantee of such
Guaranteeing Subsidiary. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (w) any liability for federal, state,
local or other taxes; (x) any Indebtedness of the Company or any Guaranteeing
Subsidiary to the Company or any Subsidiary of the
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Company or any of their respective Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (iii) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (a) to subscribe for additional Equity Interests or (b) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (iv) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the covenant entitled "Restricted Payments." If,
at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant from the date of such incurrence). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii) no Default
or Event of Default would be in existence following such designation.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof,
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by (b) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
OLD NOTES; REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company and the
Guaranteeing Subsidiaries agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the New Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities (as defined below) who are able to make certain
representations the opportunity to exchange their Transfer Restricted Securities
for New Notes. If (i) the Company is not permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
the Company within the specified time period that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer, (B) that it may not
resell the New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or (C)
that it is a broker-dealer and owns Old Notes acquired directly from the Company
or an affiliate of the Company, the Company will file with the Commission a
registration statement to cover resales of the Transfer Restricted Securities by
the Holders thereof who satisfy certain conditions relating to the provision of
information in connection with such registration statement (the "Shelf
Registration Statement"). The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Old Note until the earlier of (i) the date on which such
Note has been exchanged by a person other than a broker-dealer for a New Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of an Old Note for a New Note, the date on which such New Note is
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Old Note is
distributed to the public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to
October 3, 1997, (ii) the Company will use its best efforts to have the Exchange
Offer Registration Statement declared effective by the Commission on or prior to
December 2, 1997, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue on or prior to 30 days after the date on
which the Exchange Offer Registration Statement was declared effective by the
Commission, New Notes in exchange for all Old Notes tendered prior thereto in
the Exchange Offer, (iv) if obligated to file the Shelf Registration Statement,
the Company will file the Shelf Registration Statement with the Commission on or
prior to 45 days after such filing obligation arises and use its best efforts to
cause the Shelf Registration to be declared effective by the Commission on or
prior to 120 days after such obligation arises and (v)(A) in certain
circumstances, cause the Exchange Offer Registration Statement to remain
effective and usable for a period of 180 days following the initial
effectiveness thereof and (B) cause the Shelf Registration Statement to remain
effective and usable for a period of two years following the initial
effectiveness thereof or such shorter period ending when all the Old Notes
available for sale thereunder have been sold. If (a) the Company fails to file
any of the registration statements required by the Registration Rights Agreement
on or before the date specified for such filing, (b) any of such registration
statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness, (c) the Company fails to consummate the
Exchange Offer within 30 days after the date on which the Exchange Offer
Registration Statement is declared
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effective, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above as a "Registration Default"),
then the Company will pay liquidated damages to each Holder of Transfer
Restricted Securities, with respect to the first 90-day period immediately
following the occurrence of such Registration Default, in an amount equal to
$.05 per week per $1,000 principal amount of Transfer Restricted Securities held
by such Holder ("Liquidated Damages"). The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Transfer
Restricted Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.50 per week per $1,000 principal amount of Transfer Restricted
Securities. All accrued Liquidated Damages will be paid by the Company on each
Damages Payment Date (as defined in the Registration Rights Agreement) to the
Global Note Holder by wire transfer of immediately available funds or by federal
funds check and to Holders of Certificated Securities by wire transfer to the
accounts specified by them or by mailing checks to their registered addresses if
no such accounts have been specified. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the same periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above. Any Holder of Transfer Restricted Securities
who elects not to participate in the Exchange Offer could be deemed to be less
liquid than if such Holder participated in the Exchange Offer.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO THE EXCHANGE OFFER
The following is a summary of the principal U.S. federal income tax
consequences resulting from the exchange of the Old Notes for New Notes in the
Exchange Offer. This summary does not purport to consider all the possible U.S.
federal tax consequences of the purchase, ownership or disposition of the Notes
and is not intended to reflect the particular tax position of any beneficial
owner. It deals only with Old Notes and New Notes held as capital assets.
Moreover, except as expressly indicated, it does not address beneficial owners
that may be subject to special tax rules, such as banks, insurance companies,
dealers in securities or currencies, purchasers that hold Old Notes or New Notes
as a hedge against currency risks or as part of a straddle with other
investments or as part of a "synthetic security" or other integrated investment
(including a "conversion transaction") comprised of a Note and one or more other
investments, or purchasers that have a "functional currency" other than the U.S.
dollar. Except to the extent discussed below under "Non-U.S. Holders", this
summary is not applicable to persons other than "U.S. Holders" (defined below).
This summary is based upon the U.S. federal tax laws and regulations as now in
effect and as currently interpreted and does not take into account possible
changes in such tax laws or such interpretations, any of which may be applied
retroactively. It does not include any description of the tax laws of any state,
local or foreign government that may be applicable to the Notes or holders
thereof. Persons considering the exchange of their Old Notes for New Notes
should consult their own tax advisors concerning the application of the U.S.
federal tax laws to their particular situations as well as any consequences to
them under the laws of any other taxing jurisdiction.
U.S. HOLDERS
Payments of Interest. In general, interest on a New Note will be taxable
to a beneficial owner who or which is (i) an individual who is a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized under the laws of the United States or any state thereof
(including the District of Columbia), (iii) an estate or trust subject to United
States federal income taxation on its income without regard to its source or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more persons who
otherwise would be a U.S. Holder has the authority to control all substantial
decision of the trust (a "U.S. Holder") as ordinary income at the time it is
received or accrued, depending on the holder's method of accounting for tax
purposes.
Exchange Offer. The exchange of Old Notes for New Notes pursuant to the
Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Notes will not be considered to differ materially in
kind or extent from the Old Notes. As a result, there will be no federal income
tax consequences to holders exchanging the Old Notes pursuant to the Exchange
Offer.
NON-U.S. HOLDERS
Under present United States federal income and estate tax law and subject
to the discussion of backup withholding below:
(a) payments of principal and interest on the New Notes by the Company
or any agent of the Company to any Holder that is not a U.S. Holder (a
"Non-U.S. Holder") will not be subject to United States federal withholding
tax, provided that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (ii) the Non-U.S. Holder
is not a controlled foreign corporation that is related to the Company
(directly or indirectly) through stock ownership and (iii) either (A) the
beneficial owner of the Old Notes or the New Notes certifies to the Company
or its agent, under penalties of perjury, that he is not a "United States
person" (as defined in the Code) and provides his name and address, or (B)
a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "financial institution") and holds the Notes on behalf of the
beneficial owner certifies to the Company or its agent under penalties of
perjury that such statement has been received from the beneficial owner by
it or by a financial institution between it and the beneficial owner and
furnishes the payor with a copy thereof;
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(b) a Non-U.S. Holder will not be subject to United States federal
withholding tax on gain realized on the sale, exchange or redemption of New
Note; and
(c) a New Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to United
States federal estate tax as a result of such individual's death if, at the
time of such death, the individual did not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote and the income on the New Notes would not have
been effectively connected with the conduct of a trade or business by the
individual in the United States.
Regulations proposed by the Internal Revenue Service, if finalized in their
current form, would modify the certification requirements described in
clause(a)(iii) above with respect to certain payments made after such
regulations become effective.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the New Note is effectively connected with the conduct of such
trade or business, the Non-U.S. Holder, although exempt from the withholding tax
discussed in the preceding paragraph (provided that such holder properly claims
such exemption by furnishing a properly executed IRS Form 4224 on or before any
payment due), may be subject to U.S. federal income tax on such interest and
gain on the sale, exchange or redemption of the New Note in the same manner as
if it were a U.S. Holder.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the New Notes are outstanding, the Company
is required to provide the IRS with certain information, including the Holder's
name, address and taxpayer identification number, the aggregate amount of
principal and interest paid to that Holder during the calendar year and the
amount of tax withheld, if any. This obligation, however, does not apply with
respect to certain U.S. Holders, including corporations, tax-exempt
organizations, qualified pension and profit sharing trust and individual
retirement accounts.
In the event that a U.S. Holder subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports its tax liability, the
Company, its agent or paying agents or a broker may be required to "backup"
withhold a tax equal to 31% of each payment of interest and principal (and
premium, if any) on the New Notes. This backup withholding is not an additional
tax and may be credited against the U.S. Holder's U.S. federal income tax
liability, provided that the required information is furnished to the IRS.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a New Note if such holder has
provided the required certification that it is not a United States person as set
forth in clause (iii) in the first paragraph under "-- Non-U.S. Holders", or has
otherwise established an exemption (provided that neither the Company not its
agent has actual knowledge that the holder is a United States person or that the
conditions of any exemption are not in fact satisfied).
Payment of the proceeds from the sale of a New Note to or through a foreign
office of a broker generally will not be subject to information reporting or
backup withholding, except that information reporting may apply to such payments
if the broker is a United States person, a controlled foreign corporation for
United States tax purposes or a foreign person 50% or more of whose gross income
from all sources for the three-year period ending with the close of its taxable
year preceding the payment was effectively connected with a U.S. trade or
business. Payment of the proceeds from a sale of an Old Note or New Note to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number of otherwise establishes an exemption from
information reporting and backup withholding. The proposed Treasury Regulations,
noted above, if adopted in their current form, would also provide alternative
certification requirements and means for obtaining the exemption from
withholding tax.
99
<PAGE> 100
PLAN OF DISTRIBUTION
Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of such New
Notes received in exchange for Old Notes where such Old Notes are acquired as a
result of market-making activities or other trading activities. The Company and
the Guaranteeing Subsidiaries have agreed that for a period of 180 days after
the Expiration Date, they will make this Prospectus, as it may be amended or
supplemented from time to time, available to any Participating Broker-Dealer for
use in connection with any such resale. In addition, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-Dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such Participating Broker-Dealer and/or the purchasers of any such New
Notes. Any Participating Broker-Dealer that resells New Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such New Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver a
prospectus, and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date, the Company and the
Guaranteeing Subsidiaries promptly will send additional copies of this
Prospectus, as it may be amended or supplemented from time to time, to any
Participating Broker-Dealer upon request. The Company and the Guaranteeing
Subsidiaries have agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
LEGAL MATTERS
Certain legal matters with respect to the New Notes offered hereby and the
federal income tax consequences of the Exchange Offer are being passed upon for
the Company by Milbank, Tweed, Hadley & McCloy, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Graham-Field Health
Products, Inc. and subsidiaries at December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996 included in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Everest & Jennings at December 31,
1995 and 1994, and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Price Waterhouse LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and is included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
100
<PAGE> 101
The consolidated financial statements and schedule of Fuqua Enterprises,
Inc. at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, included in this Prospectus have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of the Lumex Division of Lumex, Inc.
at December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995 included in this Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
101
<PAGE> 102
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
GRAHAM-FIELD HEALTH PRODUCTS, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors.................................................... F-4
Consolidated balance sheets -- December 31, 1996 and 1995......................... F-5
Consolidated statements of operations -- December 31, 1996, 1995 and 1994......... F-6
Consolidated statements of stockholders' equity -- December 31, 1996, 1995 and
1994............................................................................ F-7
Consolidated statements of cash flows -- December 31, 1996, 1995 and 1994......... F-8
Notes to consolidated financial statements -- December 31, 1996................... F-9
Schedule II -- Valuation and qualifying accounts.................................. F-32
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed consolidated balance sheet -- September 30, 1997 and December 31,
1996............................................................................ F-33
Condensed consolidated statements of operations -- for the three and nine months
ended September 30, 1997 and 1996............................................... F-34
Condensed consolidated statements of cash flows -- for the nine months ended
September 30, 1997 and 1996..................................................... F-35
Notes to condensed consolidated financial statements -- September 30, 1997........ F-36
EVEREST & JENNINGS INTERNATIONAL LTD
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants................................................. F-44
Consolidated statements of operations -- December 31, 1995, 1994 and 1993......... F-45
Consolidated balance sheets -- December 31, 1995 and 1994......................... F-46
Consolidated statements of stockholders' deficit -- December 31, 1995, 1994 and
1993............................................................................ F-47
Consolidated statement of cash flows -- December 31, 1995, 1994 and 1993.......... F-50
Notes to consolidated financial statements........................................ F-52
Schedule II -- Valuation and qualifying accounts.................................. F-69
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated statements of operations -- for the nine months ended September 30,
1996 and 1995................................................................... F-70
Consolidated balance sheets -- September 30, 1996 and December 31, 1995........... F-71
Consolidated statement of stockholders' deficit -- for the nine months ended
September 30, 1996.............................................................. F-72
Consolidated statements of cash flows -- for the nine months ended September 30,
1996 and 1995................................................................... F-73
Notes to unaudited consolidated financial statements.............................. F-74
FUQUA ENTERPRISES, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors.................................................... F-81
Consolidated balance sheets -- December 31, 1996 and 1995......................... F-82
Consolidated statements of income -- December 31, 1996, 1995 and 1994............. F-83
Consolidated statements of cash flows -- December 31, 1996, 1995 and 1994......... F-84
Consolidated statements of stockholders' equity -- December 31, 1996, 1995 and
1994............................................................................ F-85
Notes to consolidated financial statements........................................ F-86
Summary of quarterly data (unaudited)............................................. F-100
Schedule II -- Valuation and qualifying accounts.................................. F-101
</TABLE>
F-1
<PAGE> 103
<TABLE>
<CAPTION>
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed consolidated balance sheets -- September 30, 1997 and December 31,
1996............................................................................ F-102
Condensed consolidated statements of income -- for three months and nine months
ended September 30, 1997 and September 30, 1996................................. F-103
Condensed consolidated statements of cash flows -- for three months and nine
months ended September 30, 1997 and September 30, 1996.......................... F-104
Notes to unaudited consolidated financial statements.............................. F-105
LUMEX DIVISION OF LUMEX, INC.
Report of Independent Auditors.................................................... F-108
Balance sheets -- March 31, 1996, December 31, 1995 and 1994...................... F-109
Statements of operations -- three months ended March 31, 1996 and years ended
December 31, 1995, 1994 and 1993................................................ F-110
Statements of cash flows -- three months ended March 31, 1996 and years ended
December 31, 1995, 1994 and 1993................................................ F-111
Notes to financial statements -- three months ended March 31, 1996 and years ended
December 31, 1995, 1994 and 1993................................................ F-112
</TABLE>
F-2
<PAGE> 104
CONSOLIDATED FINANCIAL STATEMENTS OF
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
F-3
<PAGE> 105
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Graham-Field Health Products, Inc.
We have audited the accompanying consolidated balance sheets of
Graham-Field Health Products, Inc. and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index to Financial Statements on page F-1.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Graham-Field Health Products, Inc. and subsidiaries at December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Melville, New York
March 10, 1997, except for
Note 2 paragraph 5, as to
which the date is August 28, 1997
F-4
<PAGE> 106
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 1,241,000 $ 226,000
Accounts receivable, less allowance for doubtful accounts of $7,243,000
and $1,811,000, respectively............................................ 45,703,000 23,112,000
Inventories............................................................... 48,245,000 31,239,000
Other current assets...................................................... 3,023,000 1,809,000
Recoverable and prepaid income taxes...................................... 256,000 254,000
------------ -----------
TOTAL CURRENT ASSETS............................................... 98,468,000 56,640,000
Property, plant and equipment, net.......................................... 11,264,000 8,599,000
Excess of cost over net assets acquired, net of accumulated amortization of
$8,185,000 and $7,212,000, respectively................................... 91,412,000 29,291,000
Investment in leveraged lease............................................... -- 487,000
Deferred tax assets......................................................... 938,000 3,084,000
Other assets................................................................ 5,112,000 4,910,000
------------ -----------
TOTAL ASSETS....................................................... $207,194,000 $103,011,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................................... $ 13,985,000 $ 2,100,000
Current maturities of long-term debt and Guaranteed Senior Notes.......... 2,016,000 1,621,000
Accounts payable.......................................................... 22,995,000 9,828,000
Acceptances payable....................................................... 19,800,000 5,000,000
Accrued expenses.......................................................... 25,608,000 3,030,000
------------ -----------
TOTAL CURRENT LIABILITIES.......................................... 84,404,000 21,579,000
Long-term debt.............................................................. 6,535,000 1,462,000
Other long-term liabilities................................................. 1,752,000 --
Guaranteed Senior Notes..................................................... -- 19,000,000
------------ -----------
TOTAL LIABILITIES.................................................. 92,691,000 42,041,000
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.01 per share:
authorized shares 300,000 none issued..................................... -- --
Series B preferred stock, par value $.01 per share:
authorized shares 6,100, issued and outstanding 6,100..................... 28,200,000 --
Series C preferred stock, par value $.01 per share:
authorized shares 1,000, issued and outstanding 1,000..................... 3,400,000 --
Common stock, par value $.025 per share:
authorized shares 60,000,000, issued and outstanding
19,650,744 and 15,065,286, respectively................................... 492,000 377,000
Additional paid-in capital.................................................. 101,573,000 66,891,000
(Deficit)................................................................... (18,995,000) (6,298,000)
Cumulative translation adjustment........................................... (12,000) --
------------ -----------
Subtotal.................................................................... 114,658,000 60,970,000
Notes receivable from sale of shares........................................ (155,000) --
------------ -----------
TOTAL STOCKHOLDERS' EQUITY.............................................. 114,503,000 60,970,000
Commitments and contingencies
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $207,194,000 $103,011,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 107
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Medical equipment and supplies................. $143,083,000 $112,113,000 $105,951,000
Interest and other income...................... 559,000 301,000 75,000
------------ ------------ -----------
143,642,000 112,414,000 106,026,000
------------ ------------ -----------
Costs and expenses:
Cost of revenues............................... 99,641,000 78,525,000 74,079,000
Selling, general and administrative............ 34,578,000 29,428,000 31,964,000
Interest expense............................... 2,578,000 2,720,000 2,697,000
Purchased in-process research & development
costs....................................... 12,800,000 -- --
Merger related charges......................... 3,000,000 -- --
------------ ------------ -----------
152,597,000 110,673,000 108,740,000
------------ ------------ -----------
(Loss) income before income taxes (benefit) and
extraordinary item............................. (8,955,000) 1,741,000 (2,714,000)
Income taxes (benefit)........................... 2,918,000 694,000 (735,000)
------------ ------------ -----------
(Loss) income before extraordinary item.......... (11,873,000) 1,047,000 (1,979,000)
Extraordinary loss on early retirement of debt
(net of tax benefit of $383,000)............... (736,000) -- --
------------ ------------ -----------
NET (LOSS) INCOME...................... $(12,609,000) $ 1,047,000 $ (1,979,000)
============ ============ ===========
Net (loss) income per common share:
(Loss) income before extraordinary item.......... $ (.76) $ .07 $ (.14)
Extraordinary loss on early retirement of debt... (.05) -- --
------------ ------------ -----------
Net (loss) income per common share............... $ (.81) $ .07 $ (.14)
============ ============ ===========
Weighted average number of common and common
equivalent shares.............................. 15,557,000 14,315,000 13,862,000
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 108
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B SERIES C COMMON STOCK ADDITIONAL
PREFERRED PREFERRED --------------------- PAID-IN
TOTAL STOCK STOCK SHARES AMOUNT CAPITAL
------------ ----------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.............. $ 57,897,000 -- -- 13,801,342 $345,000 $ 62,918,000
Issuance of common stock on exercise
of stock options.................... 192,000 -- -- 149,250 4,000 314,000
Tax benefit from exercise of stock
options............................. 42,000 -- -- -- -- 42,000
Retirement of Treasury Stock.......... -- -- -- (28,943) (1,000) (125,000)
Net loss.............................. (1,979,000) -- -- -- -- --
------------ ----------- ---------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1994.............. 56,152,000 -- -- 13,921,649 348,000 63,149,000
Issuance of common stock on exercise
of stock options.................... 172,000 -- -- 86,500 2,000 220,000
Regulation S offering, net............ 3,471,000 -- -- 1,071,655 27,000 3,444,000
Tax benefit from exercise of stock
options............................. 38,000 -- -- -- -- 38,000
Retirement of Treasury Stock.......... -- -- -- (14,518) -- (50,000)
Warrants issued in connection with
debt................................ 90,000...... -- -- -- -- 90,000
Net income............................ 1,047,000 -- -- -- -- --
------------ ----------- ---------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1995.............. 60,970,000 -- -- 15,065,286 377,000 66,891,000
Issuance of common stock on exercise
of stock options.................... 550,000 -- -- 153,255 4,000 711,000
Issuance of stock in connection with
acquisitions........................ 65,809,000 $28,200,000 $3,400,000 4,477,720 112,000 34,097,000
Tax benefit from exercise of stock
options............................. 38,000 -- -- -- -- 38,000
Retirement of Treasury Stock.......... -- -- -- (45,517) (1,000) (164,000)
Dividend accrued on Preferred Stock... (88,000) -- -- -- -- --
Translation adjustment................ (12,000) -- -- -- -- --
Notes receivable from officers for
sale of shares...................... (155,000) -- -- -- -- --
Net loss.............................. (12,609,000) -- -- -- -- --
------------ ----------- ---------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1996.............. $114,503,000 $28,200,000 $3,400,000 19,650,744 $492,000 $101,573,000
============ =========== ========== ========== ======== ============
<CAPTION>
NOTES
RECEIVABLE
TREASURY STOCK CUMULATIVE FROM
------------------- TRANSLATION SALE OF
(DEFICIT) SHARES AMOUNT ADJUSTMENT SHARES
------------ ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.............. $ (5,366,000) -- -- -- --
Issuance of common stock on exercise
of stock options.................... -- (28,943) $(126,000) -- --
Tax benefit from exercise of stock
options............................. -- -- -- -- --
Retirement of Treasury Stock.......... -- 28,943 126,000 -- --
Net loss.............................. (1,979,000) -- -- -- --
------------ ------- -------- -------- ---------
BALANCE, DECEMBER 31, 1994.............. (7,345,000) -- -- -- --
Issuance of common stock on exercise
of stock options.................... -- (14,518) (50,000) -- --
Regulation S offering, net............ -- -- -- -- --
Tax benefit from exercise of stock
options............................. -- -- -- -- --
Retirement of Treasury Stock.......... -- 14,518 50,000 -- --
Warrants issued in connection with
debt................................ -- -- -- -- --
Net income............................ 1,047,000 -- -- -- --
------------ ------- -------- -------- ---------
BALANCE, DECEMBER 31, 1995.............. (6,298,000) -- -- -- --
Issuance of common stock on exercise
of stock options.................... -- (45,517) (165,000) -- --
Issuance of stock in connection with
acquisitions........................ -- -- -- -- --
Tax benefit from exercise of stock
options............................. -- -- -- -- --
Retirement of Treasury Stock.......... -- 45,517 165,000 -- --
Dividend accrued on Preferred Stock... (88,000) -- -- -- --
Translation adjustment................ -- -- -- $(12,000) --
Notes receivable from officers for
sale of shares...................... -- -- -- -- $(155,000)
Net loss.............................. (12,609,000) -- -- -- --
------------ ------- -------- -------- ---------
BALANCE, DECEMBER 31, 1996.............. $(18,995,000) 0 $ 0 $(12,000) $(155,000)
============ ======= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 109
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................................. $(12,609,000) $ 1,047,000 $(1,979,000)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 3,539,000 3,347,000 3,531,000
Leveraged lease valuation adjustment............................. -- -- 500,000
Deferred income taxes............................................ 2,139,000 475,000 (936,000)
Provisions for losses on accounts receivable..................... 606,000 451,000 595,000
Gain on sale of product line..................................... (360,000) -- --
Loss on disposal of property, plant and equipment................ -- 3,000 12,000
Purchased in-process research and development cost............... 12,800,000 -- --
Non-cash amounts included in merger related charges.............. 1,191,000 -- --
Non-cash amounts included in extraordinary loss.................. 476,000 -- --
Other............................................................ -- -- 7,000
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable............................................ (11,279,000) (3,117,000) (4,147,000)
Inventories, other current assets and recoverable and prepaid
income taxes................................................. (5,269,000) (1,000) (3,053,000)
Accounts and acceptances payable and accrued expenses.......... 12,536,000 (5,312,000) 4,183,000
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................ 3,770,000 (3,107,000) (1,287,000)
INVESTING ACTIVITIES
Purchase of short-term investments................................. -- -- 1,998,000
Purchase of property, plant and equipment.......................... (1,085,000) (709,000) (1,123,000)
Acquisitions, net of cash acquired................................. (4,558,000) (668,000) --
Proceeds from the sale of property, plant, and equipment........... -- 19,000 --
Proceeds from sale of product line................................. 500,000 -- --
Proceeds from sale of assets under leveraged lease................. 487,000 -- --
Start up cost related to the St. Louis Distribution Center......... -- -- (171,000)
Notes receivable from officers..................................... (155,000) -- --
Net (increase) decrease in other assets............................ (228,000) 116,000 (30,000)
------------ ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES................ (5,039,000) (1,242,000) 674,000
FINANCING ACTIVITIES
Proceeds from notes payable to bank and long-term debt............. 27,310,000 2,054,000 1,673,000
Principal payments on long-term debt and notes payable............. (35,576,000) (1,226,000) (1,536,000)
Proceeds on exercise of stock options.............................. 550,000 172,000 192,000
Proceeds from issuance of common stock, net........................ -- 3,471,000 --
Proceeds from issuance of preferred stock in connection with an
acquisition...................................................... 10,000,000 -- --
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 2,284,000 4,471,000 329,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 1,015,000 122,000 (284,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 226,000 104,000 388,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $ 1,241,000 $ 226,000 $ 104,000
============ =========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid.................................................... $ 2,975,000 $ 2,522,000 $ 2,767,000
============ =========== ===========
Income taxes paid................................................ $ 187,000 $ 266,000 $ 260,000
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 110
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Graham-Field Health Products, Inc. and its
wholly-owned subsidiaries (the "Company") manufacture, market and distribute
medical, surgical and a broad range of other healthcare products into the home
healthcare and medical/surgical markets through a vast dealer network,
consisting of approximately 18,500 customers, principally hospital, nursing
home, physician and home health care dealers, health care product wholesalers
and retailers, including drug stores, catalog companies, pharmacies, and
home-shopping related businesses in North America. In addition, the Company has
increased its presence in Central and South America, Canada, Mexico, Europe and
Asia. The Company markets and distributes approximately 23,000 products under
its own brand names and under suppliers' names. For the year ended December 31,
1996, approximately 28% of the Company's revenues were derived from products
manufactured by the Company, approximately 18% of the Company's revenues were
derived from imported products and approximately 54% were derived from products
purchased from domestic sources, which includes products purchased from Everest
& Jennings prior to the acquisition.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries, each of which is wholly-owned.
All material intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the Financial Statements of 1996 and all
earlier periods have been restated to reflect the Company's acquisition of
Medical Supplies of America, Inc. and Subsidiaries. This acquisition took place
on August 28, 1997 and was recorded on the Company's Financial Statements as a
"Pooling of Interests."
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market value.
Cost is determined principally on the standard cost method for manufactured
goods and on the average cost method for other inventories, each of which
approximates actual cost on the first-in, first-out method.
Property, Plant and Equipment: Property, plant and equipment is recorded
at cost, less accumulated depreciation and amortization. Depreciation and
amortization is computed on the straight-line method over the lesser of the
estimated useful lives of the related assets or the lease term, where
appropriate.
Excess of Cost Over Net Assets Acquired: Excess of cost over net assets
acquired is generally amortized on a straightline basis over 30 to 40 years. The
carrying value of such costs are reviewed by management as to whether the facts
and circumstances indicate that an impairment may have occurred. If this review
indicates that such costs or a portion thereof will not be recoverable, as
determined based on the undiscounted cash flows of the entities acquired over
the remaining amortization period, the carrying value of these costs will be
measured by comparing the fair value of the group of assets acquired to the
carrying value. If fair values are unavailable, the carrying value will be
measured by comparing the carrying values to the discounted cash flows.
Impairment of Long-Lived Assets: Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This standard establishes the accounting for the impairment of
long-lived assets, certain identifiable intangibles and the excess of cost over
net assets acquired, related to
F-9
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GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
those assets to be held and used in operations, whereby impairment losses are
required to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets and certain identifiable intangibles that are expected to be
disposed of. The adoption of SFAS No. 121 did not have a material effect on the
results of operations or financial condition of the Company.
Revenue Recognition Policy: The Company recognizes revenue when products
are shipped, with appropriate provisions for uncollectible accounts and credits
for returns.
Buy-Back Program: During the first quarter of 1996, the Company's
inventory buy-back program was introduced to provide an outlet for its customers
to eliminate their excess inventory. Under the program, the Company purchases
certain excess inventory from its customers, who in turn place additional
purchase orders with the Company exceeding the value of the excess inventory
purchased. The Company is able to utilize its vast customer base and
distribution network to market and distribute the excess inventory through its
division, National Medical Excess Corp. Substantially all of the medical
products purchased by the Company as part of the inventory buy-back program are
items not generally offered for sale by the Company. Items repurchased by the
Company which are identified as items previously sold by the Company to a
customer have been de minimus based on the Company's experience, and have been
recorded in accordance with the Company's normal revenue recognition policy.
Income Taxes: The Company and its subsidiaries file a consolidated Federal
income tax return. The Company uses the liability method in accounting for
income taxes in accordance with SFAS No. 109. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Net Loss/Income Per Common Share Information: Net loss per common share
for 1996 was computed using the weighted average number of common shares
outstanding and by assuming the accrual of a dividend of 1.5% on both the Series
B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and
Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock")
in the aggregate amount of $88,000. Conversion of the preferred stock and common
equivalent shares was not assumed since the result would have been antidilutive.
Net income per common share for 1995 was computed using the weighted average
number of common shares and dilutive common equivalent shares outstanding during
the period. Net loss per common share for 1994 was computed using the weighted
average number of common shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This standard changes the method of calculating
earnings per share and will be effective for periods ending after December 15,
1997. Earlier application is not permitted; however, when adopted all prior
period earnings per share data presented will be required to be restated to
conform with the new standard.
Employee Stock Options: The Company has a stock option program which is
more fully described in Note 9. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's stock option program, options are granted with an exercise
price equal to the market price of the underlying common stock of the Company on
the date of grant. Accordingly, no compensation expense is recognized in
connection with the grant of stock options.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The new standard defines a fair
value method of accounting for the issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are also
permitted to continue
F-10
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GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to account for such transactions under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," but are required to disclose in
the financial statement footnotes, proforma net income and per share amounts as
if the Company had applied the new method of accounting for all grants made
during 1995 and 1996. SFAS No. 123 also requires increased disclosures for
stock-based compensation arrangements. Effective January 1, 1996, the Company
adopted the disclosure requirements of SFAS No. 123.
Concentration of Credit Risk: The Company manufactures, markets and
distributes medical, surgical and a broad range of other healthcare products
into the home healthcare and medical/surgical markets through a vast dealer
network consisting of approximately 18,500 customers, principally hospital,
nursing home, physician and home healthcare dealers, healthcare product
wholesaler and retailers, including drug stores, catalog companies, pharmacies
and home-shopping related business in North America. As a result of the
acquisition of Everest & Jennings International Ltd. ("Everest & Jennings") (see
Note 2), third party reimbursement through private or governmental insurance
programs and managed care programs impacts the Company's customers, which
affects a portion of the Company's business. Such impact is not material for
1996. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables
generally are due within 30 to 120 days. Credit losses relating to customers
have been consistently within management's expectations.
Concentration of Sources of Supply: Everest & Jennings' business is
heavily dependent on its maintenance of two key supply contracts. Everest &
Jennings obtains the majority of its homecare wheelchairs and wheelchair
components pursuant to an exclusive supply agreement (the "Exclusive Wheelchair
Supply Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"). The term of this
agreement extends until December 31, 1999, and on each January 1 thereafter
shall be automatically extended for one additional year unless Everest &
Jennings elects not to extend or Everest & Jennings has failed to order at least
50% of the contractually specified minimums and the manufacturer elects to
terminate. If the Exclusive Wheelchair Supply Agreement with P.T. Dharma is
terminated, there can be no assurance that Everest & Jennings will be able to
enter into a suitable supply agreement with another manufacturer. In addition,
Everest & Jennings obtains homecare beds for distribution pursuant to a supply
agreement with Healthtech Products, Inc., a wholly-owned subsidiary of Invacare
Corporation (which is a major competitor of Everest & Jennings), which is
scheduled to expire on October 15, 1997. Although the Company is in the process
of securing alternative sources of supply with other manufacturers, there can be
no assurance that arrangements as favorable as the current supply contract will
be obtainable.
Foreign Currency Translation: The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars in accordance with the
provisions of SFAS No. 52, "Foreign Currency Translation." Assets and
liabilities are translated at year-end exchange rates. Revenues and expenses are
translated at the average exchange rate for each year. The resulting translation
adjustments for each year are recorded as a separate component of stockholders'
equity. All foreign currency transaction gains and losses are included in the
determination of income and are not significant.
2. ACQUISITIONS OF BUSINESSES AND DISPOSAL OF PRODUCT LINE
On November 27, 1996, the Company acquired Everest & Jennings, pursuant to
the terms and provisions of the Amended and Restated Agreement and Plan of
Merger dated as of September 3, 1996 and amended as of October 1, 1996 (the
"Merger Agreement"), by and among the Company, Everest & Jennings, Everest &
Jennings Acquisition Corp., a wholly-owned subsidiary of the Company ("Sub"),
and BIL (Far East Holdings) Limited, a Hong Kong corporation and the majority
stockholder of Everest & Jennings ("BIL"). Under the terms of the Merger
Agreement, Sub was merged with and into Everest & Jennings with Everest &
Jennings continuing as the surviving corporation wholly-owned by the Company
(the "Merger").
In the Merger, each share of Everest & Jennings' common stock, par value
$.10 per share (the "Everest & Jennings Common Stock"), other than shares of
Everest & Jennings Common Stock cancelled pursuant to
F-11
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GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Merger Agreement, was converted into the right to receive .35 shares of
common stock, par value $.025 per share, of the Company. The Company's common
stock was valued at $7.64 per share, which represents the average closing market
price of the Company's common stock for the period three business days
immediately prior to and three business days immediately after the announcement
of the execution of the Merger Agreement. There were 7,207,689 shares of Everest
& Jennings common stock outstanding on November 26, 1996, which converted into
2,522,691 shares of the Company's common stock. In addition, in connection with,
and at the effective time of the Merger:
(i) BIL was issued 1,922,242 shares of common stock of the Company in
consideration of the repayment of indebtedness owing by Everest & Jennings
in the amount of $24,989,151 to Hong Kong and Shanghai Banking Corporation
Limited, which indebtedness (the "HSBC Indebtedness") was guaranteed by
BIL. The proceeds of such stock purchase were contributed by the Company to
Everest & Jennings immediately following the Merger and used to discharge
the HSBC Indebtedness. The Company's common stock was valued at $7.64 per
share, which represents the average closing market price of the Company's
common stock for the period three business days immediately prior to and
three business days immediately after the announcement of the execution of
the Merger Agreement.
(ii) The Company issued $61 million stated value of the Series B
Preferred Stock to BIL in exchange for certain indebtedness of Everest &
Jennings owing to BIL and shares of Everest & Jennings preferred stock
owned by BIL. The Series B Preferred Stock is entitled to a dividend of
1.5% per annum payable quarterly, votes on an as-converted basis as a
single class with the Company's common stock and the Series C Preferred
Stock (as defined below), is not subject to redemption and is convertible
into shares of the common stock of the Company (x) at the option of the
holder thereof, at a conversion price of $20 per share (or, in the case of
certain dividend payment defaults, at a conversion price of $15.50 per
share), (y) at the option of the Company, at a conversion price equal to
current trading prices (subject to a minimum conversion price of $15.50 and
a maximum conversion price of $20 per share) and (z) automatically on the
fifth anniversary of the date of issuance at a conversion price of $15.50
per share. Such conversion prices are subject to customary antidilution
adjustments. Based on an independent valuation, the fair value ascribed to
the Series B Preferred Stock is $28,200,000.
(iii) BIL was issued $10 million stated value of the Series C
Preferred Stock, the proceeds of which are available to the Company for
general corporate purposes. The Series C Preferred Stock is entitled to a
dividend of 1.5% per annum payable quarterly, votes on an as-converted
basis as a single class with the Company Common Stock and the Series B
Preferred Stock, is subject to redemption as a whole at the option of the
Company on the fifth anniversary of the date of issuance at stated value
and, if not so redeemed, will be convertible into shares of the common
stock of the Company automatically on the fifth anniversary of the date of
issuance at a conversion price of $20 per share, subject to customary
antidilution adjustments. Based on an independent valuation, the fair value
ascribed to the Series C Preferred Stock is $3,400,000.
(iv) Certain indebtedness in the amount of $4 million owing by the
Company to BIL was exchanged for an equal amount of unsecured subordinated
indebtedness of the Company maturing on April 1, 2001 and bearing interest
at the effective rate of 7.7% per annum (the "BIL Note").
The acquisition of Everest & Jennings has been accounted for under the
purchase method of accounting and, accordingly, the operating results of Everest
& Jennings have been included in the Company's consolidated financial statements
since the date of acquisition. The Company allocated $12,800,000 of the purchase
price to purchased in-process research and development projects which have not
reached technological feasibility and have no probable alternative future uses.
The Company expensed the purchased in-process and research development projects
at the date of acquisition. As a result of the acquisition, the Company incurred
$3.0 million of merger related expenses, principally for severance payments, the
write-off of certain unamortized catalog and software costs with no future
value, the accrual of costs to vacate certain of the
F-12
<PAGE> 114
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's facilities, and certain insurance policies. The excess of the
aggregate purchase price over the estimated fair market value of the net assets
acquired was approximately $62.2 million, which is being amortized on a straight
line basis over 30 years. The purchase price allocations have been completed on
a preliminary basis, subject to adjustment should new or additional facts about
the business become known. From the date of acquisition, Everest & Jennings
contributed approximately $3,634,000 of revenue for the quarter and year ended
December 31, 1996.
On September 4, 1996, the Company acquired substantially all of the assets
of V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of
medical products in Puerto Rico, for a purchase price consisting of $1,703,829
in cash, and the issuance of 32,787 shares of common stock of the Company,
valued at $7.625 per share representing the closing market price of the common
stock of the Company on the last trading day immediately prior to the closing.
In addition, the Company assumed certain liabilities of V.C. Medical in the
amount of $296,721. Under the terms of the transaction, in the event the pre-tax
income of the acquired business equals or exceeds $1,000,000 during the twelve
(12) months following the closing date, an additional $500,000 will be paid to
V.C. Medical. The shares were delivered into escrow, and will be held in escrow
until February 4, 1998, subject to any claims for indemnification for purchase
price adjustments in favor of the Company. The acquisition was accounted for as
a purchase and accordingly, assets and liabilities were recorded at fair value
at the date of acquisition and the results of operations are included subsequent
to that date. The excess of cost over the net assets acquired amounted to
approximately $988,000.
On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medical Supplies of America, Inc., a Florida
corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement") dated August 28, 1997, by and among the Company
S.E. (Gene) Davis and Vicki Ray (collectively, the "Medapex Selling
Stockholders"). In accordance with the terms of the Reorganization Agreement,
Medapex became a wholly-owned subsidiary of the Company and the Medapex Selling
Stockholders received in the aggregate 960,000 shares of Company common stock in
exchange for all of the issued and outstanding shares of the capital stock of
Medapex. Pursuant to a Real Estate Sales Agreement dated as of August 28, 1997
(the "Real Estate Sales Agreement") by and between the Company and BBD&M, a
Georgia limited partnership and an affiliate of Medapex, the Company acquired
Medapex's principal corporate headquarters and distribution facility in Atlanta,
Georgia for a purchase price consisting of (i) $622,335 payable (x) by the
issuance of 23,156 shares of Company Common Stock and (y) in cash in the amount
of $311,167, and (ii) the assumption of debt in the amount of $477,664. In
connection with the transaction, the Company also entered into a registration
rights agreement dated as of August 28, 1997, pursuant to which the Company
agreed to register for resale the shares of Company Common Stock issued pursuant
to the Reorganization Agreement and the Real Estate Sales Agreement. Each of the
Medapex Selling Stockholders entered into a two-year employment agreement and
non-competition agreement with the Company. Since this acquisition, which took
place on August 28, 1997, is recorded in the Company's Financial Statements as a
"Pooling of Interests" all prior period statements have been restated to reflect
this transaction.
The acquisition of Medapex qualifies as a tax-free reorganization and was
accounted for as a "pooling of interests." Accordingly, the Company's financial
statements for periods prior to the combination have been restated to include
the results of Medapex for all periods presented.
F-13
<PAGE> 115
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Graham-Field..................................... $127,245,000 $100,403,000 $ 94,501,000
Medapex.......................................... 16,397,000 12,011,000 11,525,000
------------ ------------ ------------
Combined......................................... $143,642,000 $112,414,000 $106,026,000
============ ============ ============
Extraordinary loss, net:
Graham-Field..................................... $ (736,000) $ -- $ --
Medapex.......................................... -- -- --
------------ ------------ ------------
Combined......................................... $ (736,000) $ -- $ --
============ ============ ============
Net (loss) income:
Graham-Field..................................... $(12,951,000) $ 738,000 $ (2,356,000)
Medapex.......................................... 342,000 309,000 377,000
------------ ------------ ------------
Combined......................................... $(12,609,000) $ 1,047,000 $ (1,979,000)
============ ============ ============
</TABLE>
The following summary presents unaudited pro forma consolidated results of
operations for the years ended December 31, 1996 and 1995 as if the acquisitions
described above occurred at the beginning of each of 1996 and 1995. This
information gives effect to the adjustment of interest expense, income tax
provisions, and to the assumed amortization of fair value adjustments, including
the excess of cost over net assets acquired. Both the 1996 and 1995 pro forma
information includes the write-off of certain purchased in-process research and
development costs of $12,800,000, merger related expenses of $3,000,000, and the
extraordinary item relating to the early retirement of indebtedness applicable
to the Guaranteed Senior Notes. The pro forma net loss per common share has been
calculated by assuming the payment of a dividend of 1.5% on both the Series B
Preferred Stock and Series C Preferred Stock in the aggregate amount of
$1,065,000 for each of the years ended December 31, 1996 and 1995. Conversion of
the preferred stock was not assumed since the result would have been
antidilutive.
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net Revenues............................................ $203,919,000 $184,364,000
------------ ------------
Loss Before Extraordinary Item.......................... $(21,088,000) $(18,692,000)
------------ ------------
Net Loss................................................ $(21,824,000) $(19,428,000)
------------ ------------
Common Per Share Data:
Loss Before Extraordinary Item.......................... $ (1.13) $ (1.05)
------------ ------------
Net Loss................................................ $ (1.17) $ (1.09)
------------ ------------
Weighted Average Number of Common Shares Outstanding.... 19,632,000 18,755,000
------------ ------------
</TABLE>
On March 4, 1996, the Company sold its Gentle Expressions@ breast pump
product line for $1,000,000 of which $500,000 was paid in cash with the balance
in a secured subordinated promissory note in the aggregate principal amount of
$500,000, payable over 48 months with interest at the prime rate plus one
percent. The Company recorded a gain of $360,000, which is included in other
revenue in the accompanying condensed consolidated statements of operations.
F-14
<PAGE> 116
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective July 1, 1995, the Company acquired substantially all of the
assets and liabilities of National Medical Excess Corp. ("NME"), a distributor
of used and refurbished medical products, including respiratory and durable
medical equipment. The NME acquisition was accounted for under the purchase
method of accounting and accordingly, assets and liabilities were recorded at
fair values at the date of acquisition. Results of operations of NME are
included in the consolidated financial statements of the Company subsequent to
that date. The purchase price, including acquisition expenses, was approximately
$723,000 in cash, plus the assumption of certain liabilities. The excess of cost
over the net assets acquired amounted to approximately $677,000.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Raw materials....................................... $ 8,423,000 $ 2,871,000
Work-in-process..................................... 4,430,000 1,620,000
Finished goods...................................... 35,392,000 26,748,000
----------- -----------
$48,245,000 $31,239,000
=========== ===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Land and buildings................................. $ 1,462,000 $ 333,000
Equipment.......................................... 17,490,000 14,833,000
Furniture and fixtures............................. 1,629,000 1,600,000
Leasehold improvements............................. 2,222,000 1,958,000
----------- -----------
22,803,000 18,724,000
Accumulated depreciation and amortization.......... (11,539,000) (10,125,000)
----------- -----------
$ 11,264,000 $ 8,599,000
=========== ===========
</TABLE>
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $1,778,000, $1,704,000 and
$1,762,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
5. INVESTMENT IN LEVERAGED LEASE
The Company was the lessor in a leveraged lease agreement entered into in
December 1983, under which helicopters, having an estimated economic life of at
least 22 years, were leased for a term of 16 years. The Company's equity
investment represented 9% of the purchase price; the remaining 91% was furnished
by third-party financing in the form of long-term debt that provided for no
recourse against the Company and was secured by a first lien on the property. At
the end of the lease term, the equipment was to be returned to the Company. The
residual value was estimated to be 57% of the cost. As a result of certain
market conditions and technological advancements, the Company recorded a charge
in the fourth quarter of 1994 of approximately $500,000, which was included in
selling, general and administrative expenses, to reflect the estimated
impairment of the residual value of the helicopters.
F-15
<PAGE> 117
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1996, the Company liquidated its investment in the leveraged lease
agreement. The cash proceeds of $487,000 approximated the recorded net
investment in the lease at December 31, 1995.
6. NOTES AND ACCEPTANCES PAYABLE
On December 10, 1996, the Company entered into a syndicated three-year
senior secured revolving credit facility (the "Credit Facility") for up to $55
million of borrowings, including letters of credit and banker's acceptances,
arranged by IBJ Schroder Bank & Trust Company ("IBJ Schroder"), as agent. The
proceeds from the Credit Facility were used to (i) refinance certain existing
indebtedness of the Company, including the indebtedness (a) under the terms of
the Note and Warrant Agreement dated as of March 12, 1992, as amended (the "John
Hancock Note and Warrant Agreement"), with John Hancock Mutual Life Insurance
Company ("John Hancock") (see Note 8), and (b) to The Chase Manhattan Bank,
under the line of credit, (see below); and (ii) to provide for working capital
needs of the Company. Under the terms of the Credit Facility, borrowings bear
interest, at the option of the Company, at IBJ Schroder's prime rate (8.25% at
December 31, 1996) or 2.25% above LIBOR, or 1.5% above the IBJ Schroder's
bankers' acceptance rate. The Credit Facility is secured by the Company's
inventory and proceeds thereof.
The Credit Agreement contains certain customary terms and provisions,
including limitations with respect to the incurrence of additional debt, liens,
transactions with affiliates, consolidations, mergers and acquisitions, sales of
assets, dividends and other distributions (other than the payment of dividends
to BIL in accordance with the terms of the Series B and Series C Preferred
Stock). In addition, the Credit Facility contains certain financial covenants,
which become effective as of the end of the fiscal quarter ending June 30, 1997,
and include a cash flow coverage and leverage ratio, and require specified
levels of earnings before interest and taxes.
Pursuant to the terms of the Credit Facility, the Company is prohibited
from declaring, paying or making any dividend or distribution on any shares of
the common stock or preferred stock of the Company (other than dividends or
distributions payable in its stock, or split-ups or reclassifications of its
stock) or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any common or preferred stock, or of any options to
purchase or acquire any such shares of common or preferred stock of the Company.
Notwithstanding the foregoing restrictions, the Company is permitted to pay cash
dividends in any fiscal year in an amount not to exceed the greater of (i) the
amount of dividends due BIL under the terms of the Series B and Series C
Preferred Stock in any fiscal year, or (ii) 12.5% of net income of the Company
on a consolidated basis, provided, that no event of default or default shall
have occurred and be continuing or would exist after giving effect to the
payment of the dividends.
At December 31, 1995, the Company had an unsecured line of credit with The
Chase Manhattan Bank available for letters of credit, acceptances and direct
borrowings. The total amount available under the line of credit was $15,000,000.
The line was available for direct borrowings in the amount of up to $5,000,000
and provided for commercial letter of credit and bankers acceptances. This line
of credit expired on December 31, 1996; however, amounts outstanding at that
date for bankers acceptances and letters of credit mature through March 31,
1997.
At December 31, 1996, the Company had aggregate direct borrowings under
both banks' facilities of $13,985,000 and acceptances payable of $19,800,000.
The weighted average interest rate on the amounts outstanding as of December 31,
1996 was 7.65%. Open letters of credit at December 31, 1996 were $1,568,000
relating to trade credit and $6.0 million for other requirements.
At December 31, 1995, the Company had direct borrowings of $2,100,000 and
$5,000,000 utilized under acceptances payable. The weighted average interest
rate on the amounts outstanding as of December 31, 1995 was 8.6%.
F-16
<PAGE> 118
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Note payable to BIL(a)................................ $4,000,000 --
Notes payable to International Business Machines Corp.
("IBM")(b).......................................... 1,019,000 $1,550,000
Capital lease obligations(c).......................... 1,344,000 --
Other(d).............................................. 2,188,000 490,000
---------- ----------
8,551,000 2,040,000
Less current maturities............................... 2,016,000 578,000
---------- ----------
$6,535,000 $1,462,000
========== ==========
</TABLE>
- ---------------
(a) On July 18, 1996, an affiliate of BIL provided the Company with a loan in
the amount of $4,000,000, at an effective interest rate of 8.8%. The loan
was used to fund the acquisition of V.C. Medical and for general corporate
purposes. In connection with the acquisition of Everest & Jennings, the
indebtedness owing by the Company to BIL was exchanged for the BIL Note.
Under the terms of the BIL Note, the Company has the right to reduce the
principal amount of the BIL Note in the event punitive damages are awarded
against the Company or any of its subsidiaries which relate to any existing
product liability claims of Everest & Jennings and/or its subsidiaries
involving a death prior to September 3, 1996.
(b) In connection with the development of the Company's St. Louis Distribution
Center, the Company entered into an agreement with IBM to provide the
computer hardware and software, and all necessary warehousing machinery and
equipment including installation thereof. This project was primarily
financed through IBM by the issuance of the Company's unsecured notes which
corresponded to various components of the project. The unsecured notes
mature through October 2000, with interest rates ranging from 7.68% to
11.53%.
(c) At December 31, 1996, the Company is obligated under certain lease
agreements for equipment which have been accounted for as capital leases.
The capital leases were acquired in connection with the acquisition of
Everest & Jennings. Future minimum payments in the aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
------------------------------------------------- ----------
<S> <C>
1997............................................. $ 954,000
1998............................................. 476,000
1999............................................. 13,000
----------
Total............................................ 1,443,000
Less amounts representing interest............... 99,000
----------
Present value of future minimum lease payments... $1,344,000
==========
</TABLE>
The net book value of assets held under capital lease obligations amounted
to $424,000 at December 31, 1996.
(d) Other long-term debt consists primarily of a mortgage payable in the amount
of $1,100,000 due in monthly installments of $22,906 through November 1998,
with a final payment of approximately $570,000 due on November 30, 1998, and
bearing interest at prime plus one-half percent. In addition, the Company
has a credit facility for its Mexican subsidiary, of which $500,000 was
outstanding as of December 31, 1996. Borrowings under the credit facility
bear interest at approximately 13%. The Mexican borrowings are secured by
the assets of the Mexican subsidiary. The borrowings are payable in
F-17
<PAGE> 119
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
semi-annual installments of $100,000 through 1999. Also, the Company assumed
debt in the amount of $478,000 pursuant to its acquisition of Medapex's
principal headquarters in Atlanta. This debt is in the form of a note
payable (the "Note") to the local bank with a remaining term of
approximately 7 years. The Note, which is collateralized by the principal
headquarters, requires the payment of interest at 72% of the current prime
rate (8.5% as of the date which the Company assumed the Note). Since this
acquisition, which took place on August 28, 1997, is recorded in the
Company's Financial Statements as a "Pooling of Interests" all prior period
statements have been restated to reflect this transaction.
The scheduled maturities of the long-term debt obligations, excluding the
present value of minimum payments on capital lease obligations, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
------------------------------------------------- ----------
<S> <C>
1997............................................. $1,166,000
1998............................................. 1,484,000
1999............................................. 192,000
2000............................................. 86,000
2001 and beyond.................................. 4,279,000
----------
$7,207,000
==========
</TABLE>
8. GUARANTEED SENIOR NOTES
On March 12, 1992, under the John Hancock Note and Warrant Agreement, the
Company privately sold at par to John Hancock its 8.28% Guaranteed Senior Notes
due February 29, 2000 (the "Guaranteed Senior Notes"), in the aggregate
principal amount of $20,000,000 (the "John Hancock Indebtedness"), and five-year
warrants to purchase 125,000 shares of the common stock of the Company at an
exercise price of $12 per share. During 1993, the John Hancock Note and Warrant
Agreement was amended to modify the terms of certain financial covenants and the
terms of the warrants issued to John Hancock. The amendment to the John Hancock
Note and Warrant Agreement provided for, among other things, an increase in the
number of shares available for issuance under the warrants from 125,000 shares
to 250,000 shares of the common stock of the Company (the "Initial Warrants"), a
reduction in the exercise price of the warrants from $12.00 to $5.50 per share,
and an extension of the expiration date of the warrants to February 29, 2000.
The Initial Warrants, which were revalued as of the date of amendment, have been
valued at $365,000, and are being amortized as additional interest over the
remaining term of the debt. At December 30, 1994, the John Hancock Note and
Warrant Agreement was amended to modify the terms of certain financial
covenants. In connection with the amendment, the Company issued to John Hancock
additional warrants to purchase 90,000 shares of the common stock of the Company
(the "Additional Warrants") at an exercise price of $5.25 per share, with an
expiration date of February 29, 2000. The Additional Warrants were valued at
$90,000 and were amortized as additional interest over the remaining term of the
debt. As a result of the Company's offshore private placement of 1,071,655
shares of common stock completed in September 1995, additional warrants to
purchase 5,336 shares of the common stock of the Company were issued to John
Hancock. In connection with the Company's offshore private placement, the
exercise prices of the warrants were adjusted from $5.50 per share to $5.42 per
share with respect to the Initial Warrants and from $5.25 per share to $5.17 per
share with respect to the Additional Warrants.
In connection with the issuance and amendments to the Guaranteed Senior
Notes, issuance costs of approximately $506,000, net of accumulated amortization
of $331,000, were included in other assets at December 31, 1995. Such costs were
amortized over the term of the Guaranteed Senior Notes.
During December 1996, the Company retired the John Hancock Indebtedness
with proceeds from the Company's Credit Facility with IBJ Schroder. In
connection with the early retirement of the John Hancock
F-18
<PAGE> 120
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Indebtedness, the Company incurred charges relating to the "make-whole" payment
and the write-off of all unamortized financing costs associated with the John
Hancock Note and Warrant Agreement. The charges amounted to $736,000 (net of a
tax benefit of $383,000), and are reported as an extraordinary item in the
accompanying consolidated statements of operations.
9. STOCKHOLDERS' EQUITY
On March 23, 1989, the Company declared, and on July 21, 1989 the
stockholders approved, a dividend distribution to stockholders of record on July
21, 1989 of one right for each outstanding share of the Company's common stock
pursuant to a Rights Agreement dated as of July 21, 1989, between the Company
and American Stock Transfer & Trust Company, as Rights Agent (the "1989 Rights
Agreement").
On September 3, 1996, immediately prior to the execution of the Merger
Agreement, the Company entered into an amendment to the 1989 Rights Agreement,
with the effect of exempting the events and transactions contemplated by the
Merger Agreement and the Amended and Restated Stockholder Agreement dated as of
September 3, 1996, as amended on September 19, 1996, by and among the Company
and Irwin Selinger (the "Stockholder Agreement"), from the 1989 Rights
Agreement. In addition, on that date the rights previously issued under the 1989
Rights Agreement were called for redemption on September 17, 1996.
On September 3, 1996, the Company also entered into a new Rights Agreement
with American Stock Transfer & Trust Company, as Rights Agent (the "1996 Rights
Agreement"). As contemplated by the 1996 Rights Agreement, the Company's Board
of Directors declared a dividend of one new preferred share purchase right (a
"Right") for each outstanding share of the common stock of the Company
outstanding on September 17, 1996. Each Right entitles the holder thereof to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company (the
"Preferred Shares") at a price of $35.00 per one one-hundredth of a Preferred
Share, subject to adjustment as provided in the 1996 Rights Agreement.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons have acquired (an
"Acquiring Person") beneficial ownership of 15% or more of the outstanding
shares of capital stock of the Company entitled generally to vote in the
election of directors ("Voting Shares") or (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors prior to such time
as any person or group of affiliated persons becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in a person or
group becoming an Acquiring Person (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
common stock certificates outstanding as of the record date, by such common
stock certificate. Notwithstanding the foregoing, BIL will not be an Acquiring
Person by virtue of its ownership of any Voting Shares acquired in accordance
with the Merger Agreement or the Stockholder Agreement (the "BIL Voting
Shares"), but BIL will become an Acquiring Person if it acquires any Voting
Shares other than BIL Voting Shares or shares distributed generally to the
holders of any series or class of capital stock of the Company. In addition, the
1996 Rights Agreement contains provisions exempting the Merger and the other
events and transactions contemplated by the Merger Agreement and the Stockholder
Agreement from the 1996 Rights Agreement.
The 1996 Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the common stock of the Company. The Rights are not
exercisable until the Distribution Date. The Rights will expire on September 3,
2006.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1 per share but will be entitled to an
F-19
<PAGE> 121
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate dividend of 100 times the dividend declared per share of common stock
of the Company. In the event of liquidation, the holders of the Preferred Shares
will be entitled to a minimum preferential liquidation payment of $100 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each Preferred Share will have 100 votes, voting together
with the shares of common stock of the Company. In the event of any merger,
consolidation or other transaction in which the common stock of the Company is
exchanged, each Preferred Share will be entitled to receive 100 times the amount
received per share of common stock of the Company. The Rights are protected by
customary antidilution provisions. Because of the nature of the Preferred
Shares' dividend, liquidation and voting rights, the value of the one
one-hundredth interest in a Preferred Share purchasable upon exercise of each
Right should approximate the value of one share of common stock of the Company.
In the event the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, the 1996 Rights Agreement provides that proper
provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive (subject to adjustment) upon exercise that
number of shares of common stock of the Company having a market value of two
times the exercise price of the Right. At any time after any person or group
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50% or more of the outstanding Voting Shares, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such person or
group, which will have become void), in whole or in part, at an exchange ratio
of one share of common stock, or one one-hundredth of a Preferred Share (or of a
share of a class or series of the Company's preferred stock having equivalent
rights, preferences and privileges), per Right (subject to adjustment).
At any time prior to a person or group of affiliated or associated persons
becoming an Acquiring Person, the Board of Directors of the Company may redeem
the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"). The redemption of the Rights may be made effective at such
time on such basis with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights in
accordance with this paragraph, the right to exercise the Rights will terminate
and the only right of the holder of the Rights will be to receive the Redemption
Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to (a) lower certain thresholds described above to not less than the greater of
(i) any percentage greater than the largest percentage of the outstanding Voting
Shares then known to the Company to be beneficially owned by any person or group
of affiliated or associated persons and (ii) 10%, (b) fix a Final Expiration
Date later than September 3, 2006, or (c) reduce the Redemption Price, (d)
increase the Purchase Price, except that from and after such time as any person
or group of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights (other
than the Acquiring Person and its affiliates and associates).
As long as the Rights are attached to the common stock of the Company, the
Company will issue one Right with each new share of common stock so that all
such shares will have Rights attached. The Company's Board of Directors has
reserved for issuance 300,000 Preferred Shares upon exercise of the Rights.
F-20
<PAGE> 122
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 27, 1996, in connection with the acquisition of Everest &
Jennings (see Note 2), the Company issued $61 million stated value of Series B
Preferred Stock and $10 million stated value of Series C Preferred Stock to BIL,
and issued an aggregate of 4,444,933 shares of the Company's common stock. The
Series B Preferred Stock is entitled to a dividend of 1.5% per annum payable
quarterly, votes on an as-converted basis as a single class with the common
stock of the Company and the Series C Preferred Stock, is not subject to
redemption and is convertible into shares of the common stock of the Company (x)
at the option of the holder thereof, at a conversion price of $20 per share (or,
in the case of certain dividend payment defaults, at a conversion price of
$15.50 per share), (y) at the option of the Company, at a conversion price equal
to current trading prices (subject to a minimum conversion price of $15.50 and a
maximum conversion price of $20 per share) and (z) automatically on the fifth
anniversary of the date of issuance at a conversion price of $15.50 per share.
Such conversion prices are subject to customary antidilution adjustments.
The Series C Preferred Stock is entitled to a dividend of 1.5% per annum
payable quarterly, votes on an as-converted basis as a single class with the
common stock of Company and the Series B Preferred Stock, is subject to
redemption as a whole at the option of the Company on the fifth anniversary of
the date of issuance at stated value and, if not so redeemed, will be
convertible into shares of the common stock of the Company automatically on the
fifth anniversary of the date of issuance at a conversion price of $20 per
share, subject to customary antidilution adjustments.
In September 1995, the Company completed an offshore private placement of
1,071,655 shares of the common stock of the Company with various European
institutional investors. The net proceeds of $3,471,000 realized from the
offering were used for general corporate purposes.
On November 27, 1996, the Company amended its certificate of incorporation
to provide for, among other things, an increase in the number of authorized
shares of common stock from 40,000,000 to 60,000,000 shares.
On September 4, 1996, the Company acquired substantially all of the assets
of V.C. Medical, in consideration of the issuance of 32,787 shares of the common
stock.
Under the Company's stock option program, the Company is authorized to
grant incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock grants and restored options. Incentive stock options
may be granted at not less than 100% (110% for owners of more than 10% of the
Company's outstanding common stock) of the fair market value of the Company's
common stock at the date of grant. Stock options outstanding under the program
generally vest and are exercisable at a rate of 50% per annum. Effective as of
December 21, 1995, directors' options to purchase 10,000 shares of the common
stock of the Company are granted to eligible directors each January 2, at an
exercise price equal to the fair market value of the common stock at the date of
grant. Directors' options are exercisable one-third each year for three years,
and have a term of ten years. Incentive and non-qualified options expire five
years from the date of grant.
In 1992, the Company amended its stock option program to increase the
maximum number of shares available under the program from 900,000 to 1,500,000.
In 1995, the Company amended its stock option program to increase the maximum
number of shares available under the program from 1,500,000 to 2,100,000. In
1996, the plan was further amended to increase the maximum number of shares
available from 2,100,000 to 3,000,000.
During 1996, 1995 and 1994, officers of the Company surrendered 45,517,
14,518 and 28,943 shares, respectively, of the Company's common stock with a
fair market value of $165,000, $50,000 and $126,000, respectively, in
satisfaction of the exercise price of stock options to purchase 50,000, 25,000
and 58,187 shares, respectively, of common stock of the Company. The shares
received in satisfaction of the exercise price of stock options were recorded as
treasury stock and were retired on a quarterly basis as authorized by the Board
of Directors. Accordingly all such shares have been restored as authorized and
unissued shares of common stock.
F-21
<PAGE> 123
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to comply with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternate fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models which were not developed for use in valuing employee stock options. Under
APB 25, no compensation expense is recognized in connection with the grant of
stock options under the Company's stock option program.
In accordance with FASB Statement No. 123, pro-forma information regarding
net loss and loss per common share has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rate of 6.5%;
dividend yields on the preferred stock of 1.5%, volatility factors of the
expected market price of the Company's common stock of .41 and .42; and a
weighted-average expected life of the option of 3.2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options due to changes in subjective input assumptions which may materially
affect the fair value estimate, and because the Company's employee stock options
have characteristics significantly different from those of traded options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C> <C>
Pro forma net (loss) income........................ $(13,098,000) $953,000
Pro forma net (loss) income per share.............. $ (.85) $ .07
</TABLE>
FASB Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994. Accordingly, the pro forma effect will not be fully reflected
until 1997.
F-22
<PAGE> 124
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to options during the years ended December 31,
1996 and 1995 under FASB Statement No. 123 and for the year ended December 31,
1994 under APB 25 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ------------------- -------------------------
WEIGHTED WEIGHTED OPTION
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -- beginning
of year....................... 912,645 $ 5.49 818,379 $ 6.10 824,886 $ 2.00-$11.75
Options granted:
Incentive options............. 699,121 6.45 257,432 3.47 144,278 $4.125-$5.913
Directors' options............ 90,000 3.25 91,852 3.65 50,000 $ 4.75-$5.375
Non-qualified options......... 91,764 6.02 -- 29,165 $4.125-$5.913
Options exercised............... (103,255) (3.83) (86,500) (2.58) (149,250) $ 2.00-$ 3.00
Options cancelled and expired... (47,100) (4.87) (168,518) (5.79) (80,700) $ 2.00-$11.75
---------- ------ --------- ------ --------
Options outstanding -- end of
year.......................... 1,643,175 $ 5.77 912,645 $ 5.49 818,379 $ 2.00-$11.75
========== ====== ========= ====== ========
Options exercisable at end of
year.......................... 582,244 $ 5.45 483,929 $ 4.95 507,686
========== ====== ========= ====== ========
Weighted average fair value of
options granted during the
year.......................... $ 2.10 $ 1.20
========== =========
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS RANGE OF EXERCISE PRICES
-------------------------------------------------------- ------------------------
<S> <C>
20,000............................................... $2.00-$2.99
409,535................................................ 3.00- 3.99
198,922................................................ 4.00- 4.99
194,400................................................ 5.00- 5.99
44,000............................................... 6.00- 6.99
725,050................................................ 7.00- 7.99
51,268............................................... Over 8.00
----------
1,643,175
==========
</TABLE>
The weighted average remaining contractual life of those options is 5
years.
Shares of common stock reserved for future issuance as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Stock options................................................ 2,240,163
Warrants issued to John Hancock.............................. 345,336
Series B Preferred Stock..................................... 3,935,483
Series C Preferred Stock..................................... 500,000
---------
7,020,982
=========
</TABLE>
The exercise of non-qualified stock options and disqualifying dispositions
of incentive stock options resulted in Federal and state income tax benefits to
the Company equal to the difference between the market price at the date of
exercise or sale of stock and the exercise price of the option. Accordingly,
during 1996, 1995 and 1994, approximately $38,000, $38,000 and $42,000,
respectively, was credited to additional paid in capital.
F-23
<PAGE> 125
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
At December 31, 1996, the Company had aggregate net operating loss
carryforwards of approximately $22,745,000 for income tax purposes which expire
at various dates from 2008 to 2010, of which approximately $20,480,000 were
acquired in connection with the Everest & Jennings acquisition and expire
primarily in 2010 and are limited as to use in any particular year. In addition,
at December 31, 1996, the Company had approximately $890,000 (net of a 35%
reduction of investment tax credits as a result of the Tax Reform Act of 1986)
of investment, research and development, jobs tax and AMT credits, for income
tax purposes which expire primarily in 1999, and which includes alternative
minimum tax credits of $500,000 which have no expiration date. The Company has
provided a valuation allowance in the fourth quarter of 1996 amounting to
approximately $400,000, since the credits are available only through the
expiration dates, and only after the utilization of available net operating loss
carryforwards. In 1995, the Company recorded deferred State tax benefits
previously not recognized as a component of the net operating loss
carryforwards.
For financial reporting purposes, due to prior years losses of Everest &
Jennings, and SRLY limitations, a full valuation allowance of approximately
$14,494,000 has been recognized in the purchase of Everest & Jennings to offset
the net deferred tax assets related to the acquired tax attributes. If realized,
the tax benefit for those items will be recorded as a reduction to the excess
cost over net assets acquired. In addition, the Company has provided an
additional valuation allowance of $600,000 against a portion of its remaining
net deferred tax asset at December 31, 1996 due to the recent acquisition of
Everest & Jennings. The amount of the remaining deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards........................ $ 7,893,000 $3,043,000
Tax credits............................................. 890,000 744,000
Accounts receivable allowances.......................... 2,600,000 723,000
Inventory related....................................... 2,575,000 1,226,000
Deferred rent........................................... 382,000 403,000
Other reserves and accrued items........................ 4,765,000 77,000
------------ ----------
19,105,000 6,216,000
Valuation allowance for deferred assets................. (15,549,000) (55,000)
------------ ----------
Total deferred tax assets................................. 3,556,000 6,161,000
============ ==========
Deferred Tax Liabilities:
Tax in excess of book depreciation...................... 1,696,000 1,713,000
Leveraged lease......................................... -- 506,000
Prepaid expenses........................................ 254,000 250,000
Amortization of intangibles............................. 668,000 477,000
Other................................................... -- 131,000
------------ ----------
Total deferred tax liabilities............................ 2,618,000 3,077,000
------------ ----------
Net deferred tax assets................................... $ 938,000 $3,084,000
============ ==========
</TABLE>
F-24
<PAGE> 126
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- ---------
<S> <C> <C> <C>
Current:
Federal........................................ $ 328,000 $129,000 $ 177,000
State and local................................ 86,000 71,000 44,000
Foreign........................................ 9,000 -- --
---------- -------- ---------
423,000 200,000 221,000
Deferred Federal and state....................... 2,495,000 494,000 (956,000)
---------- -------- ---------
$2,918,000 $694,000 $(735,000)
========== ======== =========
</TABLE>
The following is a reconciliation of income tax computed at the Federal
statutory rate to the provision for taxes:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- ------------------ ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- -------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) computed at statutory
rate..................................... $(3,045,000) (34)% $592,000 34% $ (923,000) (34)%
Expenses not deductible for income tax
purposes:
Amortization of excess of cost over net
assets acquired........................ 276,000 3% 286,000 16% 239,000 9%
In-process R&D costs..................... 4,352,000 49% -- -- -- --
Other.................................... 32,000 -- 7,000 1% 43,000 1%
State tax expense (benefit), net of Federal
benefit.................................. 303,000 3% 121,000 7% (94,000) (3)%
Previously unrecognized State tax
benefits................................. -- -- (312,000) (18)% -- --
Valuation allowance on net deferred tax
assets................................... 1,000,000 11% -- -- -- --
---------- --- --------- --- ------------ ---
$ 2,918,000 32% $694,000 40% $ (735,000) (27)%
========== === ========= === ============ ===
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
employees of its 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. Effective May 1, 1991, benefits
accruing under the Everest & Jennings, Inc. Pension Plan were frozen. During
1991, Everest & Jennings froze the Hourly Plan and purchased participating
annuity contracts to provide for accumulated and projected benefit obligations.
Everest & Jennings also froze the Salaried Plan effective as of January 1, 1993.
Accordingly, no pension cost has been reflected in the accompanying statement of
operations.
F-25
<PAGE> 127
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the status of these plans and the amounts
recognized in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................................. $17,567,000
-----------
Accumulated benefit obligation........................................ $17,567,000
-----------
Projected benefit obligation for services rendered to date.............. $17,567,000
Plan assets at fair value, primarily listed stocks, bonds, investment
funds and annuity contracts........................................... 14,746,000
-----------
Projected benefit obligation in excess of plan assets................... 2,821,000
Unrecognized transition amount.......................................... --
Unrecognized loss from change in discount rate.......................... --
-----------
Pension liability (current portion of $1,069,000)....................... $ 2,821,000
===========
</TABLE>
The following assumptions were used to determine the projected benefit
obligations and plan assets:
<TABLE>
<CAPTION>
EVEREST & JENNINGS, SMITH & DAVIS
INC. PLAN PLANS
------------------- -------------
1996 1996
------------------- -------------
<S> <C> <C>
Weighted-average discount rate........................ 7.5% 7.5%
Expected long-term rate of return on assets........... 9.0% 9.0%
</TABLE>
No long-term rate for compensation increases were assumed as all
participants are inactive and the plans are frozen.
The Company also sponsors three 401(k) Savings and Investment Plans. One
plan covers all full-time employees of the Company's wholly-owned subsidiary,
Everest & Jennings, the other plan covers all full-time employees of the
Company's wholly-owned subsidiary, Medapex, and the last plan covers the
remaining employees of the Company. The Company does not contribute to its plan
and the Everest & Jennings' plan. The Medapex plan matches 25% of the employees
contribution up to a maximum contribution of 6% of the employee's salary.
Amounts expensed for the Medapex plan for the fiscal years 1996 and 1995 were
immaterial.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of December 31, 1996 and 1995, for
which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amounts reported in the
accompanying balance sheets approximate fair value.
Notes and acceptances payable: The carrying amounts of the Company's
borrowings under its credit facility approximate their fair value.
Long-term debt: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements. At
December 31, 1996 and 1995, the carrying amount reported approximates fair
value.
Investment in leveraged lease: The carrying amounts reported in the
accompanying balance sheet for 1995 approximate fair value. Fair value is
determined based on the current value of the underlying assets.
F-26
<PAGE> 128
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Guaranteed Senior Notes: The fair value of the Company's Guaranteed Senior
Notes is estimated using a discounted cash flow analysis based on current rates
offered to the Company for debt of the same remaining maturity. At December 31,
1995, the fair value of such debt was approximately $19,200,000.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is a party to a number of noncancellable lease agreements for
warehouse space, office space and machinery and equipment rental. As of December
31, 1996 the agreements extend for various periods ranging from 1 to 11 years
and certain leases contain renewal options. Certain leases provide for payment
of real estate taxes and include escalation clauses.
For those leases which have escalation clauses, the Company has recorded
rent expense on a straight-line basis. At December 31, 1996 and 1995, $933,000
and $984,000, respectively, of rent expense was accrued in excess of rental
payments made by the Company.
As of December 31, 1996, minimal annual rental payments under all
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
------------------------------------------------
<S> <C>
1997............................................ $ 3,174,000
1998............................................ 3,132,000
1999............................................ 3,007,000
2000............................................ 2,806,000
2001............................................ 2,788,000
Thereafter...................................... 11,230,000
-----------
$26,137,000
===========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994
approximated $2,805,000, $2,400,000, and $2,549,000, respectively.
Legal Proceedings
On June 19, 1996, a class action lawsuit was filed on behalf of all
stockholders of Everest & Jennings (other than the named defendants) in the
Delaware Court of Chancery, following announcement on June 17, 1996 of the
original agreement in principle between Everest & Jennings and the Company. The
class action names as defendants the Company, Everest & Jennings, Everest &
Jennings' directors, and BIL. The class action challenges the transactions
contemplated by the original agreement in principle, alleging, among other
things, that (i) such transactions were an attempt to eliminate the public
stockholders of Everest & Jennings at an unfair price, (ii) BIL will receive
more value for its holdings in Everest & Jennings than its minority
stockholders, (iii) the public stockholders will not be adequately compensated
for the potential earnings of Everest & Jennings, (iv) BIL and the directors of
Everest & Jennings breached or aided and abetted the breach of fiduciary duties
owed to the stockholders (other than the defendants) by not exercising
independent business judgment and having conflicts of interest, and (v) the
Company aided and abetted and induced breaches of fiduciary duties by other
defendants by offering incentives to members of management, either in the form
of continued employment or monetary compensation and perquisites, in exchange
for their approval of the merger. The class action seeks to rescind the merger
or an award of rescissionary damages if it cannot be set aside, and also prays
for an award of compensatory damages. The Company believes that it has valid
defenses to the complaint's allegations of wrongdoing, and intends to vigorously
defend the lawsuit.
F-27
<PAGE> 129
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 21, 1996, the Company was sued by Minnesota Mining & Manufacturing
Company ("3M") in a claim purportedly arising under federal, state and common
law trademark, false advertising, and unfair competition laws, as well as for
breach of, and interference with, contracts. 3M alleges that the Company is
selling 3M products in violation of federal and state law, and seeks monetary
damages in an unspecified amount, as well as injunctive relief against the
Company's continued sale of 3M products. The claim was filed in the Southern
District of New York. The Company vigorously denies the allegations of 3M's
complaint, and has filed an answer denying the allegations of wrongdoing and
asserting affirmative defenses. In addition, the Company has asserted
counterclaims against 3M under federal antitrust laws, as well as an unfair
competition claim. On October 16, 1996, 3M moved to dismiss the Company's
antitrust counterclaims. Briefing of the motion has been completed and the
parties are awaiting a decision. 3M has proposed a settlement of all claims
pursuant to which the Company would, among other things, agree to restrict its
purchases of 3M products to certain authorized 3M dealers, and make a payment of
no more than $400,000. Although settlement discussions are ongoing, it is not
possible to predict the outcome of such discussions.
Everest & Jennings and its subsidiaries are parties to certain lawsuits and
proceedings as described below (the "Everest & Jennings Proceedings"). Under the
terms of the Stockholder Agreement, BIL has agreed to indemnify the Company and
its subsidiaries against the Everest & Jennings Proceedings in the event the
amount of losses, claims, demands, liabilities, damages and all related costs
and expenses (including attorney's fees and disbursements) in respect of the
Everest & Jennings Proceedings exceeds in the aggregate the applicable amounts
reserved for such proceedings on the books and records of Everest & Jennings as
of September 3, 1996. In view of BIL's obligation to indemnify the Company and
its subsidiaries with respect to such proceedings, management does not expect
that the ultimate liabilities, if any, with respect to such proceedings, will
have a material adverse effect on the consolidated financial position or results
of operations of the Company.
On July 17, 1990, a class action suit was filed in the United States
District Court for the Central District of California by a stockholder of
Everest & Jennings against Everest & Jennings and certain of its present and
former directors and officers. The suit seeks unspecified damages for alleged
non-disclosure and misrepresentation concerning Everest & Jennings in violation
of federal securities laws. The district court dismissed the complaint on March
26, 1991, and plaintiff filed his first amended complaint on May 8, 1991. The
district court again granted a motion to dismiss the entire action on November
26, 1991. Plaintiff then took an appeal to the Ninth Circuit, which reversed the
district court's dismissal of the first amended complaint and remanded the case
to the district court for further proceedings. On March 25, 1996, the district
court granted Plaintiff's motion to certify a class composed of purchasers of
the Everest & Jennings' common stock during the period from March 31, 1989 to
June 12, 1990. Plaintiff's counsel has not as yet submitted to the court any
proposed notice of class certification and, consequently, the members of the
class have not been notified that the court has certified the case to proceed as
a class action. Everest & Jennings has received and filed responses and
objections to a document request, but further action has been deferred to allow
the parties to discuss possible settlement. Everest & Jennings has ordered the
parties to file and plaintiff's counsel has filed monthly reports on the status
of settlement discussions since September 1996. There are numerous defenses
which Everest & Jennings intends to assert to the allegations in the first
amended complaint if settlement cannot be reached on acceptable terms. Under
Everest & Jennings' directors and officers insurance policy, Everest & Jennings
has coverage against liabilities incurred by its directors and officers, subject
to a self-insured retention of $150,000 (which has been exceeded by defense
costs incurred to date). The carrier has contended that fifty percent of the
liability and expenses in the case must be allocated to Everest & Jennings,
which is not an insured defendant, and fifty percent to the insured former
director and officer defendants. This proceeding constitutes an Everest &
Jennings Proceeding, which is covered under BIL's indemnification obligations
pursuant to the terms and provisions of the Stockholder Agreement.
Die Cast Products, Inc., a former subsidiary of Everest & Jennings, was
named as a defendant in a lawsuit filed by the State of California pursuant to
the Comprehensive Environmental Response, Compensa-
F-28
<PAGE> 130
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tion and Liability Act 42 U.S.C.sec.sec.9601 et seq. Everest & Jennings was
originally notified of this action on December 10, 1992. A settlement was
reached at an October 5, 1995 Mandatory Settlement Conference before Judge Rea
in the Federal District Court of the Central District of California. The state
of California has agreed to accept the sum of $2.6 million as settlement for all
past costs and future remedial work. Everest & Jennings' share of the settlement
with the state of California has amounted to $41,292.30, which sum was paid on
January 3, 1997. No further claims or assessments with respect to this matter
are anticipated at this time. This proceeding constitutes an Everest & Jennings
Proceeding, which is covered under BIL's indemnification obligations pursuant to
the terms and provisions of the Stockholder Agreement.
In March, 1993, Everest & Jennings received a notice from the U.S.
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, CA. 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. An agreement in principle now
has been reached between the Casmalia Steering Committee ("CSC") and the EPA for
a settlement of the majority of the Casmalia site liability. The Steering
Committee represents approximately 50 of the largest volume generators at the
Casmalia site. It is anticipated that the agreement will be formalized and
embodied in a Consent Decree in the summer and fall of 1997. Pursuant to the
settlement, the CSC members are committing to perform and fund Phase I work at
the site. It is estimated that the Phase I work being committed to will cost
approximately $30 to $35 million dollars and will take three to five years to
complete. This cost will be allocated to Steering Committee members based upon
their volume of waste sent to the site. Everest & Jennings accounts for 0.8% of
the waste. Thus, by participating in the Phase I settlement, Everest & Jennings
has committed to payments of approximately $280,000 to be spread over a three to
five year period. Pursuant to the settlement, Everest & Jennings will be
released from further obligation for thirty (30) years. In addition, the
Steering Committee companies are seeking to recover from the owner and operator
of the site. Any such recovery will diminish Everest & Jennings's payout
pursuant to the settlement. This proceeding constitutes an Everest & Jennings
Proceeding, which is covered under BIL's indemnification obligations pursuant to
the terms and provisions of the Stockholder Agreement.
In 1989, a patent infringement case was initiated against Everest &
Jennings and other defendants in the U.S. District Court, Central District of
California. Everest & Jennings prevailed at trial with a directed verdict of
patent invalidity and non-infringement. The plaintiff filed an appeal with the
U.S. Court of Appeals for the Federal Circuit. On March 31, 1993, the Court of
Appeals vacated the District Court's decision and remanded the case for trial.
Impacting the retrial of this litigation was a re-examination proceeding before
the Board of Patent Appeals with respect to the subject patent. A ruling was
rendered November 23, 1993 sustaining the claim of the patent which Everest &
Jennings Inc. has been charged with infringing. Upon the issuance of a patent
re-examination certificate by the U.S. Patent Office, the plaintiff presented a
motion to the District Court requesting a retrial of the case. Everest &
Jennings presented a Motion for Summary Judgment of Noninfringement based in
part upon the November 23, 1993 decision of the Board of Patent Appeals. The
Motion was granted in follow-up conferences and an official Judgment was entered
November 17, 1994. Following the appeal by the plaintiffs, the case has been
remanded to the U.S. District Court, Central District of California, for further
consideration. Everest & Jennings believes that this case is without merit and
intends to contest it vigorously. The ultimate liability of Everest & Jennings,
if any, cannot be determined at this time. This proceeding constitutes an
Everest & Jennings Proceeding, which is covered under BIL's indemnification
obligations pursuant to the terms and provisions of the Stockholder Agreement.
Following a jury trial on July 15, 1996, a verdict was rendered in the
District Court of the First Judicial District of the State of New Mexico in a
civil product liability law suit (Chris Trew et al. vs. Smith and Davis
Manufacturing Company, Inc., No. SF95-354) against Smith & Davis Manufacturing
Company, a wholly-
F-29
<PAGE> 131
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
owned subsidiary of Everest & Jennings ("Smith & Davis"), in the amount of
$635,698.12 actual damages, prejudgment interest and costs, plus $4 million
punitive damages. The suit was instituted on February 25, 1995 by the children
and surviving heirs and personal representatives of a nursing home patient in
Carlsbad, New Mexico who died on September 28, 1993 after her head became pinned
between a bed rail allegedly manufactured by Smith & Davis and her bed. The suit
alleged that the bed rail in question was defective and unsafe for its intended
purpose, that Smith & Davis was negligent in designing, manufacturing, testing
and marketing such bed rails, and that the negligence of the nursing home in
question was the proximate cause of decedent's injuries and death. The nursing
home reached a settlement with Plaintiffs prior to trial. Judgment was entered
on the jury verdict, which bears interest at the rate of 15% from August 30,
1996 until paid. On October 15, 1996, Plaintiffs filed a related case in the
Circuit Court of the County of St. Louis, Missouri (Chris Trew, et. al. v.
Everest & Jennings, et al., Cause No. 96CC-000456, Division 39), which seeks a
declaratory judgment against Everest & Jennings and BIL to pierce their
respective corporate veils and holding them jointly and severally liable for the
full amount of the New Mexico judgment. On February 26, 1997, the parties agreed
in principle to a proposed settlement in which the Plaintiffs would receive $3
million, of which Everest & Jennings estimates that approximately $1.5 million
will be paid by Everest & Jennings' insurance carriers, however, Everest &
Jennings may seek additional recovery from the insurance carriers. The amounts
required to be paid in the proposed settlement in excess of any insurance
recoveries will be borne, in whole or in part, by BIL under the indemnification
terms and provisions contained in the Stockholder Agreement and/or through the
Company's right of offset under the BIL Note.
While the results of the lawsuits and other proceedings referred to above
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, results of operation or cash flows of the Company.
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, results of operations or cash flows of the Company.
COLLECTIVE BARGAINING AGREEMENTS
The Company is a party to five (5) collective bargaining agreements
covering the Company's facilities located in Hauppauge, New York; Passaic, New
Jersey; Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico. The
collective bargaining agreements cover approximately 620 employees. The
collective bargaining agreements for Hauppauge, New York; Passaic, New Jersey;
Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico are scheduled to
expire on September 30, 1997, July 27, 1999, September 13, 1999, July 24, 1998
and December 31, 1997, respectively.
The Company has never experienced an interruption or curtailment of
operations due to labor controversy, except for a three-day period during the
summer of 1993 in which the Company experienced a strike at its Passaic, New
Jersey facility, which did not have a material adverse effect on the Company's
operations. The Company considers its employee relations to be satisfactory.
14. OTHER MATTERS
During the fourth quarter of 1996, the Company recorded charges of
$15,800,000 related to the acquisition of Everest & Jennings. The charges
included $12,800,000 related to the write-off of purchased in-process research
and development costs (see Note 2) and $3,000,000 for other merger related
charges (see Note 2).
F-30
<PAGE> 132
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company recorded an extraordinary item of $736,000 (net of
tax benefit of $383,000) related to the early extinguishment of the John Hancock
Indebtedness in the fourth quarter of 1996 (see Note 8).
During the fourth quarter of 1994, the Company recorded non-recurring
expenses of approximately $1,321,000 which were included in selling, general and
administrative expenses at December 31, 1994, of which approximately $612,000
was included in accrued expenses. These non-recurring expenses were related to
the estimated impairment of the residual value related to the Company's
investment in leveraged lease (see Note 5), an accrual for severance and other
employee costs related to employees terminated during the fourth quarter of 1994
and first quarter of 1995, an accrual for sales and franchise taxes related to
in process audits being conducted by multiple states for the periods of 1988
through 1992, and costs related to a terminated acquisition attempt and a lease
arbitration proceeding with respect to the Company's principal manufacturing
facility.
15. MAJOR CUSTOMERS
In 1994, the Company derived approximately 10% of its revenues from Apria
Healthcare Group, Inc. (formerly Abbey Home Healthcare, which merged with
Homedco in June 1995). On September 1, 1995, the Company announced that its
current supply agreement with Apria would not be renewed in 1996, and will
expire by its terms on December 31, 1995. During fiscal year 1995 and 1994, the
Company's product sales to Apria were approximately $8.1 million and $10.3
million, respectively, which represented approximately 7% and 10%, respectively,
of the Company's product sales. The Company's sales to Apria generate gross
profit margins of approximately 20%, which is significantly lower than the
Company's sales to its other customers which generate gross profit margins of
approximately 33%. During 1996, no single customer or buying group accounted for
more than 10% of the Company's revenues.
16. SUBSEQUENT EVENTS
On February 28, 1997, Everest & Jennings Canada acquired substantially all
of the assets and certain liabilities of Motion 2000 Inc. and its wholly-owned
subsidiary, Motion 2000 Quebec Inc., for a purchase price equal to Cdn. $2.9
million (Canadian Dollars) (approximately $2.15 million). The purchase price was
paid by the issuance of 187,733 shares of the common stock of the Company valued
at $11.437 per share, of which 28,095 shares were delivered into escrow. The
purchase price is subject to adjustment if the final determination of the
closing date net book value of the assets acquired by Everest & Jennings Canada
is equal to or less than Cdn. $450,000 (Canadian Dollars) (approximately
$333,000). All of the escrowed shares will be held in escrow until the earlier
to occur (the "Initial Release Date") of June 28, 1997, or the final resolution
of the purchase price. On the Initial Release Date, a portion of the escrowed
shares will be released in an amount equal to the difference between (i) 28,095
shares and (ii) the sum of the number of (x) any escrowed shares subject to any
indemnification claims, (y) any escrowed shares used to satisfy any adjustment
to the purchase price, and (z) 18,729 shares. The balance of the escrowed shares
will be released on December 31, 1997, subject to any claims for
indemnification.
On March 7, 1997, Everest & Jennings acquired Kuschall of America, Inc., a
manufacturer of pediatric wheelchairs, high-performance adult wheelchairs and
other rehabilitation products, for a purchase price of $1,510,000, representing
the net book value of Kuschall. The purchase price was paid by the issuance of
116,154 shares of the common stock of the Company valued at $13.00 per share, of
which 23,230 shares were delivered into escrow. The escrow shares will be
released on March 7, 1999, subject to any purchase price adjustments in favor of
the Company and claims for indemnification.
F-31
<PAGE> 133
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
COL. C
------------
ADDITIONS
------------
COL. B 1 COL. D COL. E
------------ ADDITIONS ------------------- -------------
COL. A BALANCE AT CHARGED 2 OTHER CHARGES BALANCE AT
- ----------------------------------------- BEGINNING OF TO COSTS CHARGED TO OTHER ADD (DEDUCT) END OF
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS -- DESCRIBE -- DESCRIBE PERIOD
- ----------------------------------------- ------------ ------------ ------------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996........... $1,811,000 $ 606,000 $ 5,077,000(2) $ (251,000)(1) $ 7,243,000
Year ended December 31, 1995........... 1,987,000 451,000 10,000(2) (637,000)(1) 1,811,000
Year ended December 31, 1994........... 2,564,000 595,000 -- (1,172,000)(1) 1,987,000
Valuation allowance for net deferred tax
assets:
Year ended December 31, 1996........... $ 55,000 $1,000,000 $14,494,000(2) -- $15,549,000
Year ended December 31, 1995........... 55,000 -- -- -- 55,000
Year ended December 31, 1994........... 55,000 -- -- -- 55,000
</TABLE>
- ---------------
(1) Net write-off of accounts receivable.
(2) Represents an allocation of the purchase price of the Everest & Jennings and
V.C. Medical acquisitions.
F-32
<PAGE> 134
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5,682,000 $ 1,241,000
Marketable securities......................................... 12,832,000 --
Accounts receivable -- net.................................... 74,770,000 45,703,000
Inventories................................................... 60,314,000 48,245,000
Other current assets.......................................... 8,146,000 3,023,000
Recoverable and prepaid income taxes.......................... 256,000 256,000
------------ ------------
TOTAL CURRENT ASSETS.................................. 162,000,000 98,468,000
Property, plant and equipment -- net............................ 14,801,000 11,264,000
Excess of cost over net assets acquired -- net.................. 103,232,000 91,412,000
Other assets.................................................... 13,015,000 5,112,000
Deferred tax asset.............................................. -- 938,000
------------ ------------
TOTAL ASSETS.......................................... $293,048,000 $207,194,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................. $ -- $ 13,985,000
Current maturities of long-term debt.......................... 2,054,000 2,016,000
Accounts payable.............................................. 22,945,000 22,995,000
Acceptances payable........................................... -- 19,800,000
Accrued expenses.............................................. 21,829,000 25,608,000
------------ ------------
TOTAL CURRENT LIABILITIES............................. 46,828,000 84,404,000
Long-term debt.................................................. 8,440,000 6,535,000
Senior subordinated notes....................................... 100,000,000 --
Other long term liabilities..................................... 1,522,000 1,752,000
------------ ------------
TOTAL LIABILITIES..................................... 156,790,000 92,691,000
STOCKHOLDERS' EQUITY:
Preferred Stock................................................. 31,600,000 31,600,000
Common Stock.................................................... 530,000 496,000
Additional paid-in capital...................................... 115,702,000 101,569,000
(Deficit)....................................................... (11,548,000) (18,995,000)
Unrealized gain on marketable securities........................ 72,000 --
Cumulative translation adjustment............................... 61,000 (12,000)
------------ ------------
Sub-total....................................................... 136,417,000 114,658,000
Notes receivable from sale of shares............................ (159,000) (155,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................ 136,258,000 114,503,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $293,048,000 $207,194,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-33
<PAGE> 135
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Medical equipment and supplies.... $70,745,000 $36,436,000 $189,515,000 $100,674,000
Interest and other income......... 363,000 31,000 759,000 537,000
----------- ----------- ------------ ------------
71,108,000 36,467,000 190,274,000 101,211,000
Cost and expenses:
Cost of revenues.................. 47,159,000 24,942,000 128,100,000 69,203,000
Selling, general and
administrative................. 16,018,000 9,021,000 43,976,000 25,678,000
Interest expense.................. 2,394,000 672,000 4,557,000 1,962,000
----------- ----------- ------------ ------------
65,571,000 34,635,000 176,633,000 96,843,000
----------- ----------- ------------ ------------
Income before income taxes.......... 5,537,000 1,832,000 13,641,000 4,368,000
Income taxes........................ 2,187,000 811,000 5,395,000 1,943,000
----------- ----------- ------------ ------------
Net income.......................... 3,350,000 1,021,000 8,246,000 2,425,000
Preferred stock dividends........... 266,000 -- 799,000 --
----------- ----------- ------------ ------------
Net income available to common
stockholders...................... $ 3,084,000 $ 1,021,000 $ 7,447,000 $ 2,425,000
=========== =========== ============ ============
Per share data (Note 2):
Net income per common and common
equivalent shares.............. $ .13 $ .07 $ .32 $ .16
=========== =========== ============ ============
Weighted average number of common
and common equivalent shares
outstanding.................... 26,739,000 15,674,000 25,888,000 15,466,000
=========== =========== ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-34
<PAGE> 136
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 8,246,000 $ 2,425,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization................................. 4,700,000 2,487,000
Provision for losses on accounts receivable................... 935,000 441,000
Deferred income taxes......................................... 1,538,000 1,861,000
Gain on sale of product line.................................. -- (360,000)
Gain on sale of marketable securities......................... (41,000) --
Changes in operating assets and liabilities:
Accounts receivable........................................ (24,519,000) (8,573,000)
Inventories, other current assets and recoverable and
prepaid income taxes..................................... (11,404,000) (6,601,000)
Accounts and acceptances payable, accrued expenses, and
other.................................................... (8,468,000) 9,753,000
------------ -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES... (29,013,000) 1,433,000
------------ -----------
INVESTING ACTIVITIES
Purchases of marketable securities.............................. (97,216,000) --
Purchases of property, plant and equipment...................... (3,637,000) (762,000)
Acquisitions, net of cash acquired.............................. (10,006,000) (2,191,000)
Notes receivable from officers.................................. (4,000) (199,000)
Proceeds from sale of marketable securities..................... 84,497,000 --
Proceeds from sale of product line.............................. -- 500,000
Proceeds from sale of assets under leveraged lease.............. -- 487,000
Net increase in other assets.................................... (1,653,000) (158,000)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES................. (28,019,000) (2,323,000)
------------ -----------
FINANCING ACTIVITIES
Proceeds from issuance of Senior Subordinated Notes............. 100,000,000 --
Proceeds from notes payable and long-term debt.................. 147,138,000 6,590,000
Payments on notes payable and long-term debt.................... (162,352,000) (6,112,000)
Payments on acceptances payable, net............................ (19,800,000) --
Proceeds on exercise of stock options........................... 1,052,000 479,000
Payments for note issue costs................................... (4,565,000) --
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 61,473,000 957,000
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS................. 4,441,000 67,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... 1,241,000 284,000
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 5,682,000 $ 351,000
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-35
<PAGE> 137
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of Graham-Field, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial position
as of September 30, 1997 (unaudited), the results of operations for the three
and nine months ended September 30, 1997 and 1996 (unaudited) and the statements
of cash flows for the nine months ended September 30, 1997 and 1996 (unaudited).
Additionally, it should be noted that the accompanying financial statements
and notes thereto do not purport to be complete disclosures in conformity with
generally accepted accounting principles. While Graham-Field believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and the notes included in
Graham-Field's Annual Report on Form 10-K for the year ended December 31, 1996.
Inventories at September 30, 1997 have been valued at average cost based on
perpetual records or the gross profit method.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted on December 31,
1997. At that time, Graham-Field will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the quarter and nine month period
ended September 30, 1997 of $.02 and $.05 per share, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings per share for the
quarter and nine month period ended September 30, 1997 is not expected to be
material.
The results of operations for the three and nine months ended September 30,
1997 and 1996 are not necessarily indicative of results for the full year.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
2. NET INCOME PER SHARE
Net income per common share was computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
period. For the 1997 period, net income per common share was calculated assuming
the conversion of Graham-Field's Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock") and the Series C Cumulative Convertible
Preferred Stock (the "Series C Preferred Stock") into an aggregate of 4,435,484
common shares and the elimination of a dividend of 1.5% on the Series B and
Series C Preferred Stock in the aggregate amount of $266,000 and $799,000,
respectively for the three and nine month periods ended September 30, 1997.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials............................... $ 14,258,000 $ 8,423,000
Work-in-process............................. 4,558,000 4,430,000
Finished goods.............................. 41,498,000 35,392,000
----------- -----------
$ 60,314,000 $ 48,245,000
=========== ===========
</TABLE>
F-36
<PAGE> 138
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
As of September 30, 1997, Graham-Field has recorded net deferred tax assets
primarily comprised of net operating loss carryforwards acquired in connection
with the Everest & Jennings acquisition, which expire at various dates from 2008
to 2010. For financial reporting purposes, due to losses of Everest & Jennings
incurred prior to Graham-Field's acquisition of Everest & Jennings and SRLY
limitations, a full valuation allowance has been recognized in connection with
the net operating loss carryforwards of Everest & Jennings to offset the net
deferred tax asset. If realized, the tax benefit for such items will be recorded
as a reduction to the excess of cost over net assets acquired.
The effective tax rate for the quarter and nine months ended September 30,
1997 is 39.5% primarily due to the percentage of income earned by foreign
entities which are taxed at lower rates. Deferred taxes have not been provided
on the undistributed earnings of the foreign entities since it is management's
intention to invest such earnings in the entities indefinitely.
5. ACQUISITION OF BUSINESS
On September 5, 1997, Graham-Field entered into an Agreement and Plan of
Merger (the "Merger Agreement"), by and among Fuqua Enterprises, Inc., a
Delaware corporation ("Fuqua"), GFHP Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Graham-Field ("Sub"), and Graham-Field
providing for the acquisition of Fuqua. Pursuant to the Merger Agreement, on
December 30, 1997 Sub was merged with and into Fuqua with Fuqua continuing as
the surviving corporation wholly owned by Graham-Field (the "Merger").
Graham-Field has received the written opinion of Smith Barney Inc. to the effect
that the consideration payable by Graham-Field pursuant to the Merger Agreement
is fair from a financial point of view to Graham-Field.
In the Merger, each share of Fuqua's common stock, par value $2.50 per
share (the "Fuqua Common Stock"), other than shares of Fuqua Common Stock
canceled pursuant to the Merger Agreement, was converted into the right to
receive 2.1 (the "Conversion Number") shares of common stock, par value $.025
per share, of Graham-Field (the "Graham-Field Common Stock"). There were
4,482,709 shares of Fuqua Common Stock outstanding on September 5, 1997.
The Merger Agreement contains customary representations and warranties of
the parties, which did not survive the effectiveness of the Merger. In addition,
pursuant to the Merger Agreement, Graham-Field and Fuqua agreed to operate their
businesses in the ordinary course pending consummation of the Merger, and Fuqua
agreed not to solicit or enter into negotiations or agreements relating to a
competing business combination transaction. The Merger was conditioned, among
other things, upon the approval of the holders of at least a majority of the
outstanding shares of Fuqua capital stock entitled to vote thereon, upon the
approval of the holders of at least a majority of the shares of Graham-Field
Common Stock voting at a special meeting of the stockholders of Graham-Field,
and upon the expiration of certain regulatory waiting periods.
To induce Graham-Field and Sub to enter into the Merger Agreement,
Graham-Field entered into (1) a Stockholders Agreement, dated as of September 5,
1997 (the "Stockholders Agreement"), with BIL (Far East Holdings) Limited and
BIL Securities (Offshore) Ltd. (together, "BIL"), Irwin Selinger ("Mr.
Selinger"), the Chairman of the Board and Chief Executive Officer of
Graham-Field, and J.B. Fuqua, J. Rex Fuqua, Fuqua Holdings I, L.P., The Jennifer
Calhoun Fuqua Trust, The Lauren Brooks Fuqua Trust and The J.B. Fuqua
Foundation, Inc. (together, the "Fuqua Stockholders") and (2) a Voting Agreement
(the "Voting Agreement") with Gene J. Minotto ("Mr. Minotto"), pursuant to
which, among other things, the Fuqua Stockholders and Mr. Minotto (who, as of
September 5, 1997, own collectively 45.9% of the outstanding Fuqua Common Stock)
agreed to vote their shares of Fuqua Common Stock in favor of approval of the
Merger and adoption of the Merger Agreement and all transactions contemplated
thereby. The Fuqua Stockholders and Mr. Minotto also agreed, until the Effective
Time, not to dispose of any of the Fuqua
F-37
<PAGE> 139
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock or any interest therein, exercise any right of conversion with
respect to such shares, deposit any of such shares into a voting trust or enter
into a voting agreement or arrangement or grant any proxy with respect thereto
or enter into any contract, option or other arrangement or undertaking with
respect to the direct or indirect disposition of such shares. In addition, the
Fuqua Stockholders and Mr. Minotto agreed pursuant to the Stockholders Agreement
and Voting Agreement not to initiate, solicit or encourage, directly or
indirectly, any inquiries with respect to any alternative business combination
transaction relating to Fuqua or engage in any negotiations concerning any such
transaction. The Fuqua Stockholders and Mr. Minotto also agreed to promptly
notify Graham-Field of any inquiries or proposed negotiations with respect to
any such proposed transaction.
Pursuant to the Stockholders Agreement, BIL and Mr. Selinger (who, as of
September 5, 1997, owned collectively 37% of the voting power of the capital
stock of Graham-Field), agreed to vote their shares of Graham-Field Common Stock
in favor of approval of the Merger and adoption of the Merger Agreement and all
transactions contemplated thereby at a special meeting of Graham-Field
stockholders.
The Fuqua Stockholders have agreed in the Stockholders Agreement not to
acquire additional shares of Graham-Field Common Stock, seek to acquire
ownership of Graham-Field, engage in any solicitation of proxies with respect to
Graham-Field, or otherwise seek or propose to acquire control of Graham-Field
Board provided the Fuqua Stockholders own securities representing at least 5% of
the voting power of the outstanding capital stock of Graham-Field. Pursuant to
the Stockholders Agreement, so long as the Fuqua Stockholders beneficially own
5% or more of the voting power of the outstanding capital stock of Graham-Field,
the Fuqua Stockholders will have the right to designate one member of the Board
of Directors of Graham-Field (the "Graham-Field Board"). The Fuqua Stockholders
also agreed to certain restrictions in their transfer of shares of Graham-Field
Common Stock received in the Merger.
The Stockholders Agreement will terminate following the Merger, if the
Fuqua Stockholders beneficially own less than 5% of the voting power of the
outstanding capital stock of Graham-Field or upon a change of control of
Graham-Field Board.
In addition, on September 5, 1997, Graham-Field entered into a Registration
Rights Agreement with the Fuqua Stockholders (the "Registration Rights
Agreement") providing certain demand and "piggyback" registration rights to the
Fuqua Stockholders with respect to the securities of Graham-Field to be acquired
by the Fuqua Stockholders pursuant to the Merger Agreement. Graham-Field will be
required to pay the expenses incurred by the Fuqua Stockholders in connection
with any such registrations. The Registration Rights Agreement will
automatically terminate upon a termination of the Merger Agreement in accordance
with its terms. Graham-Field has also agreed to provide certain registration
rights to Mr. Minotto.
On August 28, 1997, Graham-Field acquired all of the issued and outstanding
shares of the capital stock of Medical Supplies of America, Inc., a Florida
corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement") dated August 28, 1997, by and among Graham-
Field, S.E. (Gene) Davis and Vicki Ray (collectively, the "Medapex Selling
Stockholders"). In accordance with the terms of the Reorganization Agreement,
Medapex became a wholly-owned subsidiary of Graham-Field and the Medapex Selling
Stockholders received in the aggregate 960,000 shares of Graham-Field Common
Stock in exchange for all of the issued and outstanding shares of the capital
stock of Medapex. Pursuant to a Real Estate Sales Agreement dated as of August
28, 1997 (the "Real Estate Sales Agreement"), by and between Graham-Field and
BBD&M, a Georgia limited partnership and an affiliate of Medapex, Graham-Field
acquired Medapex's principal corporate headquarters and distribution facility in
Atlanta, Georgia for a purchase price consisting of (i) $622,335 payable (x) by
the issuance of 23,156 shares of Graham-Field Common Stock and (y) in cash in
the amount of $311,167, and (ii) the assumption of debt in the amount of
$477,664. In connection with the transaction, Graham-Field also entered into a
registration rights agreement dated as of August 28, 1997, pursuant to which
Graham-Field agreed to register for resale the shares of Graham-Field Common
Stock issued pursuant to the Reorganization Agreement and the Real
F-38
<PAGE> 140
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estate Sales Agreement. Each of the Medapex Selling Stockholders entered into a
two-year employment agreement and non-competition agreement with Graham-Field.
The acquisition of Medapex qualifies as a tax-free reorganization and was
accounted for as a "pooling of interests." Accordingly, Graham-Field's financial
statements have been restated to include the results of Medapex for all periods
presented. Separate results of operations for the periods prior to the share
exchange with Medapex are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues:
Graham-Field.............. $67,827,000 $32,384,000 $176,987,000 $ 89,360,000
Medapex................... 3,281,000 4,083,000 13,287,000 11,851,000
----------- ----------- ------------ ------------
Combined.................. $71,108,000 $36,467,000 $190,274,000 $101,211,000
=========== =========== ============ ============
Net Income:
Graham-Field.............. $ 3,158,000 $ 965,000 $ 7,859,000 $ 2,290,000
Medapex................... 192,000 56,000 387,000 135,000
----------- ----------- ------------ ------------
Combined.................. $ 3,350,000 $ 1,021,000 $ 8,246,000 $ 2,425,000
=========== =========== ============ ============
</TABLE>
On August 17, 1997, Graham-Field acquired substantially all of the assets
and certain liabilities of MediSource, Inc. ("Medi-Source"), a privately-owned
distributor of medical supplies, for $4,500,000 in cash. Graham-Field also
entered into a five (5) year non-competition agreement with the previous owner
in the aggregate amount of $301,000 payable over the five (5) year period. The
acquisition was accounted for as a purchase, and accordingly, assets and
liabilities were recorded at fair value at the date of acquisition and the
results of operations are included subsequent to that date. The excess of the
purchase price over net assets acquired was approximately $3,428,000.
On June 25, 1997, Graham-Field acquired all of the capital stock of LaBac
Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction
pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among
Graham-Field, LaBac Acquisition Corp., a wholly-owned subsidiary of
Graham-Field, LaBac, Gregory A. Peek and Michael L. Peek (collectively, the
"LaBac Selling Stockholders"). LaBac, a privately-owned Company, manufactures
and distributes custom power wheelchair seating systems and manual wheelchairs
throughout North America. In connection with the acquisition, LaBac became a
wholly-owned subsidiary of Graham-Field, and the LaBac Selling Stockholders
received in the aggregate 772,557 shares of Graham-Field Common Stock valued at
$11.77 per share in exchange for all of the issued and outstanding shares of the
capital stock of LaBac. In addition, 77,255 of the shares of Graham-Field Common
Stock were placed in escrow for a period of one (1) year following the Effective
Date of the Merger for payment of indemnity claims to Graham-Field or purchase
price adjustments in favor of Graham-Field. Graham-Field also entered into a
three (3) year consulting agreement with the LaBac Selling Stockholders and an
entity controlled by the LaBac Selling Stockholders, and noncompetition
agreements with each of the LaBac Selling Stockholders. The acquisition was
accounted for as a purchase and accordingly, assets and liabilities were
recorded at fair value at the date of acquisition and the results of operations
are included subsequent to that date. The excess of cost over net assets
acquired amounted to approximately $7.4 million.
On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of
Graham-Field, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for a purchase price of $1.51 million representing the
net book value of Kuschall. The purchase price was paid by the issuance of
116,154 shares of Graham-Field Common Stock valued at $13.00 per share, of which
23,230 shares were delivered into escrow. The escrow shares will be released on
March 7, 1999, subject to any purchase price adjustments in favor of
Graham-Field and claims for indemnification. The acquisition was accounted for
as a purchase and accordingly, assets and liabilities were
F-39
<PAGE> 141
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded at fair value at the date of acquisition and the results of operations
are included subsequent to that date.
On February 28, 1997, Everest & Jennings Canada, a wholly owned subsidiary
of Graham-Field, acquired substantially all of the assets and certain
liabilities of Motion 2000 Inc. and its wholly-owned subsidiary, Motion 2000
Quebec Inc., for a purchase price equal to Cdn. $2.9 million (Canadian Dollars)
(approximately $2.15 million). The purchase price was paid by the issuance of
187,733 shares of Graham-Field Common Stock valued at $11.437 per share, of
which 28,095 shares were delivered into escrow. All of the escrowed shares were
held in escrow until June 28, 1997, at which time 9,366 shares were released.
The balance of the escrowed shares will be released on December 31, 1997,
subject to any claims for indemnification. The acquisition was accounted for as
a purchase and accordingly, assets and liabilities were recorded at fair value
at the date of acquisition and the results of operations are included subsequent
to that date. The excess of cost over the net assets acquired amounted to
approximately $1.9 million.
On November 27, 1996, Graham-Field acquired Everest & Jennings pursuant to
the terms and provisions of the Amended and Restated Agreement and Plan of
Merger dated as of September 3, 1996 and amended as of October 1, 1996, by and
among Graham-Field, Everest & Jennings, Everest & Jennings Acquisition Corp., a
wholly-owned subsidiary of Graham-Field and BIL, the majority stockholder of
Everest & Jennings. The acquisition of Everest & Jennings has been accounted for
under the purchase method of accounting and, accordingly, assets and liabilities
were recorded at fair value at the date of acquisition and the operating results
of Everest & Jennings have been included in Graham-Field's consolidated
financial statements since the date of acquisition. The excess of the aggregate
purchase price over the estimated fair market value of the net assets acquired
is approximately $65.6 million, as adjusted.
On September 4, 1996, Graham-Field acquired substantially all of the assets
of V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of
medical products in Puerto Rico, for a purchase price consisting of $1,703,829
in cash, and the issuance of 32,787 shares of Graham-Field Common Stock valued
at $7.625 per share representing the closing market price of Graham-Field Common
Stock on the last trading day immediately prior to the closing. In addition,
Graham-Field assumed certain liabilities of V.C. Medical in the amount of
$296,721. Under the terms of the transaction, in the event the pre-tax income of
the acquired business equals or exceeds $1,000,000 during the twelve (12) months
following the closing date, an additional $500,000 will be paid to V.C. Medical.
The shares will be held in escrow until February 4, 1998, subject to any claims
for indemnification in favor of Graham-Field. The acquisition was accounted for
as a purchase and accordingly, assets and liabilities were recorded at fair
value at the date of acquisition and the results of operations are included
subsequent to that date. The excess of cost over the net assets acquired
amounted to approximately $939,000.
The following summary presents unaudited pro forma consolidated results of
operations for the nine months ended September 30, 1997 and 1996 as if the
acquisitions accounted for under the purchase method of accounting occurred at
the beginning of each of 1997 and 1996. This information gives effect to the
adjustment of interest expense, income tax provisions, and to the assumed
amortization of fair value adjustments, including the excess of cost over net
assets acquired. The 1996 pro forma information does not include the write-off
of certain purchased in-process research and development costs of $12,800,000,
merger related expenses of $3,000,000 associated with the acquisition of Everest
& Jennings, and an extraordinary item relating to the early retirement of
indebtedness under the John Hancock Note and Warrant Agreement, as amended. The
pro forma net loss per common share for 1996 has been calculated assuming the
payment of a dividend of 1.5% on both the Series B Preferred Stock and Series C
Preferred Stock in the aggregate amount of $799,000 for the nine months ended
September 30, 1997. Conversion of the preferred stock was not assumed since the
result would have been antidilutive.
F-40
<PAGE> 142
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Net Revenues............................... $201,532,000 $170,376,000
============ ============
Income (Loss) Before Income Taxes.......... $ 14,163,000 $ (1,791,000)
Income Taxes............................... 5,665,000 578,000
------------ ------------
Net Income (Loss).......................... $ 8,498,000 $ (2,369,000)
============ ============
Net Income (Loss) per Share................ $ .32 $ (.15)
============ ============
Weighted Average Number of Common and
Dilutive Common Equivalent Shares
Outstanding.............................. 26,454,000 21,024,000
============ ============
</TABLE>
6. OTHER MATTERS
On August 4, 1997, Graham-Field issued $100 million of its 9.75% Senior
Subordinated Notes due 2007 (the "Notes") under Rule 144A of the Securities Act
of 1933, as amended (the "Securities Act"). The Notes are general unsecured
obligations of Graham-Field, subordinated in right of payment to all existing
and future senior debt of Graham-Field, including indebtedness under the Credit
Facility (the "Credit Facility") arranged by IBJ Schroder Business Credit Corp,
as agent ("IBJ"). The Notes are guaranteed (the "Subsidiary Guarantees"),
jointly and severally, on a senior subordinated basis by all existing and future
restricted subsidiaries of Graham-Field, other than foreign subsidiaries (the
"Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in
right of payment to all existing and future senior debt of the Guaranteeing
Subsidiaries including any guarantees by the Guaranteeing Subsidiaries of
Graham-Field's obligations under the Credit Facility.
The net proceeds from the offering of the Notes were used to repay $60.3
million of indebtedness under the Credit Facility and $5 million of indebtedness
due to BIL. The balance of the proceeds will be used for general corporate
purposes, including the funding for acquisitions, the opening of additional
Graham-Field Express facilities and strategic alliances.
Under the terms of the indenture governing the Notes (the "Indenture"), the
Notes are not redeemable at Graham-Field's option prior to August 15, 2002.
Thereafter, the Notes are redeemable, in whole or in part, at the option of
Graham-Field, at certain redemption prices plus accrued and unpaid interest to
the date of redemption. In addition, prior to August 15, 2000, Graham-Field may,
at its option, redeem up to 25% of the aggregate principal amount of Notes
originally issued with the net proceeds from one or more public offerings of
Graham-Field Common Stock at a redemption price of 109.75% of the principal
amount, plus accrued and unpaid interest to the date of redemption; provided
that at least 75% of the aggregate principal amount of Notes originally issued
remain outstanding after giving effect to any such redemption.
The Indenture contains customary covenants including, but not limited to,
covenants relating to limitations on the incurrence of additional indebtedness,
the creation of liens, restricted payments, the sales of assets, mergers and
consolidations, payment restrictions affecting subsidiaries, and transactions
with affiliates. In addition, in the event of a change of control of
Graham-Field as defined in the Indenture, each holder of the Notes will have the
right to require Graham-Field to repurchase such holder's Notes, in whole or in
part, at a purchase price of 101% of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase.
Graham-Field and the Guaranteeing Subsidiaries have agreed, pursuant to a
registration rights agreement (the "Registration Rights Agreement") with the
initial purchaser of the Notes, to file with the
F-41
<PAGE> 143
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities and Exchange Commission a registration statement (the "Exchange Offer
Registration Statement") registering an issue of notes identical in all material
respects to the Notes (the "Exchange Notes") and to offer to the holders of the
Notes the opportunity to exchange their Notes for Exchange Notes (the "Exchange
Offer"). If Graham-Field is not permitted to file the Exchange Offer
Registration Statement or if certain holders of the Notes are not permitted to
participate in, or would not receive freely tradeable Exchange Notes pursuant
to, the Exchange Offer, Graham-Field has agreed to file a shelf registration
statement (the "Shelf Registration Statement") with respect to resales of the
Notes. The Notes are subject to the payment of liquidated damages under certain
circumstances if Graham-Field and the Guaranteeing Subsidiaries are not in
compliance with their obligations under the Registration Rights Agreement.
7. LEGAL PROCEEDINGS
Graham-Field and its subsidiaries are parties to lawsuits and other
proceedings arising out of the conduct of its ordinary course of business,
including those relating to product liability and the sale and distribution of
its products. While the results of such lawsuits and other proceedings cannot be
predicted with certainty, management does not expect that the ultimate
liabilities, if any, will have a material adverse effect on the consolidated
financial position, results of operations or cash flow of Graham-Field.
F-42
<PAGE> 144
CONSOLIDATED FINANCIAL STATEMENTS OF
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
F-43
<PAGE> 145
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' 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, 1995
and 1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These consolidated financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. 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 and disclosures in the consolidated
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.
PRICE WATERHOUSE LLP
St. Louis, Missouri
March 15, 1996, except as to the tenth
paragraph of Note 3, which
is as of June 4, 1996
F-44
<PAGE> 146
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Revenues................................................ $ 74,627 $ 79,438 $ 94,459
Cost of sales........................................... 58,597 65,888 83,825
---------- ---------- --------
Gross profit.................................. 16,030 13,550 10,634
---------- ---------- --------
Selling expenses........................................ 11,006 12,448 18,777
General and administrative expenses..................... 5,527 6,519 16,441
Research & development expenses (Note 5)................ 1,123 1,885 10,764
Restructuring expenses (Note 2)......................... -- -- 15,104
---------- ---------- --------
Total operating expenses...................... 17,656 20,852 61,086
---------- ---------- --------
Loss from operations.......................... (1,626) (7,302) (50,452)
---------- ---------- --------
Other expense:
Interest expense, BIL (Note 7)........................ (1,669) (897) (2,585)
Interest expense, other............................... (2,061) (1,722) (2,487)
---------- ---------- --------
Other expense, net...................................... (3,730) (2,619) (5,072)
---------- ---------- --------
Loss from operations before income taxes.............. (5,356) (9,921) (55,524)
Income tax provision (benefit) (Note 8)................. 96 (162) 173
---------- ---------- --------
Net loss...................................... $ (5,452) $ (9,759) $(55,697)
========== ========== ========
Loss per share.......................................... $ (0.75) $ (1.35) $ (59.61)
========== ========== ========
Weighted average number of Common Shares outstanding.... 7,227,281 7,220,121 934,387
========== ========== ========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-45
<PAGE> 147
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 117 $ 513
Accounts receivable, less allowance for doubtful accounts of $1,847
and $2,088, respectively (Note 4)................................ 16,952 18,894
Inventories (Notes 4 and 9)......................................... 19,570 20,449
Assets held for sale (Notes 1 and 4)................................ -- 11,289
Other current assets................................................ 1,299 1,444
-------- --------
Total current assets........................................ 37,938 52,589
-------- --------
PROPERTY, PLANT AND EQUIPMENT (Note 4):
Land................................................................ 261 237
Buildings and improvements.......................................... 4,500 4,056
Machinery and equipment............................................. 15,380 14,636
-------- --------
20,141 18,929
Less accumulated depreciation and amortization...................... (12,992) (10,994)
-------- --------
Property, plant and equipment, net.......................... 7,149 7,935
NOTES RECEIVABLE (Note 4)............................................. 2,524 --
INTANGIBLE ASSETS, NET (Note 3)....................................... 402 710
OTHER ASSETS.......................................................... 217 335
-------- --------
TOTAL ASSETS................................................ $ 48,230 $ 61,569
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings and current installments of long-term debt of
$1,089 and $2,600, respectively (Note 7)......................... $ 4,473 $ 11,155
Short-term borrowings from BIL (Note 7)............................. -- 6,503
Accounts payable.................................................... 8,361 11,958
Accrued payroll costs............................................... 6,327 7,900
Accrued interest, BIL (Note 7)...................................... 2,629 960
Accrued expenses.................................................... 5,310 9,612
Accrued restructuring expenses (Notes 1, 2 and 4)................... 659 4,476
-------- --------
Total current liabilities................................... 27,759 52,564
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 7)....................... 22,370 12,968
LONG-TERM BORROWINGS FROM BIL (Note 7)................................ 21,103 12,000
OTHER LONG-TERM LIABILITIES........................................... 130 218
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13) STOCKHOLDERS' DEFICIT
(Notes 6 and 10):
Series A Convertible Preferred Stock................................ 13,175 12,087
Series B Convertible Preferred Stock................................ 1,317 1,317
Series C Convertible Preferred Stock................................ 20,000 20,000
Single Class Common Stock, par value: $.10; authorized 12,000,000
shares........................................................... 722 722
Additional paid-in capital.......................................... 105,608 105,595
Accumulated deficit................................................. (159,793) (153,228)
Minimum pension liability adjustment................................ (3,264) (1,812)
Cumulative translation adjustments.................................. (897) (862)
-------- --------
Total stockholders' deficit................................. (23,132) (16,181)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 48,230 $ 61,569
======== ========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-46
<PAGE> 148
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE SERIES C CONVERTIBLE CLASS A* CLASS B*
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------- ---------------- -------------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- ------- ------ ---------- ------- --------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1992.......... 6,075,419 $10,174 786,357 $1,317 -- $ -- 679,285 $ 68 2,353,427 $ 24
Common Stock
Issued............ -- -- -- -- -- -- 5,333 -- -- --
Reclassification of
Common Stock*..... -- -- -- -- -- -- 235,342 24 (2,353,427) (24)
Preferred Stock
Issued -- Debt
Conversion........ -- -- -- -- 20,000,000 20,000 -- -- --
Common Stock Issued
-- Debt
Conversion........ -- -- -- -- -- -- 5,500,000 550 -- --
Stock Issuance Costs
-- Debt
Conversion........ -- -- -- -- -- -- -- -- --
Common Stock Issued
-- MCT
Acquisition....... -- -- -- -- -- -- 800,000 80 --
Pay-in-kind
dividends on
Series A
Convertible
Preferred Stock... 546,787 915 -- -- -- -- -- -- -- --
Net loss............ -- -- -- -- -- -- -- -- -- --
Adjustment for
Pension
Liability......... -- -- -- -- -- -- -- -- -- --
Translation
adjustments....... -- -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ ---------- ------- --------- ---- --------- ----
Balance at December
31, 1993.......... 6,622,206 $11,089 786,357 $1,317 20,000,000 $20,000 7,219,961 $722 -0- $-0-
========= ======= ======= ====== ========== ======= ========= ==== ========= ====
<CAPTION>
MINIMUM
ADDITIONAL ACCUMU- PENSION CUMULATIVE
PAID-IN LATED LIABILITY TRANSLATION
CAPITAL DEFICIT ADJUSTMENT ADJUSTMENTS TOTAL
---------- --------- ----------- ----------- --------
<S> <<C> <C> <C> <C> <C>
Balance at December
31, 1992.......... $ 43,708 $ (85,585) $ -- $(504) $(30,798)
Common Stock
Issued............ -- -- -- -- --
Reclassification of
Common Stock*..... -- -- -- -- --
Preferred Stock
Issued -- Debt
Conversion........ -- -- -- -- 20,000
Common Stock Issued
-- Debt
Conversion........ 54,450 -- -- -- 55,000
Stock Issuance Costs
-- Debt
Conversion........ (500) -- -- -- (500)
Common Stock Issued
-- MCT
Acquisition....... 7,920 -- -- -- 8,000
Pay-in-kind
dividends on
Series A
Convertible
Preferred Stock... -- (1,167) -- -- (252)
Net loss............ -- (55,697) -- -- (55,697)
Adjustment for
Pension
Liability......... -- -- (2,606) -- (2,606)
Translation
adjustments....... -- -- -- (155) (155)
-------- --------- ------- ----- --------
Balance at December
31, 1993.......... $105,578 $(142,449) $(2,606) $(659) $ (7,008)
======== ========= ======= ===== ========
</TABLE>
- ---------------
* Effective November 18, 1993, Class A Common Stock and Class B Common Stock
were combined into a single class Common Stock.
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-47
<PAGE> 149
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ---------------- -------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ------- ------ ---------- ------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 6,622,206 $11,089 786,357 $1,317 20,000,000 $20,000 7,219,961 $722 $105,578
Common Stock issued for
Exercised Stock Options....... -- -- -- -- -- -- 5,820 -- 17
Pay-in-kind dividends on Series
A Convertible Preferred
Stock......................... 595,998 998 -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- -- -- --
Adjustment for Pension
Liability..................... -- -- -- -- -- -- -- -- --
Translation adjustments......... -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ ---------- ------- --------- --- --------
Balance at December 31, 1994.... 7,218,204 $12,087 786,357 $1,317 20,000,000 $20,000 7,225,781 $722 $105,595
========= ======= ======= ====== ========== ======= ========= === ========
<CAPTION>
MINIMUM
PENSION CUMULATIVE
ACCUMULATED LIABILITY TRANSLATION
DEFICIT ADJUSTMENT ADJUSTMENTS TOTAL
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1993.... $(142,449) $ (2,606) $(659) $ (7,008)
Common Stock issued for
Exercised Stock Options....... -- -- -- 17
Pay-in-kind dividends on Series
A Convertible Preferred
Stock......................... (1,020) -- -- (22)
Net loss........................ (9,759) -- -- (9,759)
Adjustment for Pension
Liability..................... -- 794 -- 794
Translation adjustments......... -- -- (203) (203)
---------- -------- ------ ------
Balance at December 31, 1994.... $(153,228) $ (1,812) $(862) $(16,181)
========== ======== ====== ======
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-48
<PAGE> 150
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ---------------- -------------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------- ------- ------ ---------- ------- --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994.......... 7,218,204 $12,087 786,357 $1,317 20,000,000 $20,000 7,225,781 $722 $105,595 $(153,228)
Common Stock issued
for Exercised
Stock Options..... -- -- -- -- -- -- 2,283 -- 13 --
Pay-in-kind
dividends on
Series A
Convertible
Preferred Stock... 649,638 1,088 -- -- -- -- -- -- -- (1,113)
Net loss............ -- -- -- -- -- -- -- -- -- (5,452)
Adjustment for
Pension
Liability......... -- -- -- -- -- -- -- -- -- --
Translation
adjustments....... -- -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ ---------- ------- --------- ---- -------- ---------
Balance at December
31, 1995.......... 7,867,842 $13,175 786,357 $1,317 20,000,000 $20,000 7,228,064 $722 $105,608 $(159,793)
========= ======= ======= ====== ========== ======= ========= ==== ======== =========
<CAPTION>
MINIMUM
PENSION CUMULATIVE
LIABILITY TRANSLATION
ADJUSTMENT ADJUSTMENTS TOTAL
---------- ----------- --------
<S> <C> <C> <C>
Balance at December
31, 1994.......... $ (1,812) $(862) $(16,181)
Common Stock issued
for Exercised
Stock Options..... -- -- 13
Pay-in-kind
dividends on
Series A
Convertible
Preferred Stock... -- -- (25)
Net loss............ -- -- (5,452)
Adjustment for
Pension
Liability......... (1,452) -- (1,452)
Translation
adjustments....... -- (35) (35)
------- ----- --------
Balance at December
31, 1995.......... $ (3,264) $(897) $(23,132)
======= ===== ========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-49
<PAGE> 151
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(5,452) $(9,759) $(55,697)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization........................... 2,153 1,978 2,637
Charge for in-process R&D on MCT acquisition............ -- -- 9,764
Restructuring expenses (Note 2):
Reserve on disposition of Smith & Davis institutional
business.............................................. -- -- 13,000
Net increase (decrease) in certain accrued expenses..... (3,817) (2,262) 245
Changes in operating assets and liabilities, net of effects
of the 1993 MCT acquisition (Note 5):
Accounts receivable..................................... 3,069 (1,800) (1,652)
Inventories............................................. (107) (2,329) 2,336
Accounts payable........................................ (1,357) 3,699 (9,268)
Accrued interest, BIL................................... 1,669 775 2,409
Accrued expenses........................................ (6,138) (2,277) 1,421
Other, net.............................................. 319 (140) 817
------- ------- --------
Cash used in operating activities.......................... (9,661) (12,115) (33,988)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................................. (772) (1,463) (955)
MCT acquisition, net of cash acquired...................... -- -- (1,833)
Proceeds from sale of assets held for sale................. 4,518 -- --
Receipt of principal of notes receivable................... 309 -- --
------- ------- --------
Cash provided by (used in) investing activities............ 4,055 (1,463) (2,788)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from BIL (Note 7)................................. 5,600 13,701 45,795
Repayments to BIL (Note 7)................................. (3,000) -- --
Increase (decrease) in short-term and long-term borrowings,
net..................................................... 2,720 (1,371) (6,326)
Costs pertaining to equity conversion...................... -- -- (500)
Exercise of Common Stock Option............................ 13 17 --
Changes in other long-term liabilities..................... (88) -- (311)
------- ------- --------
Cash provided by financing activities...................... 5,245 12,347 38,658
------- ------- --------
Effect of exchange rate changes on cash flows................ (35) (128) (155)
------- ------- --------
Increase (decrease) in cash balance.......................... (396) (1,359) 1,727
Cash and cash equivalents at beginning of year............... 513 1,872 145
------- ------- --------
Cash and cash equivalents at end of year..................... $ 117 $ 513 $ 1,872
======= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest..................................... $ 2,111 $ 1,675 $ 2,611
Cash paid for income taxes................................. 216 142 164
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-50
<PAGE> 152
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL INFORMATION FOR NONCASH FINANCING AND INVESTING ACTIVITIES:
During 1995, the Company sold the Smith & Davis Institutional Business for
proceeds that included approximately $4.5 million in cash (which was used to
repay debt), $2.7 million in assumption of liabilities, and notes valued at
approximately $2.1 million.
Effective as of December 31, 1993, a Common Stock Note in the principal
amount of $55,000 was converted into 5,500,000 shares of Common Stock and a
Preferred Stock Note in the principal amount of $20,000 was converted into
20,000,000 shares of Series C Convertible Preferred Stock.
In accordance with SFAS No. 87, the Company recorded an additional minimum
pension liability for underfunded plans of $2,606 at December 31, 1993 (Note
11). This amount was adjusted to $1,812 at December 31, 1994. As of December 31,
1995 this amount was increased to $3,264 due to a decrease in the discount rate
utilized to determine the liability.
During 1993, the Company entered into new capital lease agreements of
$2,465 for a new computer and phone system.
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
F-51
<PAGE> 153
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 1 -- CORPORATE RESTRUCTURING
Everest & Jennings International Ltd. ("E&J" or the "Company") through its
subsidiaries manufactures wheelchairs and distributes homecare beds. Effective
in the fourth quarter of 1993, the Company adopted a plan to dispose of Smith &
Davis' hospital and nursing home bed and institutional casegoods businesses (the
"Institutional Business") and recorded a reserve of $13 million to write down
the assets of the Institutional Business to their estimated net realizable
values and for the estimated operating losses during the phase out period and
the estimated costs of disposition. See Note 2 -- Restructuring Expenses and
Note 4 -- Assets Held for Sale. Pursuant to an Asset Purchase Agreement dated
February 15, 1995, the Company sold the Institutional Business effective April
4, 1995. The proceeds consisted of approximately $4.5 million in cash (which was
used to repay debt), $2.7 million in assumption of liabilities, and notes valued
at approximately $2.1 million. The reduction in accrued restructuring expense
since December 31, 1994 primarily reflects changes in estimates, adjustments and
the payment of disposal costs related to the sale.
Since 1989 the Company has incurred substantial financial losses in a
continuing effort to restructure its operations with the objective of improving
its competitive position within 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. In 1992 the Company relocated its
corporate headquarters and principal wheelchair manufacturing operations from
California to 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. In October,
1993, the Company transferred its data processing operations from California to
Missouri, which represented the final step in the Company's relocation.
Additionally, the Company continues to analyze its cost structure and operating
efficiencies for potential savings.
On September 30, 1992, the Company finalized a $20 million revolving credit
facility with The Hongkong and Shanghai Banking Corporation Limited -- Chicago
Branch ("HSBC"). The repayment of the HSBC facility has been guaranteed by
Brierley Investments Limited, an affiliate of BIL (Far East Holdings) Limited
("BIL"), currently the Company's majority shareholder. From the proceeds of the
HSBC facility, $11 million was utilized to repay advances previously made by
BIL. The remaining proceeds were used to fund restructuring expenses, to replace
existing letters of credit and for working capital purposes. In December 1995,
the revolving credit facility was amended to allow borrowings of up to $25
million. See Note 7 -- Debt.
Through September 30, 1993, BIL provided the Company with $43.3 of
additional funding beyond the amounts available under the HSBC credit line. As
of September 30, 1993, the Company and BIL entered into a Debt Conversion
Agreement, which provided, in part, for the conversion of $75,000,000 of
short-term indebtedness and accrued interest into equity. See Note 6 -- Debt
Restructuring and Conversion. From October 1, 1993 to December 31, 1995, BIL
advanced $27.4 million to the Company to fund operating losses and previously
accrued restructuring charges. See Note 7 -- Debt for details as to the
Company's indebtedness to BIL and other lenders. At December 31, 1995, the total
amount of outstanding advances from BIL was $21.1.
The Company's 1995 and 1994 revenues and operating results were negatively
impacted by ongoing price competition. Long lead times and shipping delays due
to start-up inefficiencies in manufacturing operations adversely impacted
customer confidence. Management continues to address the Company's problems with
manufacturing and shipment delays. Additionally, the Company continues to
address the rationalization of its production facilities in the US, Canada and
Mexico and the increased outsourcing of products and product components, which
the Company expects will lower its production costs. Order rates, margins and
market share must increase, production and operating costs must be further
reduced and customer confidence must
F-52
<PAGE> 154
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 1 -- CORPORATE RESTRUCTURING -- (CONTINUED)
continue to be restored if the Company is to generate the cash flow necessary to
fund its debt service and \operations on a continuing basis and to achieve
profitability. Although the Company has programs in place which are designed to
address these issues, there is no assurance that such programs will achieve
their objectives.
The accompanying consolidated 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 restructuring
expenses and recurring operating losses and has a net capital deficiency at
December 31, 1995. No assurance can be made that the Company will successfully
emerge from or complete its restructuring activities.
NOTE 2 -- RESTRUCTURING EXPENSES
As disclosed in Note 1, the Company sold the Institutional Business of its
Smith & Davis subsidiary effective April 4, 1995. At December 31, 1993 the
Company had prepared estimates of the net realizable value of related assets to
be sold (see Note 4--Assets Held for Sale) and other costs directly associated
with the decision to dispose of such business along with operating losses
expected to be incurred until the business was sold. No additional provision was
required to the amount discussed below which was recorded in 1993 relative to
the disposal of the Institutional Business. The proceeds from the sale of the
Institutional Business were used primarily to reduce debt.
During the fourth quarter of 1993, the Company recorded $15.1 million of
restructuring expenses in connection with the consolidation of manufacturing and
distribution facilities in the United States and Canada ($2.1 million) and the
sale of the Smith & Davis Institutional Business ($13 million). The charge with
respect to the manufacturing and distribution facilities primarily relates to
the termination of various facilities leases. The amount recorded for the sale
of the Institutional Business was as follows:
<TABLE>
<S> <C>
Reduction of assets to estimated net realizable values....... $10.0 million
Estimated operating losses during phase-out period........... 1.3 million
Disposal costs, including transaction costs.................. 1.7 million
-------------
$13.0 million
=============
</TABLE>
The reduction of assets to estimated net realizable value is mainly
attributable to intangible assets and property, plant and equipment.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. The Company's principal
subsidiaries include Everest & Jennings, Inc. located in St. Louis, Missouri;
Everest & Jennings Canadian Limited located in Toronto, Canada; Everest &
Jennings de Mexico, S.A. de C.V. located in Guadalajara, Mexico; and Smith &
Davis Manufacturing Company, also located in St. Louis, Missouri. Net assets of
the foreign subsidiaries totalled $3,154 as of December 31, 1995. All
significant intercompany accounts and transactions have been eliminated.
F-53
<PAGE> 155
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Cash and Cash Equivalents: The Company considers all highly liquid
short-term investments with original maturities of three months or less to be
cash equivalents and, therefore, includes such investments as cash and cash
equivalents in its consolidated financial statements.
Valuation of Inventories: Inventories are stated at the lower of cost,
determined by the first-in, first-out (FIFO) method, or market. 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 held for sale which were written down in value in
anticipation of their being sold (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, with asset lives ranging from one to forty years. Leasehold
improvements are amortized over the life of the related lease.
Investment in Joint Venture: On August 15, 1990, the Company entered into a
joint venture agreement with an Indonesian company. The Company contributed
fixed assets valued at $300 to the joint venture in exchange for 30% of the
joint venture's outstanding common stock. Due to continued losses experienced by
the joint venture, the Company wrote off this investment in 1993 and sold its
remaining interest in 1996, resulting in an immaterial impact on the
Consolidated Financial Statements.
Excess of Investment over Net Assets Acquired: Intangible assets, net,
includes primarily the excess of cost over net assets acquired (goodwill) of
Medical Composite Technology, Inc. of $900, which is being amortized using the
straight-line method over a period of three years. See Note 5 -- Acquisition.
Income Taxes: The Company utilizes an asset and liability approach in
accounting for income taxes and requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's consolidated financial statements or tax
returns. Since it is unlikely that the Company will realize the future tax
benefits of the net deferred tax asset due to its substantial net operating
losses, a valuation allowance has been established for the full amount.
Loss Per Share: Loss per share for each of the years in the three-year
period ended December 31, 1995 is calculated based on the weighted average
number of the combined shares of both Class A and Class B Common Stock
outstanding during the periods, and the weighted average number of shares of
single class Common Stock outstanding after November 18, 1993.
On June 4, 1996, the Company's shareholders approved a one-for-ten reverse
stock split, effective June 6, 1996. The stated par value of one share of common
stock was changed from $.01 to $.10 as a result of the stock split. All
references in the consolidated financial statements to average number of shares
outstanding and related prices, per share amounts and stock option plan data
have been restated to reflect the reverse stock split.
Concentration of Credit Risk: The Company sells its products to customers
in the healthcare industry, primarily in North America. Third party
reimbursement through private or governmental insurance programs and managed
care programs impacts a significant component of the Company's business.
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.
F-54
<PAGE> 156
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Net sales by product line for each year of the three year period ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net sales, durable medical products:
Wheelchairs................................... $59,762 $63,819 $61,750
Beds and Accessories.......................... 10,265 9,098 29,266
Other......................................... 4,600 6,521 3,443
------- ------- -------
$74,627 $79,438 $94,459
======= ======= =======
</TABLE>
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.
The Company currently buys ready-to-assemble wheelchair kits, an important
component of its products, from one supplier. A change in suppliers could cause
a delay in manufacturing and a possible loss of sales, which would affect
operating results adversely. However, the Company believes that numerous
alternative supply sources are available for these materials.
Foreign Currency Translation: The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars in accordance with the
provisions of SFAS No. 52, "Foreign Currency Translation." Assets and
liabilities are translated at year-end exchange rates. Revenues and expenses are
translated at the average exchange rate for each year. The resulting translation
adjustments for each year are recorded as a separate component of stockholders'
equity. All foreign currency transaction gains and losses are included in the
determination of income and are not significant.
Recently Issued Accounting Pronouncement: In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which addresses
accounting for stock option, purchase and award plans. The Company will adopt
SFAS 123 in 1996 and will then have the option of valuing stock compensation
using either the "fair value based method" or the "intrinsic value based
method". The Company anticipates that, when adopted, SFAS 123 will have no
material effect on its financial position or results of operations.
Reclassification: Certain reclassifications (beginning in 1994) including
the reclassification of shipping and distribution costs from operating expenses
to cost of sales have been made to prior period consolidated financial
statements to conform with current period presentation. The reclassifications
have no effect on loss from operations and net loss as previously reported.
NOTE 4 -- ASSETS HELD FOR SALE
Pursuant to an Asset Purchase Agreement dated February 15, 1995, the
Company sold the Smith & Davis Institutional Business effective April 4, 1995.
The proceeds consisted of approximately $4.5 million in cash (which was used to
repay debt), $2.7 million in assumption of liabilities, and notes valued at
approximately $2.1 million; $0.2 million of such notes were repaid in 1995 with
the remainder expected to be repaid in 1996.
F-55
<PAGE> 157
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 4 -- ASSETS HELD FOR SALE -- (CONTINUED)
Net assets held for sale of the Institutional Business consisted of the
items in the following table as of December 31, 1994 (stated at estimated net
realizable values). The value of these assets approximated the net proceeds from
the sale of the Institutional Business on the sale date of April 4, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
<S> <C>
Accounts receivable...................................... $ 4,099
Inventories.............................................. 4,298
Land and buildings....................................... 1,350
Machinery & equipment.................................... 1,200
Other assets............................................. 342
-------
Total assets held for sale..................... $11,289
=======
</TABLE>
Revenues of the Institutional Business and related costs were included in
the consolidated results of the Company in years prior to 1994. The 1993
restructuring provision included an estimate of losses to be incurred during the
phase-out period. During the phase out period commencing January 1, 1994 through
the disposal date (April 4, 1995), the results of the Smith & Davis
Institutional Business were included as a component of accrued restructuring
expenses on the consolidated balance sheet. The reduction in accrued
restructuring expense since December 31, 1994 primarily reflects changes in
estimates, adjustments and the payment of disposal costs related to the sale.
Revenues and net income (loss) from operations (unaudited) for the Institutional
Business were as follows:
<TABLE>
<CAPTION>
FOR YEAR ENDED
JANUARY 1, 1995 DECEMBER 31,
THROUGH --------------------
APRIL 4, 1995 1994 1993
--------------- ------- --------
<S> <C> <C> <C>
Revenues.............................. $ 5,508 $21,220 $ 17,335
Net income (loss)..................... $ 129 $(1,400) $(17,310)
</TABLE>
Pursuant to an Asset Purchase Agreement dated July 24, 1995, the Company
sold the Smith & Davis Oxycon line of oxygen concentrator products. This
transaction was finalized effective August 9, 1995. The proceeds from the sale
consisted of a note valued at $0.6 million. This transaction did not result in a
material gain or loss.
NOTE 5 -- ACQUISITION
In January 1994, the Company completed the acquisition (the "Acquisition")
of Medical Composite Technology, Inc. ("MCT"). The $10.6 million purchase price
consisted of the issuance of 800,000 shares of Common Stock, $2 million in the
form of pre-closing cash advances, and the assumption of $0.6 million of net
liabilities. Additionally, the Company assumed 10,761 unvested and 30,042 vested
stock options; such options are for the purchase of the Company's Common Stock.
MCT develops and designs state-of-the-art durable medical equipment, including
wheelchairs and other medical mobility products.
The Acquisition was accounted for as a purchase. Of the $10.6 million
purchase price, $9.7 million of the purchase price is attributable to in-process
research and development which was expensed in the fourth quarter of 1993. The
balance of the purchase price over the fair value of assets acquired, $0.9
million, was allocated to goodwill and is being amortized over a period of three
years.
For purposes of consolidated financial statement presentation, the
Acquisition was effective on December 31, 1993. Accordingly, the Company's
consolidated balance sheet as of December 31, 1995, 1994 and 1993
F-56
<PAGE> 158
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 5 -- ACQUISITION -- (CONTINUED)
include the assets and liabilities of MCT. MCT's results of operations are
included in the consolidated financial statements from the date of acquisition.
Pro forma combined results of operations (unaudited) of the Company and MCT
for the year ended December 31, 1993 are presented below. Pro forma results of
operations are not necessarily indicative of the results of operations if the
companies had constituted a single entity during the period combined (dollars in
millions except per share data).
<TABLE>
<S> <C>
Net sales.......................................................... $ 95.4
Net loss from continuing operations................................ (60.1)
Net loss per share (1,734,387 shares).............................. (34.70)
</TABLE>
NOTE 6 -- DEBT RESTRUCTURING AND CONVERSION
As of September 30, 1993, the Company, Everest & Jennings, Inc. ("E&J
Inc."), Jennings Investment Co. and BIL entered into a Debt Conversion Agreement
to provide for the conversion (the "Debt Conversion Transaction") of
approximately $75 million in principal and accrued, unpaid interest (the
"Converted BIL Debt"), owed by the Company and E&J Inc. to BIL. Pursuant to the
Debt Conversion Transaction, the Company and E&J Inc. issued to BIL a
Convertible Promissory Note Common Stock (the "Common Stock Note") in the
initial principal amount of $45 million and a Convertible Promissory Note
Preferred Stock (the "Preferred Stock Note") in the original principal amount of
$20 million. The Common Stock Note was subsequently increased to $55 million via
a transfer of $10 million from the Revolving Promissory Note to the Common Stock
Note. The Common Stock Note was converted into 5.5 million shares of Common
stock and the Preferred Stock Note was converted into 20 million shares of
Series C Convertible Preferred Stock on January 12, 1994 upon the satisfaction
of certain preestablished conditions.
The Company held a Special Meeting of Stockholders on December 31, 1993, to
ratify and approve the Debt Conversion Transaction. Concurrent with ratification
and approval of the Debt Conversion Transaction, the Company's stockholders
approved and adopted amendments to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 2,500,000 to
12,000,000 and to increase the number of authorized shares of Preferred Stock
from 11,000,000 to 31,000,000 (the "Recapitalization Proposals").
The effects of the conversions of both the Common Stock Note and the
Preferred Stock Note have been reflected in the consolidated financial
statements as of December 31, 1995, 1994 and 1993. No gain or loss was
recognized as a result of the Debt Conversion Transaction.
F-57
<PAGE> 159
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 7 -- DEBT
The Company's debt as of December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Revolving Promissory Note to BIL....................... -0- $ 6,503
Loans payable to HSBC.................................. 18,700 10,000
Other domestic debt.................................... 2,622 8,913
Foreign debt........................................... 5,521 5,210
Long-term loan payable to BIL.......................... 21,103 12,000
------- -------
Total debt................................... 47,946 42,626
Less short-term debt and current installments of
long-term debt....................................... 4,473 17,658
------- -------
Long-term debt, net of current installments,
including Revolving Promissory Note to BIL
in 1994.................................... $43,473 $24,968
======= =======
</TABLE>
Aggregate long-term debt maturities during each of the next five fiscal
years is as follows:
<TABLE>
<S> <C>
1996............................................. $ 4,473
1997............................................. 41,333
1998............................................. 965
1999............................................. 375
2000............................................. 275
Thereafter....................................... 525
-------
$47,946
=======
</TABLE>
The weighted average interest rate at December 31, 1995 on outstanding
short-term borrowings of $4,473 was approximately 9%. The short-term borrowings
at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Foreign Debt...................................... $3,396
Other Short-term Debt............................. 1,077
------
$4,473
======
</TABLE>
In order to facilitate the relocation process by the Company from
California to Missouri, in February, 1992, BIL acquired all of Security Pacific
National Bank's rights (the "Bank Interest") in the First Amended and Restated
Credit Agreement that had been executed in 1991 ("Bank Loan"). The acquisition
of the Bank Loan by BIL resulted in BIL acquiring the Series B Convertible
Preferred Stock (786,000 shares). As a condition of the HSBC Revolving Credit
Agreement, BIL 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 September 30,
1993, the Bank Loan was restructured as part of the Debt Conversion Transaction.
As of September 30, 1993, the Company entered into the Debt Conversion
Agreement with BIL whereby $75 million of the indebtedness due BIL was
restructured by the issuance of the Common Stock Note and the Preferred Stock
Note (see Note 6). The balance of the indebtedness owed BIL ($6.8 million) which
was not converted into the Common Stock Note and the Preferred Stock Note was
treated as advances under the Revolving Promissory Note.
In December 1995, HSBC and E&J Inc. agreed to amend the Revolving Credit
Agreement originally entered into on September 30, 1992 and extend its term
through September, 1997. The HSBC facility, as amended, provides up to $6
million of letter of credit availability and cash advances of up to $25 million
to
F-58
<PAGE> 160
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 7 -- DEBT -- (CONTINUED)
E&J Inc. Advances under the Revolving Credit Agreement bear interest at the
prime rate plus 0.25%, as announced by Marine Midland Bank N.A. from time to
time (8.5% at December 31, 1995), and are guaranteed by Brierley Investments
Limited, an affiliate of BIL. Repayment of existing debt with BIL is
subordinated to the HSBC debt, and Brierley Investments Limited, an affiliate of
BIL, guaranteed its repayment.
On December 21, 1995, $3 million of the increased credit facility was
utilized to repay an advance from BIL made earlier in 1995. As of December 31,
1995, $18.7 million of the $25 million available for cash advances had been
utilized.
As part of the Debt Conversion Transaction, BIL agreed to provide to the
Company and E&J Inc. a revolving credit facility of up to $12.5 million, as
evidenced by the Revolving Promissory Note. At December 31, 1995, this facility
was completely utilized. BIL has advanced the Company an additional $8.6 million
under the Revolving Promissory Note, bringing the total outstanding advances
from BIL to the Company at December 31, 1995 to $21.1 million. The Revolving
Promissory Note and other advances mature on September 30, 1997, bear interest
at the rate of 8% per annum, and are secured by a lien on and security interest
in all assets of the Company and E&J Inc. The Revolving Promissory Note is
subordinated to all debt borrowed by the Company or E&J Inc. from, or the
payment of which has been guaranteed by the Company or E&J Inc. to HSBC, the
Pension Benefit Guaranty Corporation and any other financial institution
constituting a principal lender to the Company and/or E&J Inc. As of December
31, 1995, $2.6 million of accrued, unpaid interest is due BIL under the
Revolving Promissory Note.
In July 1991, the Company obtained a three-year secured credit facility in
the amount of up to $13 million at an interest rate of prime plus 3% for its
Smith & Davis subsidiary. The facility was secured by substantially all of the
assets of Smith & Davis. In February 1993, this credit line was amended to
increase the availability of funding to the Company, reduce the borrowing cost
to prime plus 2% and extend the term to December 31, 1995. The proceeds from the
sale of the Institutional Business were used to reduce this debt, and in
December 1995 the balance under this credit line was fully repaid utilizing
funds advanced from BIL. Additionally, Smith & Davis had other borrowings
primarily consisting of amounts owed under an industrial revenue bond totaling
$0.1 million at December 31, 1995, with an interest rate approximating 6%. The
remaining balance is due in March 1996.
During May 1992, the Company's Canadian subsidiary renewed existing credit
facilities in the aggregate of $4.7 million, which was fully utilized as of
December 31, 1995 at interest rates ranging from prime plus 1% to prime plus
1 1/4%. The loans are secured by the assets of the Canadian subsidiary.
During June 1994, the Company's Mexican subsidiary obtained a credit
facility in the aggregate of $1.0 million, of which $0.7 million was borrowed as
of December 31, 1995 at interest rates approximating 13%. The loans are secured
by the assets of the Mexican subsidiary and are due in annual installments
through 1999.
At December 31, 1995, the Company was contingently liable under existing
letters of credit in the aggregate amount of approximately $5.75 million.
At December 31, 1995 the Company owed $24.7 million to banks and other
commercial lenders, $2.1 million under capitalized lease obligations, and $21.1
million to BIL.
F-59
<PAGE> 161
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 8 -- INCOME TAXES
The components of the income tax provision (benefit) from operations for
each of the years in the three year period ended December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ----- ----
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ -- $ --
Foreign............................................ 160 97 197
State.............................................. -- -- --
Deferred:
Federal............................................ $ -- $ -- $ --
Foreign............................................ (64) (259) (24)
State.............................................. -- -- --
---- ----- ----
$ 96 $(162) $173
==== ===== ====
</TABLE>
A reconciliation of the provision (benefit) for taxes on loss from
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, 1995 is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit.............. $(l,821) $(3,373) $(18,878)
Increases (reductions) due to:
State taxes, net of federal benefit........ -- -- --
Foreign subsidiaries with different tax
rates................................... (80) 52 319
Domestic losses with no tax benefit........ 1,997 3,159 18,732
------- ------- --------
$ 96 $ (162) $ 173
======= ======= ========
</TABLE>
The Company and certain subsidiaries file consolidated federal income and
combined state tax returns. For federal income tax purposes, as of December 31,
1995, the Company has net operating loss (NOL) carryforwards of approximately
$143 million and tax credit carryforwards of approximately $1 million that
expire in 1997 through 2010. In accordance with the Internal Revenue Code, when
certain changes in company ownership occur, utilization of NOL carryforwards is
limited. The Company has determined that there has been a change in ownership
due to the various debt and equity transactions consummated with BIL as
described in Note 6 -- Debt Restructuring and Conversion and Note 7 -- Debt. As
a result, approximately $88.5 million of the Company's NOL carryforwards are
subject to an annual limitation of approximately $3 million. If the full amount
of that limitation is not used in any year, the amount not used increases the
allowable limit in the subsequent year.
In addition, there are approximately $7 million and $6 million,
respectively, of preacquisition NOL carryforwards generated by Smith & Davis and
MCT with expiration dates through 2004. Annual utilization of these NOLs is
limited to $0.6 million for Smith & Davis and $0.5 million for MCT to reduce
that entity's future contribution to consolidated taxable income.
The Company's foreign source income is not material.
F-60
<PAGE> 162
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 9 -- INVENTORIES
Inventories at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Raw materials............................................ $10,365 $10,249
Work-in-process.......................................... 4,593 5,585
Finished goods........................................... 4,612 4,615
------- -------
$19,570 $20,449
======= =======
</TABLE>
NOTE 10 -- COMMON AND PREFERRED STOCK
At the March 17, 1992 meeting, the stockholders approved a resolution to
authorize a new class of preferred stock. Thereafter, approximately 5.9 million
shares of 9% Series A Convertible Preferred Stock were issued for conversion of
BIL debt and accrued interest as discussed in Note 7. Such preferred shares are
redeemable into one-tenth of one share of common stock at the Company's option
until the second anniversary of conversion of the debt, and thereafter at the
holder's option until the seventh anniversary of conversion of the debt except
for any in-kind dividends which would be redeemable at 15% 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
the 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 15% 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 one-tenth of one
share of common stock. Also as discussed in Note 7, 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 one-tenth of one share of Common Stock
(except for any unpaid interest owed) at any time prior to the seventh
anniversary of the issuance date of said preferred shares.
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 was amended to replace the Company's authorized
Class A Common Stock and Class B Common Stock with a new single class of Common
Stock having 2,500,000 authorized shares, and reclassified 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 became
effective as of the close of business on November 18, 1993.
On December 31, 1993, the Company's stockholders approved the Debt
Conversion Transaction (see Note 6), which resulted in the issuance of 5.5
million shares of Common Stock and 20 million shares of 7% Series C Convertible
Preferred Stock upon conversion of the Common Stock Note and the Preferred Stock
Note, respectively. Each share of Series A, B and C preferred shares is
convertible into one-tenth of one share of common stock and is entitled to vote
with the common stock on an as-converted basis. The Series A and B preferred
shares are callable at a price of $1.67458437. Such call option has been waived
by BIL through September 30, 1997. The Debt Conversion Transaction resulted in
an increase in the total shares outstanding, on a fully diluted basis, to 9.96
million (including shares issued for the MCT acquisition), and increased the
percentage ownership of the Company by BIL and its affiliates from approximately
60% at December 31, 1992 to approximately 85% at December 31, 1993.
The Company has three 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 the Common Stock
on the date of grant. The
F-61
<PAGE> 163
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 10 -- COMMON AND PREFERRED STOCK -- (CONTINUED)
changes in this stock option plan in each of the years in the three year period
ended December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Outstanding, beginning of year.................. 5,645 10,245 23,437
Granted......................................... -- -- --
Exercised....................................... -- -- --
Cancelled....................................... (1,405) (4,600) (13,192)
------ ------ -------
Outstanding, end of year........................ 4,240 5,645 10,245
====== ====== =======
Exercisable, end of year........................ 4,240 5,645 10,245
====== ====== =======
</TABLE>
Options outstanding as of December 31, 1995 were granted at prices ranging
from $18.80 to $127.50 per share. As of December 31, 1995, 4,240 shares were
exercisable in the price range of $18.80 to $127.50 per share.
The Company also has an Omnibus Incentive Plan, which was adopted by the
Board of Directors during 1990. Options are exercisable over a ten-year period,
and were granted at prices which represent the fair market value of the Common
Stock on the date of grant. The changes in the Omnibus Incentive Plan in each of
the years in the three year period ended December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Outstanding, beginning of year................ 21,969 54,906 72,500
Granted....................................... -- -- 21,900
Exercised..................................... -- -- --
Cancelled..................................... (12,869) (32,937) (39,494)
------- ------- -------
Outstanding, end of year...................... 9,100 21,969 54,906
======= ======= =======
Exercisable, end of year...................... 8,400 20,091 30,794
======= ======= =======
</TABLE>
At December 31, 1995, 80,000 shares have been reserved for issuance
pursuant to this plan, and 9,100 options were outstanding which were granted at
prices ranging from $12.50 to $23.80.
Effective April 25, 1994, the Company adopted the 1994 Everest & Jennings
Stock Option Plan (the "1994 Plan"), providing for the granting of nonqualified
stock options to purchase up to 440,000 shares of the Company's Common Stock to
selected full time employees of the Company. Under the 1994 Plan, options become
exercisable in 50% increments when the Company achieves certain performance
goals and are automatically exercisable five years after the grant date,
assuming continuous employment with the Company. Option activity in the 1994
Plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Outstanding, beginning of year........................... 315,200 368,200
Granted.................................................. 100,900 --
Exercised................................................ -- --
Cancelled................................................ (96,800) (53,000)
------- -------
Outstanding, end of year................................. 319,300 315,200
======= =======
</TABLE>
F-62
<PAGE> 164
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 10 -- COMMON AND PREFERRED STOCK -- (CONTINUED)
Options outstanding as of December 31, 1995 were granted at $8.50, which
approximates the fair market value of the Company's common stock at the date of
grant. No options were exercisable at December 31, 1995 pursuant to this Plan.
At December 31, 1995, 120,700 shares were available for the granting of
additional options.
As part of the MCT acquisition, the Company assumed 10,761 unvested and
30,042 vested stock options at exercise prices ranging from $.60 to $2.80. These
options are for the acquisition of the Company's Common Stock. Option activity
in the MCT Plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Options assumed............................................ -- 40,803
Outstanding, beginning of year............................. 31,683 --
Exercised.................................................. (2,283) (5,820)
Cancelled.................................................. -- (3,300)
------ ------
Outstanding, end of year................................... 29,400 31,683
====== ======
Exercisable, end of year................................... 28,419 28,419
====== ======
</TABLE>
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company has a non-contributory 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 expense (income) under these plans was $364, $(15)
and $40 for 1995, 1994 and 1993, respectively.
F-63
<PAGE> 165
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 11 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The following table sets forth the status of these plans and the amounts
recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................... $17,678 $15,612 $17,695
======= ======= =======
Accumulated benefit obligation.............................. $17,678 $15,621 $17,816
======= ======= =======
Projected benefit obligation for services rendered to
date...................................................... $17,678 $15,621 $17,816
Plan assets at fair value, primarily listed stocks, bonds
and investment funds...................................... 13,513 12,100 12,763
------- ------- -------
Projected benefit obligation in excess of plan assets....... (4,165) (3,521) (5,053)
Unrecognized transition amount.............................. (85) (98) (85)
Unrecognized loss from change in discount rate.............. 3,420 1,960 3,043
------- ------- -------
Pension liability included in Accrued payroll costs......... $ (830) $(l,659) $(2,095)
======= ======= =======
The pension cost relating to these plans is comprised of the
following:
Service cost--benefits earned during period................. $ -- $ -- $ --
Interest cost on projected benefit obligation............... 1,323 1,263 1,295
Actual return on plan assets................................ (2,396) (378) (872)
Net amortization and deferral............................... 1,437 (900) (223)
Curtailment gain............................................ -- -- (160)
------- ------- -------
Net periodic pension cost................................... $ 364 $ (15) $ 40
======= ======= =======
</TABLE>
Effective May 1, 1991, benefits accruing under the Everest & Jennings, Inc.
Pension Plan were frozen. Due to a reduction in its weighted-average discount
rate, and in accordance with the provisions of SFAS No. 87, "Employees'
Accounting for Pensions", an additional minimum funding liability, representing
the excess of accumulated plan benefits over plan assets and accrued pension
costs of S2,606 was recorded for the Everest & Jennings, Inc. Pension Plan as an
increase in stockholders' deficit for the year ended December 31, 1993. As of
December 31, 1994, stockholders' deficit was credited for $794 to reduce the
minimum liability to $1,812. As of December 31, 1995, stockholders' deficit was
increased by $1,452 to reflect an increase in the minimum liability as a result
of a decrease in the discount rate used to determine the minimum liability.
Additionally, during 1991 the Company froze the Smith & Davis Hourly Plan
and purchased participating annuity contracts to provide for accumulated and
projected benefit obligations. The Company has also frozen the Smith & Davis
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:
<TABLE>
<CAPTION>
EVEREST & JENNINGS,
INC. SMITH & DAVIS
PLAN PLANS
---------------------- ----------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted-average discount rate.................... 7.5 % 8.5 % 7.5 % 8.0 % 8.5 % 7.5 %
Expected long-term rate of return on assets....... 9.0 % 9.0 % 9.0 % 9.0 % 9.0 % 8.5 %
Long-term rate for compensation increases......... -- -- -- -- -- --
</TABLE>
F-64
<PAGE> 166
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 11 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
In 1995, 1994 and 1993, no long term rates for compensation increases were
assumed for the defined benefit plans, as all participants are inactive and the
plans are frozen.
The Company also sponsored a 401(k) Savings and Investment Plan (the
"401(k) plan") covering all full-time employees of Everest & Jennings, Inc.
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. As of March 1,
1994, the Company suspended its contribution to the 401(k) Plan for all
non-bargaining unit employees. Employees may contribute between 1% and 15% of
base salary. Expense recorded for the 401(k) plan totaled approximately $20 in
1995, $35 in 1994 and $134 in 1993.
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
eight years and generally provide for the payment of taxes, insurance and
maintenance by the lessee. Certain of these leases have purchase options at
varying rates.
The Company's property held under capital leases, included in property,
plant and equipment, at December 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Machinery and equipment.............................. $ 2,827 $ 2,784
Less accumulated amortization........................ (1,769) (1,168)
------- -------
$ 1,058 $ 1,616
======= =======
</TABLE>
Minimum future lease obligations on long-term noncancelable leases in
effect at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1996....................................... $ 970 $ 707
1997....................................... 933 608
1998....................................... 469 595
1999....................................... -- 590
2000....................................... -- 589
Thereafter................................. -- 1,206
------ ------
Net minimum lease payments................. $ 2,372 $ 4,295
====== ======
Less amount representing interest.......... (262)
------
Present value of minimum lease payments.... 2,110
Less current portion....................... (804)
------
$ 1,306
======
</TABLE>
Rental expense for operating leases amounted to approximately $1,349,
$2,122 and $1,913 in 1995, 1994 and 1993, respectively.
F-65
<PAGE> 167
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE -- 13 CONTINGENT LIABILITIES
In July, 1990, a class action suit was filed in the United States District
Court for the Central District of California by a stockholder of the Company
against the Company and certain of its present and former directors and
officers. The suit 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 was briefed and oral argument heard in June, 1993.
Because of the precedent set by a Ninth Circuit decision in another case which
was decided after the district court's order of dismissal but before the Ninth
Circuit decided plaintiff's appeal, the Ninth Circuit reversed the district
court's dismissal of the case and remanded the case to the district court for
further proceedings in an opinion handed down by the Ninth Circuit on August 24,
1995. The district court directed plaintiff to file a new motion for class
certification and the plaintiff did so on February 29, 1996. The Company opposes
that motion, and it is set for hearing on March 25, 1996. 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 was in the sum of $1.1
million. In January, 1993 an answer and counter-claim were filed on behalf of
the Company. The answer denied breach of the contract and disputed the monetary
claim asserted in the Demand. In the counterclaim, the Company asserted 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. 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, brought
the total paid to date by the Company to ICF Kaiser to approximately $0.7
million. During June 1994 the Arbitrator ruled in favor of ICF Kaiser against
the Company in the amount of $1.3 million. This case was settled during the
fourth quarter of 1994 by payment to ICF Kaiser of $1.0 million, and such
payment was charged against existing Company reserves.
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. sec.sec. 9601 et sec. 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. A settlement in principle between
the State of California and the various potentially responsible parties was
reached in October 1995. It is anticipated that the Company's portion of the
settlement will be less than was originally anticipated. Accordingly, the
previously recorded reserve for this matter was reduced in 1995.
In March, 1993, E&J Inc. 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
F-66
<PAGE> 168
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE -- 13 CONTINGENT LIABILITIES -- (CONTINUED)
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. E&J
Inc. and 64 other entities were invited to the organizational meeting. E&J Inc.
is a member of a manufacturers' group of potentially responsible parties which
has investigated the site and proposed a remediation plan to the EPA. To reflect
E&J Inc.'s estimated allocation of costs thereunder, a reserve of $1.0 million
was recorded, which was included in the Consolidated Statements of Operations
for 1993. During 1995 an agreement in principle was reached with the EPA for a
settlement of the majority of the Casmalia site liability. The settlement
provides for the work to be completed in three phases. Phase I work, which is
estimated to take three to five years to complete, will require the Company,
along with other responsible parties, to participate in funding the water
management, certain construction projects and completion of the site
investigation. Phase II work, consisting of the remaining remedial construction
activities and the first five years of operation and maintenance, will be funded
by other parties and is estimated to take ten years. Subsequent to Phase II,
additional operation and maintenance will be required for approximately 30
years. The estimated exposure of the Company under this agreement is less than
originally anticipated and the previously recorded reserve has been reduced
accordingly.
In 1989, a patent infringement case was initiated against E&J Inc. and
other defendants in the U.S. District Court, Central District of California. E&J
Inc. prevailed at trial with a directed verdict of patent invalidity and
non-infringement. The plaintiff filed an appeal with the U.S. Court of Appeals
for the Federal Circuit. On March 31, 1993, the Court of Appeals vacated the
District Court's decision and remanded the case for trial. Impacting the retrial
of this litigation was a re-examination proceeding before the Board of Patent
Appeals with respect to the subject patent. A ruling was rendered November 23,
1993 sustaining the claim of the patent which E&J Inc. has been charged with
infringing. Upon the issuance of a patent re-examination certificate by the U.S.
Patent Office, the plaintiff presented a motion to the District Court requesting
a retrial of the case. The Company presented a Motion for Summary Judgment of
Noninfringement based in part upon the November 23, 1993 decision of the Board
of Patent Appeals. The Motion was granted in follow-up conferences and an
official Judgment was entered November 17, 1994. The plaintiff filed a Notice of
Appeal on November 23, 1994, and a briefing schedule has been indicated by the
Appellate Court. A written opinion was filed March 21, 1995 and the appeal was
argued August 8, 1995. A decision has not yet been announced. E&J Inc. believes
that this case is without merit and intends to contest it vigorously. The
ultimate liability of E&J Inc., if any, cannot be determined at this time.
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.
F-67
<PAGE> 169
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED AND PER-SHARE DATA)
NOTE 14 -- QUARTERLY FINANCIAL INFORMATION
The following chart sets forth the highlights of the quarterly consolidated
results of operations in fiscal years 1995, 1994 and 1993:
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)(A)
------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
--------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Fiscal year 1995
Revenues................. $18,513 $ 18,449 $19,346 $ 18,319 $ 74,627
Gross profit............. 4,207 4,404 4,126 3,293(d) 16,030
Net loss................. (1,170) (860) (924) (2,498)(d) (5,452)
Loss per share........... (.20) (.08) (.10) (.37) (.75)
Fiscal year 1994
Revenues................. $20,213 $ 20,146 $19,829 $ 19,250 $ 79,438
Gross profit............. 4,080 4,657 4,674 139(b) 13,550
Net loss................. (1,673) (940) (897) (6,249)(b) (9,759)
Loss per share........... (.20) (.10) (.10) (.95) (1.35)
Fiscal year 1993
Revenues................. $24,752 $ 23,524 $23,458 $ 22,725 $ 94,459
Gross profit............. 5,839 2,784 3,993 (1,982) 10,634
Net loss................. (2,977) (7,837) (5,236) (39,647)(c) (55,697)(c)
Loss per share........... (3.30) (8.61) (5.70) (42.00) (59.61)
</TABLE>
- ---------------
(a) In the fourth quarter of 1994, based on predominant industry practice, the
Company changed its method of classification of shipping and distribution
costs in the statement of operations. Such costs are now presented in cost
of sales versus operating expenses in prior years. For purposes of quarterly
financial information all gross profit amounts presented have been revised
to reflect such reclassification.
(b) Gross profit was adversely affected during the fourth quarter of 1994 by a
$3.0 million charge to reserves for product liability, workers' compensation
claims and inventory cost adjustments.
(c) Includes charges of $13 million for the Institutional Business disposition,
$2.1 million for the consolidation of manufacturing and distribution
facilities, and $9.7 million for MCT in-process R&D.
(d) Productivity at the Company's primary domestic manufacturing facility was
negatively impacted during the fourth quarter of 1995 as a result of a WARN
act notice issued pursuant to the layoff of 30% of the work force at that
facility. These layoffs, which were completed during the first quarter of
1996. were a result of the transfer of workload to lower-cost facilities and
the Company's continued manufacturing rationalization.
F-68
<PAGE> 170
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
FOR THE YEAR ENDED PERIOD EXPENSES DEDUCTIONS OF PERIOD
- -------------------------------------------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
December 31, 1995:
Allowance for doubtful accounts........... $2,088 $ 577 $ 818 $1,847
Accrued restructuring expenses............ 4,476 123 3,940 3,140
December 31, 1994:
Allowance for doubtful accounts........... $1,506 $1,630 $1,048 $2,088
Accrued restructuring expenses............ 6,292 -0- 1,816 4,476
December 31, 1993:
Allowance for doubtful accounts........... $3,505 $1,515 $3,514(a) $1,506
Accrued restructuring expenses............ 6,047 5,074(b)(c) 4,829 6,292
</TABLE>
- ---------------
(a) This includes amount related to the accounts of the Institutional Business
which have been reclassified as Assets Held for Sale.
(b) Accrued restructuring expenses include costs incurred in the process of
relocating the Company's primary domestic wheelchair manufacturing facility
from California to Missouri. $10,030 and $2,079 of restructuring expenses
were charged to other balance sheet accounts for 1993 and 1992,
respectively.
(c) Accrued restructuring expenses include costs related to the disposition of
the Institutional Business.
F-69
<PAGE> 171
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................................. $ 49,561 $ 56,308
Cost of sales......................................................... 40,861 43,571
--------- ---------
Gross profit.......................................................... 8,700 12,737
Selling expenses...................................................... 8,667 8,936
General and administrative expenses................................... 5,047 3,964
--------- ---------
Total operating expenses.............................................. 13,714 12,900
--------- ---------
Loss from operations.................................................. (5,014) (163)
Interest expense, BIL (Note 6)........................................ 1,280 1,179
Interest expense, other............................................... 2,160 1,539
--------- ---------
Loss before income taxes.............................................. (8,454) (2,881)
Income tax provisions................................................. 6 73
--------- ---------
Net loss.............................................................. $ (8,460) $ (2,954)
========= =========
Loss per share (Note 7)............................................... $ (1.17) $ (.41)
========= =========
Weighted average number of Common Shares outstanding.................. 7,214,565 7,226,556
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-70
<PAGE> 172
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
1995
SEPTEMBER -----------
30
1996
-----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 12 $ 117
Accounts receivable, less allowance for doubtful accounts of
$1,376 in 1996 and $1,847 in 1995.......................... 14,448 16,952
Notes receivable (Note 9)..................................... 2,559 252
Inventories (Note 8).......................................... 17,858 19,570
Other current assets.......................................... 629 1,047
-------- --------
Total current assets.................................. 35,506 37,938
PROPERTY, PLANT AND EQUIPMENT:
Land.......................................................... 370 261
Buildings and improvements.................................... 4,574 4,500
Machinery and equipment....................................... 16,093 15,380
-------- --------
21,037 20,141
Less accumulated depreciation and amortization................ (14,066) (12,992)
-------- --------
Property, plant and equipment, net............................ 6,971 7,149
NOTES RECEIVABLE (Note 9)....................................... 297 2,524
INTANGIBLE ASSETS, NET.......................................... 171 402
OTHER ASSETS.................................................... 345 217
-------- --------
TOTAL ASSETS.......................................... $ 43,290 $ 48,230
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings and current installments of long-term
debt of $1,552 in 1996 and $1,089 in 1995 (Note 6)......... $ 4,782 $ 4,473
Accounts payable.............................................. 7,109 8,361
Accrued payroll costs......................................... 5,032 6,327
Accrued interest, BIL (Note 6)................................ 3,909 2,629
Accrued expenses.............................................. 5,681 5,310
Accrued restructuring expenses (Note 1)....................... 339 659
-------- --------
Total current liabilities............................. 26,852 27,759
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 6)................. 27,516 22,370
LONG-TERM BORROWINGS FROM BIL (Note 6).......................... 21,103 21,103
OTHER LONG-TERM LIABILITIES..................................... 79 130
COMMITMENTS AND CONTINGENCIES (Notes 1 and 10)
STOCKHOLDERS' DEFICIT: (Note 1)
Series A Convertible Preferred Stock.......................... 13,175 13,175
Series B Convertible Preferred Stock.......................... 1,317 1,317
Series C Convertible Preferred Stock.......................... 20,000 20,000
Common Stock, par value: $.10; authorized 12,000,000 shares... 719 722
Additional paid-in capital.................................... 105,608 105,608
Accumulated deficit........................................... (169,143) (159,793)
Minimum pension liability adjustment.......................... (3,264) (3,264)
Cumulative translation adjustments............................ (672) (897)
-------- --------
Total stockholders' deficit................................ (32,260) (23,132)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT........... $ 43,290 $ 48,230
======== ========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-71
<PAGE> 173
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ---------------- -------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ------- ------ ---------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995.......... 7,867,842 $13,175 786,357 $1,317 20,000,000 $20,000 72,280,646 $722 $105,608
Accrued Dividends on
Series A
Convertible
Preferred Stock... -- -- -- -- -- -- -- -- --
Net loss............ -- -- -- -- -- -- -- -- --
Adjustment for one-
for-ten Stock
Split............. -- -- -- -- -- -- (65,084,081) (3) --
Translation
Adjustments....... -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ ---------- ------- ----------- ---- -------
Balance at September
30, 1996.......... 7,867,842 $13,175 786,357 $1,317 20,000,000 $20,000 7,196,565 $719 $105,608
========= ======= ======= ====== ========== ======= =========== ==== =======
<CAPTION>
MINIMUM
PENSION CUMULATIVE
ACCUMULATED LIABILITY TRANSLATION
DEFICIT ADJUSTMENT ADJUSTMENTS TOTAL
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December
31, 1995.......... $(159,793) $ (3,264) $(897) $(23,132)
Accrued Dividends on
Series A
Convertible
Preferred Stock... (890) -- -- (890)
Net loss............ (8,460) -- -- (8,460)
Adjustment for one-
for-ten Stock
Split............. -- -- -- (3)
Translation
Adjustments....... -- -- 225 225
-------- ------- ----- --------
Balance at September
30, 1996.......... $(169,143) $ (3,264) $(672) $(32,260)
======== ======= ===== ========
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-72
<PAGE> 174
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
1996 1995
------- -------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $(8,460) $(2,954)
Adjustment to reconcile net loss to cash used in operating
activities:
Depreciation and amortization..................................... 1,305 1,812
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable.................................................. 2,183 1,991
Trade notes receivable............................................... (2,307) --
Inventories.......................................................... 1,712 2,247
Accounts payable..................................................... (1,252) (3,321)
Accrued interest, BIL................................................ 1,280 1,179
Accrued payroll costs, expenses and income taxes..................... (1,295) (2,916)
Accrued restructuring expenses....................................... (320) (3,727)
Other, net........................................................... 90 (126)
------- -------
Cash used in operating activities.................................... (7,064) (5,815)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (896) (1,003)
Proceeds from disposition of assets held for sale.................... -- 4,518
Cash received in payment of note receivable.......................... 2,227 --
------- -------
Cash provided by investing activities................................ 1,331 3,515
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from BIL.................................................... -- 5,100
Increase (decrease) in short-term and long-term borrowings, net...... 5,455 (3,157)
Proceeds from exercise of stock options.............................. 3 3
Changes in other long-term liabilities............................... (51) (73)
------- -------
Cash provided by financing activities................................ 5,401 1,873
Effect of exchange rate changes on cash flow......................... 227 150
Decrease in cash balance............................................. (105) (277)
Cash and cash equivalents balance at beginning of year............... 117 513
------- -------
CASH AND CASH EQUIVALENTS BALANCE AT END OF PERIOD..................... $ 12 $ 236
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................................. $ 1,857 $ 1,584
Cash paid for income taxes............................................. $ 203 $ 59
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements
F-73
<PAGE> 175
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
NOTE 1 -- CORPORATE RESTRUCTURING
The Company has incurred substantial financial losses in a continuing
effort to restructure its operations with the objective of improving its
competitive position within the durable medical equipment industry.
Restructuring activities have included asset sales, significant reductions in
headcount, plant closures and consolidations, product line rationalization, debt
to equity conversion and outsourcing of manufacturing operations.
The Company's 1996 revenues and operating results have been negatively
impacted by ongoing price competition. Additionally, the Company continues to
address the rationalization of its production facilities in the US, Canada and
Mexico and the increased outsourcing of products and product components, the
effects of which are expected to lower the Company's production costs. On May
26, 1996 the Company issued a WARN Act Notice and announced a substantial
workforce reduction at its primary domestic wheelchair manufacturing facility.
Such reduction was substantially completed during the third quarter of 1996. US
operations are now limited to administration, distribution, certain custom
manufacturing and light assembly. A severance reserve of approximately $391 has
been included in the Company's results of operations for the three months ended
June 30, 1996 and an additional severance reserve of approximately $132 has been
included in the Company's results of operations for the three months ended
September 30, 1996 resulting in approximately $523 of severance expense being
included in the Company's results of operations for the months ended September
30, 1996. The Company anticipates incurring additional restructuring expenses
during the fourth quarter 1996 as workload transfers substantially complete.
The accompanying consolidated financial statements have been prepared under
the going concern concept, which 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 restructuring
expenses and recurring operating losses and has a net capital deficiency at
September 30, 1996. No assurance can be made that the Company will successfully
emerge from or complete its restructuring activities.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed for the three month and nine month
periods ended September 30, 1996 are the same as those disclosed in the Notes to
the Company's December 31, 1995 Consolidated Financial Statements, which were
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. All dollar amounts in these Notes to Unaudited Consolidated
Financial Statements are in thousands except per-share data or as otherwise
specified. In the opinion of management, all adjustments, consisting of normal
recurring adjustments necessary for a fair presentation of (a) the consolidated
results of operations for the three month and nine month periods ended September
30, 1996 and 1995; (b) the consolidated financial position at September 30, 1996
and December 31, 1995; and (c) the consolidated cash flows for the nine month
periods ended September 30, 1996 and 1995 have been made. However, the
consolidated financial statements included herewith do not include any
adjustments that might result from the Company's inability to emerge from or
complete its ongoing restructuring activities and continue as a going
concern -- See Note 1 to the Unaudited Consolidated Financial Statements.
NOTE 3 -- OWNERSHIP
80% of the Company's common shares and all of the Company's Series A, B and
C Preferred shares are owned by a wholly-owned subsidiary of Brierley
Investments Ltd ("BIL"), a New Zealand investment firm.
F-74
<PAGE> 176
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
NOTE 4 -- PROPOSED MERGER WITH GRAHAM-FIELD HEALTH PRODUCTS, INC.
On September 3, 1996, the Company announced it had entered into a
definitive Agreement and Plan of Merger with Graham-Field Health Products, Inc.
providing for the previously announced acquisition of the Company by
Graham-Field. The Board of Directors of the Company received a fairness opinion
from Vector Securities International, Inc. to the effect that the consideration
to be received by the holders of the Company's Common Stock pursuant to the
Merger Agreement is fair to such stockholders from a financial point of view.
The terms of the acquisition are the same as those reflected in the parties'
previous announcement on August 14, 1996.
As a result of the merger, the Company will become a wholly-owned
subsidiary of Graham-Field. In the merger, the stockholders of the Company will
receive one share of Graham-Field common stock for each 2.857 shares of the
common stock of the Company. The merger ratio is subject to reduction so that
the value of the Graham-Field common stock to be received will not exceed $5.50
per share of the Company's common stock. There are currently 7,207,689 shares of
the Company's common stock outstanding.
In connection with the merger, BIL will purchase for cash up to 1.9 million
additional shares of Graham-Field common stock, valued at the greater of $13 per
share or the average market price of the common stock of Graham-Field for the 10
consecutive trading days prior to the merger closing date. Graham-Field will use
the proceeds to repay all debt of the Company in the approximate amount of $25
million to The Hongkong and Shanghai Banking Corporation Limited (see Note
6 -- Debt). In addition, Graham-Field will issue to BIL up to $61 million of a
new Series B Cumulative Convertible Preferred Stock in exchange for the
indebtedness of the Company owing to BIL (see Note 6 -- Debt) and shares of the
Company's preferred stock owned by BIL. Also as part of the transaction, BIL
will purchase for cash $10 million of a new Series C Cumulative Convertible
Preferred Stock of Graham-Field, the proceeds of which will be available to
Graham-Field for general corporate purposes. Finally, certain indebtedness in
the amount of $4 million owing by Graham-Field to BIL will be exchanged for a $4
million unsecured subordinated promissory note of Graham-Field which will mature
on April 1, 2001 and will bear interest at an effective rate of 7.7% per annum.
The Series B and Series C Preferred Stock to be issued by Graham-Field to
BIL will be entitled to a dividend at the rate of 1.5% per year, payable at the
option of Graham-Field either in cash or in shares of its common stock. In
addition, the shares of Graham-Field Series B and Series C Preferred Stock will
vote on an as-converted basis, as a single class together with the Graham-Field
common stock, on all matters submitted to a vote of the stockholders of
Graham-Field. The Series B Preferred Stock will not be redeemable and will be
convertible into shares of Graham-Field common stock (x) at the option of the
holder, at a conversion price of $20 per share, (y) at the option of
Graham-Field, at a conversion price equal to the then current trading price (but
not less than $15.50 or more than $20 per share), and (z) automatically on the
fifth anniversary of the date of issuance at a conversion price of $15.50 per
share, in each case subject to certain antidilution adjustments. The Series C
Preferred Stock will be subject to redemption as a whole at Graham-Field's
option on the fifth anniversary of the date of issuance at stated value and, if
not redeemed, will automatically convert on the fifth anniversary of the date of
issuance at a conversion price of $20 per share, subject to certain antidilution
adjustments.
As a result of the merger, BIL will own shares of common and preferred
stock of Graham-Field representing approximately 34% of the voting power of all
outstanding shares of Graham-Field stock. Simultaneous with the signing of the
Merger Agreement, Graham-Field and BIL entered into a Stockholder Agreement
pursuant to which BIL has agreed to vote all of its shares of the Company's
stock in favor of the merger. In the Stockholder Agreement, BIL also has agreed
to grant Graham-Field a right of first refusal with respect to certain sales of
its Graham-Field stock, to indemnify Graham-Field against certain existing
actions and proceedings to which the Company is a party and, so long as BIL owns
Graham-Field stock representing
F-75
<PAGE> 177
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
NOTE 4 -- PROPOSED MERGER WITH GRAHAM-FIELD HEALTH PRODUCTS, INC. -- (CONTINUED)
at least 5% of the voting power of the outstanding shares, not to acquire
additional shares without the consent of Graham-Field's Board of Directors
(which consent will not be unreasonably withheld), seek to acquire ownership of
Graham-Field, engage in any solicitation of proxies with respect to Graham-Field
or otherwise seek to propose to acquire control of the Graham-Field Board of
Directors. Pursuant to the Stockholder Agreement, BIL will have the right to
designate two members of Graham-Field's Board of Directors, subject to reduction
if BIL reduces its ownership of Graham-Field stock. BIL also will have the right
to participate on a pro rata basis in certain future stock issuances by
Graham-Field. The Stockholder Agreement will automatically terminate upon a
change of control of Graham-Field or its Board of Directors. In addition,
Graham-Field has granted certain registration rights to BIL with respect to its
Graham-Field shares.
The closing of the transaction is subject to customary conditions,
including approval by the stockholders of both Graham-Field and Everest &
Jennings. The closing is currently scheduled for November 27, 1996.
See Note 10 for a description of a class action complaint filed in Delaware
with respect to the proposed acquisition of the Company by Graham-Field.
NOTE 5 -- COMMON STOCK
On June 4, 1996 the Company's shareholders approved a one-for-ten reverse
stock split, effective June 6, 1996. The stated par value of one share of common
stock was changed from $.0l to $.10 as a result of the stock split. All
references in the consolidated financial statements to average number of shares
outstanding and related prices, per share amounts and stock option plan data
have been restated to reflect the reverse stock split.
NOTE 6 -- DEBT
The Company's debt as of September 30, 1996 and December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Loans payable to HSBC.............................. $ 25,000 $ 18,700
Other domestic debt................................ 1,770 2,622
Foreign debt....................................... 5,528 5,521
Long-term loan payable to BIL...................... 21,103 21,103
------- -------
Total debt......................................... 53,401 47,946
Less short-term borrowings and current installments
of long-term debt................................ 4,782 4,473
------- -------
Long-term debt, net of current portion, including
BIL Credit Facility.............................. $ 48,619 $ 43,473
======= =======
</TABLE>
On September 30, 1992 Everest & Jennings Inc., a wholly-owned subsidiary of
the Company, entered into a Revolving Credit Agreement with The Hongkong and
Shanghai Banking Corporation Limited ("HSBC"). This Agreement has been revised
and extended several times and currently expires September 30, 1997. Advances
under the Revolving Credit Agreement, as amended, bear interest at the prime
rate as announced by Marine Midland Bank, N.A. from time to time plus 0.25% per
annum. The HSBC facility, as amended, provides up to $6 million for letter of
credit availability and, additionally, cash advances of up to $25 million to
Everest & Jennings Inc. Repayment of existing debt with BIL is subordinated to
the HSBC debt, and an affiliate of BIL has guaranteed repayment of the HSBC
debt. As of September 30, 1996 this facility was fully utilized.
F-76
<PAGE> 178
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
NOTE 6 -- DEBT -- (CONTINUED)
BIL has provided the Company a credit facility which allows advances up to
$21.1 million. At September 30, 1996 and December 31, 1995 this facility has
been fully utilized. The BIL credit facility has been extended to September 30,
1997, bears interest at the rate of 8% per annum, and is secured by a lien on
and security interest in all assets of the Company and Everest & Jennings Inc.
As of September 30, 1996, $3.9 million of accrued, unpaid interest was due BIL
under the BIL credit facility.
The Company's Canadian subsidiary has credit facilities in the aggregate of
$5.5 million, of which $4.9 million was borrowed as of September 30, 1996 at
interest rates ranging from prime plus 1% to prime plus 1.25%. The loans are
secured by the assets of the Canadian subsidiary and certain Letters of Credit
supplied by HSBC and BIL.
The Company's Mexican subsidiary has a credit facility in the aggregate of
$1.0 million, of which $0.6 million was borrowed as of September 30, 1996 at
interest rates approximating 13%. The loan is secured by the assets of the
Mexican subsidiary.
At September 30, 1996, the Company was contingently liable to HSBC under
existing letters of credit in the aggregate amount of approximately $5.8
million.
NOTE 7 -- LOSS PER SHARE
Loss per share for the three month and nine month periods ended September
30, 1996 and 1995 is calculated based on the weighted average number of shares
of Common Stock outstanding during the periods, giving effect to the reverse
stock split as discussed in Note 5.
NOTE 8 -- INVENTORIES
Inventories at September 30, 1996 and December 31, 1995 consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER
30 DECEMBER 31
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials..................................... $ 9,789 $10,365
Work-in-process................................... 3,005 4,593
Finished goods.................................... 5,064 4,612
------- -------
$17,858 $19,570
======= =======
</TABLE>
NOTE 9 -- NOTES RECEIVABLE (LONG TERM)
The Company received notes of $2.1 million and $0.6 million upon the sale
of its institutional business and oxygen concentrator business, respectively, in
1995. The $2.1 million note was paid in full on April 2, 1996. The $0.6 million
note has been reduced to $0.3 million as of September 30, 1996 and was
substantially paid during October 1996. The remaining Notes receivable are
payable by customers, bear interest at various rates and mature in one to three
years. During October 1996 approximately $2.4 million of the outstanding Notes
Receivable were sold to BIL.
NOTE 10 -- CONTINGENT LIABILITIES
In July, 1990 a class action suit was filed in the United States District
Court for the Central District of California by a stockholder of the Company
against the Company and certain of its present and former directors and
officers. The suit seeks unspecified damages for alleged non-disclosure and
misrepresentation
F-77
<PAGE> 179
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
NOTE 10 -- CONTINGENT LIABILITIES -- (CONTINUED)
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 was briefed and oral argument heard in June, 1993. Because of the
precedent set by a Ninth Circuit decision in another case which was decided
after the district court's order of dismissal but before the Ninth Circuit
decided plaintiff's appeal, the Ninth Circuit reversed the district court's
dismissal of the case and remanded the case to the district court for further
proceedings in an opinion handed down by the Ninth Circuit on August 24, 1995.
On March 25, 1996, the district court granted plaintiffs motion to certify a
class composed of purchasers of the Company's Common Stock during the period
from March 31, 1989 to June 12, 1990. The ultimate liability, if any, cannot be
determined at this time.
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. sec.sec. 9601 et sec. The Company was originally
notified of this action on December 10, 1992. The lawsuit sought 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, CA ("Randolph Street Site"). It alleged that the Randolph Street Site
was used for the treatment, storage and disposal of hazardous substances. A
settlement in principle between the State of California and the various
potentially responsible parties was reached in October 1995. A consent decree
was signed in July 1996. The Company's portion of the settlement was less than
originally anticipated. Accordingly, the previously recorded reserve for this
matter was reduced in 1995 to the settlement amount.
In March, 1993 Everest & Jennings Inc. received a notice from the U.S.
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, CA. The EPA alleges that the
Casmalia Site was 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, was 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 sought
cooperation from generators to assist in the clean up and closing of the
Casmalia Site. Everest & Jennings Inc. is a member of a manufacturers group of
potentially responsible parties which has investigated the site and proposed a
remediation plan to the EPA. To reflect Everest & Jennings Inc.'s estimated
allocation of costs thereunder, a reserve of $1.0 million was recorded, which
was included in the Consolidated Statements of Operations for 1993. During 1995
an agreement in principle was reached with the EPA for a settlement of the
majority of the Casmalia site liability. A consent decree was signed during July
1996. The settlement provides for the work to be completed in three phases.
Phase I work, which is estimated to take three to five years to complete, will
require the Company, along with other responsible parties, to participate in
funding the water management, certain construction projects and completion of
the site investigation. Phase II work, consisting of the remaining remedial
construction activities and the first five years of operation and maintenance,
will be funded by other parties and is estimated to take ten years. Subsequent
to Phase II, additional operation and maintenance will be required for
approximately 30 years. The estimated exposure of the Company under this
agreement is less than originally anticipated and the previously recorded
reserve has been reduced to the expected settlement amount.
F-78
<PAGE> 180
EVEREST & JENNINGS INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA)
NOTE 10 -- CONTINGENT LIABILITIES -- (CONTINUED)
In 1989 a patent infringement case was initiated against Everest & Jennings
Inc. and other defendants in the U.S. District Court, Central District of
California. Everest & Jennings Inc. prevailed at trial with a directed verdict
of patent invalidity and non-infringement. The plaintiff filed an appeal with
the U.S. Court of Appeals for the Federal Circuit. On March 31, 1993, the Court
of Appeals vacated the District Court's decision and remanded the case for
trial. Impacting the retrial of this litigation was a re-examination proceeding
before the Board of Patent Appeals with respect to the subject patent. A ruling
was rendered November 23, 1993 sustaining the claim of the patent which Everest
& Jennings Inc. has been charged with infringing. Upon the issuance of a patent
re-examination certificate by the U.S. Patent Office, the plaintiff presented a
motion to the District Court requesting a retrial of the case. The Company
presented a Motion for Summary Judgment of Noninfringement based in part upon
the November 23, 1993 decision of the Board of Patent Appeals. The Motion was
granted in follow-up conferences and an official Judgment was entered November
17, 1994. Following the appeal by the plaintiffs, the case has been remanded to
the US District Court, Central District of California, for further
consideration. Everest & Jennings Inc. believes that this case is without merit
and intends to contest it vigorously. The ultimate liability of Everest &
Jennings Inc., if any, cannot be determined at this time.
Following a jury trial on July 15, 1996, a verdict was rendered in the
District Court of the First Judicial District of the State of New Mexico in a
civil product liability law suit (Chris Trew et al. vs. Smith and Davis
Manufacturing Company, Inc., No. SF95-354) against Smith & Davis Manufacturing
Company, a wholly-owned subsidiary of the Company ("Smith & Davis"), in the
amount of $550 actual damages and $4 million punitive damages. The suit was
instituted on February 25, 1995 by the children and surviving heirs and personal
representatives of a nursing home patient in Carlsbad, New Mexico who died on
September 28, 1993 after her head became pinned between a bed rail allegedly
manufactured by Smith & Davis and her bed. The suit alleged that the bed rail in
question was defective and unsafe for its intended purpose, that Smith & Davis
was negligent in designing, manufacturing, testing and marketing such bed rails
and that the negligence of the nursing home in question was the proximate cause
of the decedent's injuries and death. The nursing home reached a settlement with
plaintiffs prior to trial. Judgment has been entered on the jury verdict and
Smith & Davis plans to appeal the judgment.
On June 18, 1996 a Class Action Complaint captioned Ron Kauffman v. Rodney
F. Hogg, et al. was filed in the Court of Chancery in New Castle County,
Delaware with respect to the proposed acquisition of the Company by Graham-Field
(see Note 4), naming as defendants the Company, its directors, BIL and
Graham-Field. The suit alleges that, as a result of the proposed acquisition of
the Company by Graham-Field, minority shareholders will not receive their
proportionate share of the value of the Company's assets and will be prevented
from obtaining a fair price for their stock. Plaintiff alleges that the
acquisition offers minority shareholders value which is less than the Company's
trading price prior to the announcement of the acquisition, and that BIL will
receive more value for its holdings than minority shareholders. The plaintiff
alleges that the directors breached their fiduciary duties to minority
shareholders by not exercising independent business judgment and by acting for
their own personal benefit. The plaintiff seeks certification of a class
consisting of minority shareholders of the Company. Plaintiff requests that the
acquisition be enjoined or, alternatively, that damages be awarded to the class.
To date, no responsive pleading has been filed by any of the defendants and no
discovery has been taken.
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.
F-79
<PAGE> 181
CONSOLIDATED FINANCIAL STATEMENTS
OF FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
F-80
<PAGE> 182
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Fuqua Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Fuqua
Enterprises, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also included the
financial statement schedule referred to in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fuqua Enterprises, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for certain investments in debt and
equity securities to comply with Statement of Financial Accounting Standards No.
115.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 20, 1997,
except for the last paragraph of
Note 2, as to which the date is
February 26, 1997
F-81
<PAGE> 183
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 4,616 $ 29,000
Investments available for sale......................................... -- 12,550
Receivables
Trade accounts, less allowance of $250 (1995, $200).................. 33,871 19,102
Note receivable from sale of subsidiary.............................. -- 11,352
Lease receivables, less allowance of $350 (1995, $0)................. 1,147 --
Inventories............................................................ 42,059 21,695
Prepaid expenses and other assets...................................... 2,620 910
Deferred income taxes.................................................. 3,477 3,614
-------- --------
Total Current Assets.............................................. 87,790 98,223
-------- --------
Property, plant and equipment.......................................... 48,927 32,303
Less accumulated depreciation.......................................... (15,166) (10,841)
-------- --------
Net Property, Plant and Equipment................................. 33,761 21,462
-------- --------
Intangible assets, less accumulated amortization of $399 (1995, $25)... 20,014 5,013
Lease receivables...................................................... 3,503 --
Deferred income taxes.................................................. -- 1,066
Other assets........................................................... 1,408 95
-------- --------
Total Assets of Continuing Operations............................. 146,476 125,859
Total Assets of Discontinued Operations........................... 4,935 10,903
-------- --------
Total Assets................................................. $151,411 $136,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.......................................................... $ -- $ 2,064
Accounts payable and accrued expenses.................................. 29,992 18,800
Long-term liabilities due within one year.............................. 1,453 11,668
-------- --------
Total Current Liabilities......................................... 31,445 32,532
Long-term debt obligations............................................. 30,686 22,041
-------- --------
Total Liabilities of Continuing Operations........................ 62,131 54,573
Total Liabilities of Discontinued Operations...................... -- 301
-------- --------
Total Liabilities............................................ 62,131 54,874
-------- --------
Stockholders' equity
Preference stock, $1 par value:
authorized 8,000,000 shares; none issued.......................... -- --
Common stock, $2.50 par value:
authorized 20,000,000 shares; issued 4,523,669 shares; (1995,
4,443,169 shares)................................................. 11,309 11,108
Additional paid-in capital............................................. 24,847 24,074
Retained earnings...................................................... 53,971 46,698
Unrealized gains (losses) on investments............................... -- 28
-------- --------
90,127 81,908
Treasury stock, at cost: 44,822 shares; (1995, 995 shares)............. (847) (20)
-------- --------
Total Stockholders' Equity................................... 89,280 81,888
-------- --------
Total Liabilities and Stockholders' Equity................... $151,411 $136,762
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-82
<PAGE> 184
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Net sales.............................................. $181,543 $117,128 $118,011
Investment income...................................... 1,939 828 541
-------- -------- --------
Total revenues......................................... 183,482 117,956 118,552
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales.......................................... 140,773 98,356 100,446
Selling, general and administrative expenses........... 28,757 10,757 8,897
Interest expense....................................... 2,470 894 725
-------- -------- --------
Total costs and expenses............................... 172,000 110,007 110,068
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.... 11,482 7,949 8,484
INCOME TAXES............................................. 4,209 2,699 2,662
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................ 7,273 5,250 5,822
-------- -------- --------
DISCONTINUED OPERATIONS:
Income from discontinued operations (Net of income
taxes (benefits) of 0, ($103) and $1,215,
respectively)....................................... -- 1,160 3,751
Loss on disposal of discontinued operations including
earnings net of taxes during the phase out period
(Net of income tax benefits of $2,753).............. -- (3,900) --
-------- -------- --------
-- (2,740) 3,751
-------- -------- --------
NET INCOME............................................... $ 7,273 $ 2,510 $ 9,573
======== ======== ========
PER SHARE:
Income from Continuing Operations...................... $ 1.60 $ 1.32 $ 1.51
======== ======== ========
Net Income............................................. $ 1.60 $ .63 $ 2.48
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-83
<PAGE> 185
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
-------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations............................... $ 7,273 $ 5,250 $ 5,822
Adjustments:
Depreciation and amortization................................. 4,196 1,931 1,603
Deferred income taxes......................................... 1,203 464 (88)
Loss on sales of available for sale investments............... 54 -- --
Changes in Assets and Liabilities:
Trade accounts receivables.................................... (4,485) 886 (716)
Lease receivables............................................. 1,551 -- --
Prepaid expenses.............................................. (1,134) -- --
Inventories................................................... (7,736) (130) (1,889)
Other assets.................................................. (1,078) (225) 39
Income taxes.................................................. -- (1,112) (724)
Payables, accrued expenses, and other liabilities............. (5,010) (1,624) (3,628)
-------- ------- --------
Net cash provided by (used in) continuing operations............ (5,166) 5,440 419
-------- ------- --------
Income from discontinued operations............................. -- 1,160 3,751
Loss on disposal of discontinued operations..................... -- (3,900) --
Net items providing cash from discontinued operations........... 4,160 (194) 583
-------- ------- --------
Net cash provided by (used in) discontinued operations.......... 4,160 (2,934) 4,334
-------- ------- --------
Net cash provided by (used in) all operations................... (1,006) 2,506 4,753
-------- ------- --------
INVESTING ACTIVITIES:
Proceeds from the sale of discontinued operations............... 11,352 22,648 --
Purchase of business, net of cash acquired...................... (7,743) (2,263) --
Sales of available for sale investments......................... 32,798 3,306 100
Purchases of available for sale investments..................... (20,302) (5,272) (6,630)
Sales of property, plant and equipment.......................... -- -- 31
Purchases of property, plant and equipment...................... (2,996) (1,509) (4,024)
Total from discontinued operations.............................. -- -- (4,525)
-------- ------- --------
Net cash provided by (used in) investing activities............. 13,109 16,910 (15,048)
-------- ------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in notes payable........................ (2,064) (11,750) 5,750
Payment of long-term liabilities................................ (34,570) (3,521) (1,273)
Additional long-term liabilities................................ -- 19,615 3,079
Exercise of stock options....................................... 974 1,009 248
Acquired shares for treasury.................................... (827) -- (190)
-------- ------- --------
Net cash provided by (used in) financing activities............. (36,487) 5,353 7,614
-------- ------- --------
Increase (Decrease) in Cash and Cash Equivalents................ (28,544) 24,769 (2,681)
Increase in Cash and Cash Equivalents from discontinued
operations.................................................... 4,160 -- 2,445
Cash and cash equivalents at beginning of year.................. 29,000 4,231 4,467
-------- ------- --------
Cash and cash equivalents at end of the year.................... $ 4,616 $29,000 $ 4,231
======== ======= ========
CASH PAID DURING THE YEAR FOR:
Interest........................................................ $ 2,975 $ 2,116 $ 1,185
Income taxes.................................................... 3,506 4,515 5,266
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contingent payment related to meeting certain earn out
objectives (American Southern)................................ -- -- 1,000
Issuance of stock or debt in connection with acquisitions....... 33,000 11,550 --
Assumption of note receivable from sale of American Southern.... -- 11,352 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-84
<PAGE> 186
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAINS
COMMON PAID-IN RETAINED (LOSSES) ON TREASURY
STOCK CAPITAL EARNINGS INVESTMENTS STOCK TOTAL
------- ---------- -------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993............ $ 9,510 $ 14,075 $ 34,615 $ 218 $ (1,040) $57,378
Net income............................ -- -- 9,573 -- -- 9,573
Exercise of stock options............. 69 299 -- -- (120) 248
Acquired shares for treasury.......... -- -- -- -- (190) (190)
Adjustment to beginning balance for
change in accounting method, net of
tax................................. -- -- -- 1,238 -- 1,238
Unrealized losses on investments...... -- -- -- (3,925) -- (3,925)
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1994............ 9,579 14,374 44,188 (2,469) (1,350) 64,322
Net income............................ -- -- 2,510 -- -- 2,510
Exercise of stock options............. 205 871 -- -- (67) 1,009
Issuance of stock in connection with
acquisition......................... 1,324 8,829 -- -- 1,397 11,550
Unrealized gains on investments....... -- -- -- 2,497 -- 2,497
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1995............ 11,108 24,074 46,698 28 (20) 81,888
Net income............................ -- -- 7,273 -- -- 7,273
Exercise of stock options............. 201 773 -- -- -- 974
Acquired shares for treasury.......... -- -- -- -- (827) (827)
Unrealized losses on investments...... -- -- -- (28) -- (28)
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1996............ $11,309 $ 24,847 $ 53,971 $ -- $ (847) $89,280
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-85
<PAGE> 187
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Business: Fuqua Enterprises, Inc. ("Fuqua") is a manufacturer of a variety
of products, including beds, patient aids, specialty seating, bathroom safety,
mobility products and therapeutic support systems for the acute, long-term and
home health care markets. Additionally, Fuqua produces a broad line of leathers
that are sold to manufacturers of shoes, handbags, personal leather goods and
furniture in both the United States and foreign markets.
Fuqua sold its insurance subsidiary, American Southern Insurance Company
("American Southern") during 1995 and, in January 1996, made the decision to
discontinue the operations of Kroy Tanning Company, Incorporated ("Kroy"), which
historically had been unprofitable. Additionally, Fuqua acquired Basic American
Medical Products, Inc. ("Basic") in November 1995 and the medical products
division of Lumex, Inc. (the "Lumex Division") in April 1996 (together, the
"Medical Products Operations").
Principles of Consolidation: The consolidated financial statements include
the accounts of Fuqua and all of its wholly and majority owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Accounting Changes: Effective January 1, 1996, Fuqua adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The adoption of SFAS 121 had no effect on
Fuqua's Consolidated Financial Statements.
Effective January 1, 1996, Fuqua adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
encouraged companies to recognize expense for stock-based awards based on their
fair market values on the dates of grant. As an alternative provided for in SFAS
123, Fuqua has elected to account for its stock options in accordance with APB
Opinion No. 25 and related Interpretations ("APB 25"). The disclosures required
by SFAS 123 are included in Note 9 to the Consolidated Financial Statements.
Effective January 1, 1994, Fuqua adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). In accordance with SFAS 115, prior period financial
statements were not restated to reflect the change in accounting principle. The
cumulative effect on net income as of January 1, 1994 of adopting SFAS 115 for
investments which previously were classified as held to maturity and which were
then classified as trading securities was immaterial. The balance of
stockholders' equity as of January 1, 1994 was increased by $1,238,000, net of
income taxes, to reflect the net unrealized gains on investments previously
classified as held to maturity which were reclassified as available for sale.
Income Per Share: Income per share is based upon 4,554,276 shares in 1996,
3,962,876 in 1995 and 3,860,324 in 1994, representing the weighted-average
number of shares outstanding during the year, plus common stock equivalents.
Common stock equivalents include option shares granted under Fuqua's stock
option plans.
Financial Instruments: Financial instruments which potentially subject
Fuqua to concentrations of credit risk are primarily cash equivalents and
short-term investments in investment grade, short-term debt instruments and
preferred stocks. Concentrations of credit risk with respect to trade accounts
receivable and lease receivables are limited due to the large number of
customers in Fuqua's customer base and their dispersion across different
geographic areas. Fuqua maintains an allowance for doubtful accounts based upon
the expected collectibility of its trade accounts and lease receivables.
F-86
<PAGE> 188
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Costs: Fuqua, through its subsidiaries, expenses advertising
costs when incurred. The amounts of such costs were insignificant in 1996, 1995
and 1994.
Cash and Cash Equivalents: For purposes of the consolidated balance sheets
and statements of cash flows, Fuqua considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents
(1996 -- $4,616,000, 1995 -- $29,000,000). The cash proceeds of $22,648,000 from
the sale of American Southern on December 31, 1995 were invested in cash
equivalents collateralized by U.S. Treasury obligations. The carrying amounts
reported in the balance sheets for cash and cash equivalents approximate their
fair values.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined as follows: raw materials and supplies -- first-in, first-out;
work in process and finished goods -- average.
Property, Plant and Equipment: Property, plant and equipment to be used in
operations are stated at cost. Depreciation is provided principally by the
straight-line method over estimated useful lives which range as follows:
buildings and improvements: 10-40 years; machinery and office equipment: 5-15
years; and automobiles and trucks: 5-10 years.
Revenue Recognition: Sales are recorded when goods are shipped and the
customers are obligated to pay.
Research and Development: Research and development costs are expensed as
incurred and were $1,422,000, $802,000 and $800,000 in 1996, 1995 and 1994,
respectively.
Short-term Borrowings: The weighted average interest rate on short-term
borrowings was 7.4% and 6.8% during 1995 and 1994, respectively. There were no
short-term borrowings in 1996.
Use of Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.
2. ACQUISITIONS
On November 8, 1995, Fuqua acquired Basic. Basic, whose divisions include
Simmons Healthcare, Omni Manufacturing and SSC Medical, is a manufacturer and
distributor of medical equipment and furnishings for the acute, long-term and
home health care markets.
The purchase price consisted of $2,500,000 in cash and 600,000 shares of
Fuqua's common stock. The shares issued were not registered under the Securities
Act of 1933 and, accordingly, are restricted as to resale. Under the terms of
the acquisition, there are demand and "piggyback" registration rights with
respect to these shares. The transaction was accounted for using the purchase
method; accordingly, the assets and liabilities of Basic have been recorded at
their estimated fair values at the date of acquisition. The excess of purchase
price over the net assets acquired of $5,038,000 has been assigned to goodwill
and is being amortized on a straight-line basis over 30 years.
On April 3, 1996, Fuqua acquired the Lumex Division. The Lumex Division is
a manufacturer of medical equipment, including beds, specialty seating products,
patient aids, bathroom safety, mobility products and therapeutic support
surfaces for the acute, long-term and home health care markets.
The purchase price for the Lumex Division was $40,750,000, subject to a
final purchase price adjustment to be determined by comparing special purpose
balance sheets at December 31, 1995 and March 31, 1996. In the event that this
comparison resulted in an increase or decrease in net assets, such amounts were
to be added to or subtracted from the purchase price. The asset sale agreement
provides Fuqua the ability to challenge recorded amounts in the March 31, 1996
special purpose balance sheet and to the extent such adjustments can
F-87
<PAGE> 189
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not be agreed to between Fuqua and the seller, the adjustments are to be settled
through arbitration. The final purchase price adjustment is in dispute and is
currently being resolved through arbitration. If the ultimate outcome in
arbitration of the purchase price adjustment is a change to the purchase price,
this will result in a change in the allocation thereof to the net assets
acquired.
The purchase price paid by Fuqua for the Lumex Division was financed with
internal funds and borrowings of $33,000,000 under Fuqua's Revolving Credit
Facility. The excess of purchase price over the net assets acquired of
$15,375,000 was assigned to goodwill and is being amortized on a straight-line
basis over 30 years. Included in the purchase price allocation were accruals of
$2,300,000 for exiting activities, consisting principally of future lease costs
for duplicate facilities.
The results of operations of Basic have been included in the Consolidated
Financial Statements for the two month period since the date of acquisition in
1995 and for the full year in 1996. The results of operations of the Lumex
Division have been included in the Consolidated Financial Statements for the
nine month period since the date of acquisition in 1996. The following unaudited
pro forma summary presents Fuqua's consolidated results from continuing
operations as if the acquisitions had occurred on the first day of the full year
preceding their respective acquisition dates. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisitions actually been made as of that date
or of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net sales...................................... $195,113 $198,365 $141,263
Income from continuing operations.............. 2,425 4,519 6,406
Per share:
Income from continuing operations............ $ .53 $ 1.14 $ 1.44
</TABLE>
In March 1996, Fuqua, through its Leather Operations, entered into an
agreement to acquire a 70% interest in a joint venture which acquired a 50%
interest in a tannery in the People's Republic of China. In November 1996, the
Leather Operations' interest in the joint venture was reduced to 60% as a result
of admitting a new venture partner. Investment and advances related to the joint
venture at December 31, 1996 were $1,967,000. The results of operations of the
joint venture, which are accounted for under the equity method, were not
significant to the 1996 Consolidated Financial Statements.
Subsequent Event -- Acquisition of Prism: On February 26, 1997, Fuqua
acquired 100% of the outstanding common stock and warrants of Prism Enterprises,
Inc. ("Prism"). Prism, whose 1996 net sales were $12,000,000, is a manufacturer
of therapeutic heat and cold packs for medical and consumer uses and vacuum
systems for obstetrical and other applications. Prism's operating facilities are
located in San Antonio, Texas and Rancho Cucamonga, California. The purchase
price was $19,500,000 and was financed with borrowings under Fuqua's Revolving
Credit Facility.
3. DISCONTINUED OPERATIONS
In December 1995, Fuqua sold its insurance subsidiary, American Southern,
for $34,000,000 to Atlantic American Corporation, an Atlanta, Georgia based
publicly traded insurance company. The proceeds from the sale included cash of
$22,648,000 and a note receivable from the purchaser of $11,352,000. The note
receivable accrued interest at prime, half of which was payable quarterly and
half of which was paid, together with the principal, in October 1996. The note
receivable had indemnification and certain offset rights which were similar to
the provisions of an $11,668,000 note payable issued to the seller when Fuqua
acquired American Southern in 1991. In October 1996, the proceeds from Atlantic
American's payment of the note receivable were used to repay this note payable.
The sale transaction resulted in a pretax loss on disposal of
F-88
<PAGE> 190
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3,553,000, less earnings (net of taxes) during the phase out period of the
fourth quarter of 1995 of $1,303,000 and less estimated tax benefits of
$1,350,000. During 1996, interest charges of $662,000 were incurred and offset
against the accrual established in 1995 to provide for the loss on disposal of
American Southern.
In January 1996, Fuqua made the decision to discontinue the operations of
Kroy, which historically had been unprofitable. In accordance with generally
accepted accounting principles (Emerging Issues Task Force No. 95-18), Kroy was
treated as a discontinued operation in 1995 and preceding years' Consolidated
Financial Statements.
The pretax loss on disposal of Kroy was $4,800,000, less estimated tax
benefits of $1,800,000. This accrual provided for reserves necessary to write
down assets (consisting principally of receivables, inventory and property,
plant and equipment) to their net realizable values and to pay for obligations,
including environmental costs, required in connection with the wind down of
operations. During 1996, $3,080,000 (before the benefit of income taxes) of such
costs were charged against this accrual. Operations at the East Wilton facility
ceased in the fourth quarter of 1996.
Discontinued operations include estimates of the amounts expected to be
realized from Kroy's assets and future obligations. While the amounts Fuqua will
ultimately realize or be obligated for could differ from the amounts assumed in
arriving at the loss on disposal of Kroy. Management believes that the reserves
established at December 31, 1995, continue to appear reasonable.
The results of operations of American Southern and its subsidiaries through
September 30, 1995 and for Kroy through December 31, 1995 have been classified
as income from discontinued operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Revenues................................................. $45,932 $49,406
Costs and expenses....................................... 44,875 44,440
------- -------
Income before income taxes............................... 1,057 4,966
Income tax (benefit) provision........................... (103) 1,215
------- -------
Income from discontinued operations...................... $ 1,160 $ 3,751
======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Finished goods........................................... $16,238 $ 6,598
Work in process.......................................... 12,338 6,738
Raw materials and supplies............................... 13,483 8,359
------- -------
$42,059 $21,695
======= =======
</TABLE>
F-89
<PAGE> 191
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land and land improvements............................... $ 664 $ 257
Buildings and improvements............................... 18,753 12,803
Machinery and office equipment........................... 23,386 18,399
Automobiles and trucks................................... 1,044 844
Building held for sale................................... 5,080 --
------- -------
$48,927 $32,303
======= =======
</TABLE>
6. LEASE RECEIVABLES
The Lumex Division offered lease financing to distributors of its low air
loss bed systems under the terms of either a fixed payment lease or shared
revenue lease contract, both of which were accounted for as sales type leases.
Standard lease contracts contained fixed monthly payments and were generally for
36-48 months, at which time title passes to the lessee. Under shared revenue
lease contracts, the lessee paid the greater of: a fixed percentage of monthly
revenue collected from rentals of the equipment or a minimum monthly payment.
Shared revenue lease contracts were generally for 60 months, at which time title
does not pass to the lessee. Leases are secured by the equipment leased
including any revenues derived therefrom. Lease receivables were comprised of
the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Minimum lease payments receivable......................... $ 6,491
Less unearned interest income............................. (1,522)
Less allowance for uncollectible accounts................. (319)
Less current portion...................................... (1,147)
-------
Non-current portion....................................... $ 3,503
=======
</TABLE>
Minimum lease payments receivable are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1997.................................................... $1,147
1998.................................................... 1,399
1999.................................................... 1,377
2000.................................................... 727
------
$4,650
======
</TABLE>
F-90
<PAGE> 192
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accounts payable......................................... $10,916 $ 5,390
Accrued compensation..................................... 2,335 1,536
Accrued insurance........................................ 639 996
Accrued profit-sharing plan.............................. 511 381
Accrual for discontinued operations...................... 2,405 6,147
Other accrued expenses................................... 13,186 4,350
------- -------
$29,992 $18,800
======= =======
</TABLE>
8. LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Revolving Credit Facility, interest at LIBOR + .5%, due in 1999.......... $28,000 $18,500
Industrial revenue obligations, secured by improvements, 4.5% to 6.9%,
due to 2004............................................................ 1,126 1,335
Step down revolver payable in monthly installments, interest at 8.75%
through April 1997 when balance is due................................. -- 745
Master draw note with interest payable at 7.5% through April 1997 when
balance is due......................................................... -- 937
Term loan, payable in monthly installments, interest at LIBOR +.55%,
remaining principal due January 2001................................... 1,535 --
Term note, payable in monthly installments, interest at 8.75% through May
2000................................................................... -- 120
Note payable in monthly installments, interest at 8% through June 2007,
callable at the option of the lender within a 90-day period beginning
July 1998, July 2001 or July 2002...................................... -- 360
Liability for future payments under employment contracts................. 25 44
------- -------
$30,686.. $22,041
======= =======
</TABLE>
On June 28, 1996, Fuqua amended its Revolving Credit Facility to expand the
maximum borrowing amount from $60,000,000 to $100,000,000 and to add an
additional bank to the facility. The Revolving Credit Facility has a three-year
term and is to be used for working capital and to provide funds for corporate
development activities. The interest rate under the Revolving Credit Facility is
based on matrix pricing which ranges from LIBOR plus 40 basis points to LIBOR
plus 100 basis points, plus a charge on the unused commitment of 12.5 basis
points to 25 basis points. The Revolving Credit Facility includes normal and
customary restrictive covenants regarding funded debt to capital, funded debt to
cash flow, interest coverage, and dividend payments. Management believes that,
at December 31, 1996, Fuqua is in compliance with the covenants of the Revolving
Credit Facility and with the covenants of other Fuqua debt agreements.
F-91
<PAGE> 193
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturity requirements for the next five years in respect to
the current and non-current portions of long-term debt obligations at December
31, 1996 are as follows (dollars in thousands): 1997 -- $1,453; 1998 -- $290;
1999 -- $28,292; 2000 -- $295; 2001 -- $1,357; and thereafter $452. The carrying
amounts of long-term liabilities approximate their fair values.
9. STOCK OPTIONS
On June 29, 1989, the Board of Directors approved a nonqualified stock
option plan for key employees (the "1989 Plan"), reserving 300,000 shares of
Common Stock for issuance under the 1989 Plan. The options are granted at prices
and under terms determined by the Stock Option Committee of the Board of
Directors. All options expired five years from the date of grant.
On January 21, 1992, the Board of Directors approved a stock option plan
(the "1992 Plan"), reserving 300,000 shares of Common Stock for issuance under
the 1992 Plan. The 1992 Plan, which was approved by the stockholders on May 16,
1992, provides for the granting of options to officers, directors, key
employees, consultants, advisors and others providing goods and services to
Fuqua. The options are granted at prices and under terms determined by the Stock
Option Committee of the Board of Directors. All options expire five to ten years
from the date of grant.
In November 1995, the Board of Directors approved the 1995 Long-Term
Incentive Plan (the "Incentive Plan"), reserving 300,000 shares of Common Stock
for issuance under the Incentive Plan. The Incentive Plan, which was approved by
the stockholders on June 1, 1996, provides for the granting of awards to
officers and key employees of Fuqua. The awards are granted at prices and under
terms determined by the Stock Option Committee of the Board of Directors. All
awards expire from five to ten years from the date of grant.
Also in November 1995, the Board of Directors approved the 1995 Stock
Option Plan for Outside Directors (the "Directors' Plan"), reserving 50,000
shares of Common Stock for issuance under the Directors' Plan. The options are
automatically granted to directors annually. The Directors' Plan was approved by
the stockholders on June 1, 1996.
At December 31, 1996 and 1995, there were 217,600 and 364,000 shares of
common stock, respectively, reserved for future grants in connection with
Fuqua's stock option plans.
A summary of stock option activity under the above-described plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
PRICE AVERAGE
SHARES RANGE PRICE
------- -------------- ---------
<S> <C> <C> <C>
Balance at December 31, 1993.................... 227,175 $ 8.50-$20.38
Granted....................................... 20,000 $20.38
Exercised..................................... (27,675) $8.50
Cancelled..................................... (2,000) $20.38
-------
Balance at December 31, 1994.................... 217,500 $ 8.50-$21.00 $ 11.47
Granted....................................... 254,000 $18.38-$20.50 $ 19.63
Exercised..................................... (82,000) $8.50 $ 8.50
Cancelled..................................... (5,000) $20.38 $ 20.38
-------
Balance at December 31, 1995.................... 384,500 $ 8.50-$21.00 $ 17.38
Granted....................................... 146,400 $21.25-$24.00 $ 21.72
Exercised..................................... (80,500) $ 8.50-$ 9.50 $ 9.01
-------
Balance at December 31, 1996.................... 450,400 $ 9.50-$24.00 $ 20.29
=======
</TABLE>
F-92
<PAGE> 194
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------------------------------
RANGE OF NUMBER OF WEIGHTED- WEIGHTED-
EXERCISE OPTIONS AVERAGE AVERAGE
PRICE OUTSTANDING REMAINING LIFE EXERCISE PRICE
----------------------------------- ----------- -------------- --------------
<S> <C> <C> <C>
$9.50.............................. 5,000 1 year $ 9.50
$18.38-$24.00...................... 445,400 5 years $20.41
-----------
450,400
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
------------------------------------------------------------------------------------
RANGE OF NUMBER OF WEIGHTED-
EXERCISE OPTIONS AVERAGE
PRICE EXERCISABLE EXERCISE PRICE
-------------------------------------------------- ----------- --------------
<S> <C> <C>
$9.50............................................. 5,000 $ 9.50
$18.38-$24.00..................................... 190,533 $20.09
-------
195,333
=======
</TABLE>
Fuqua elected to follow APB 25 in accounting for its stock options because,
as discussed below, the alternative fair value accounting provided for under
SFAS 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
Fuqua's stock options equals or exceeds the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income is required by SFAS 123, which
also requires that the information be determined as if Fuqua has accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions.
<TABLE>
<CAPTION>
ASSUMPTIONS 1996 1995
------------------------------------------------------------------ ------- -------
<S> <C> <C>
Risk free interest rates.......................................... 5.91% 6.13%
Dividend yield.................................................... None None
Market volatility factors......................................... .38 .37
Life of options................................................... 5 years 7 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options' vesting periods. The
weighted-average fair values of options granted during 1996 and 1995 equaled
$9.93 and $9.25, respectively. Fuqua's pro forma net income information follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Pro Forma Net Income........................................ $6,942,000 $1,456,000
Pro Forma Net Income Per Share.............................. $ 1.52 $ .37
</TABLE>
Since SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected in Fuqua's historical
results until 2000, the date through which options vest.
F-93
<PAGE> 195
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SALES AND SEGMENT INFORMATION
Fuqua's foreign operations were not significant in 1996. Sales of the
Leather Operations and Medical Products Operations to customers outside the
United States, which have been classified by country where such amounts exceed
10% of net sales and otherwise geographically are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Hong Kong............................................. $22,281 $15,819 $16,457
North America......................................... 3,512 3,075 7,584
Europe................................................ 3,197 2,687 3,467
Asia, other than Hong Kong............................ 7,390 5,148 6,773
Other................................................. 1,914 3,933 235
------- ------- -------
$38,294 $30,662 $34,516
======= ======= =======
</TABLE>
In 1996, sales of leather to one customer amounted to $15,722,000 and to
another $15,506,000. In 1995, sales of leather to one customer amounted to
$23,662,000 and to another $15,938,000. In 1994, sales of leather to one
customer amounted to $20,007,000 and to another $17,426,000.
Beginning in 1990, the Leather Operations began buying hides, that had
already undergone the initial chrome tanning process, from one principal
supplier. Management believes that alternatives sources of supply at competitive
prices are available.
Fuqua's continuing operations are carried on through its subsidiaries which
operate in two distinct business segments, Leather Operations and Medical
Products Operations. The Medical Products Operations became part of Fuqua
through the acquisition of Basic in November 1995 and the Lumex Division in
April 1996.
F-94
<PAGE> 196
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating results and other financial data are presented as follows for
each business segment which, at December 31, 1996, remain as continuing
operations of Fuqua:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
Leather Operations............................... $107,832 $111,930 $118,011
Medical Products Operations...................... 73,711 5,198 --
-------- -------- --------
Consolidated..................................... $181,543 $117,128 $118,011
======== ======== ========
Operating profit (loss):
Leather Operations............................... $ 10,914 $ 10,423 $ 10,985
Medical Products Operations...................... 4,720 401 --
Corporate........................................ (1,682) (1,981) (1,776)
-------- -------- --------
Consolidated..................................... $ 13,952 $ 8,843 $ 9,209
======== ======== ========
Identifiable assets:
Leather Operations............................... $ 57,163 $ 44,474 $ 44,724
Medical Products Operations...................... 80,491 26,719 --
Corporate........................................ 8,822 54,666 15,788
-------- -------- --------
Consolidated..................................... $146,476 $125,859 $ 60,512
======== ======== ========
Capital expenditures:
Leather Operations............................... $ 1,594 $ 1,509 $ 4,024
Medical Products Operations...................... 1,313 619 --
Corporate........................................ 89 -- --
-------- -------- --------
Consolidated..................................... $ 2,996 $ 2,128 $ 4,024
======== ======== ========
Depreciation and Amortization:
Leather Operations............................... $ 1,702 $ 1,582 $ 1,387
Medical Products Operations...................... 2,274 113 --
Corporate........................................ 220 236 216
-------- -------- --------
Consolidated..................................... $ 4,196 $ 1,931 $ 1,603
======== ======== ========
</TABLE>
There were no intersegment sales during 1996, 1995 or 1994.
Operating profit (loss) by segment represents net sales less direct
operating expenses. No allocation has been made for general corporate expenses,
interest income from corporate investments or any foreign or domestic taxes.
Identifiable assets are tangible and intangible assets used exclusively in the
operations of each business segment. Corporate assets represent cash,
investments and leasehold improvements, furniture and fixtures associated with
Fuqua's corporate office.
11. GENERAL AND ADMINISTRATIVE EXPENSES
In September 1994, Fuqua amended the Management Agreement ("Agreement")
with Fuqua Capital Corporation ("Capital"), a corporation wholly-owned by J. B.
Fuqua, Chairman of the Board, and J. Rex Fuqua, Vice Chairman of the Board.
Under the Agreement, Capital provides investment services and performs certain
managerial and administrative duties. The term of the Agreement is through June
1, 2000 and provides for a management fee of $360,000 for each year of the
noncancellable term.
F-95
<PAGE> 197
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1994, Fuqua amended its lease for corporate office space to
extend the term for five years. Concurrently, Fuqua entered into a new sublease
with a similar five year term with Capital for the portion of space which
Capital uses. The sublease provides that if Fuqua moves out of the space it
shares with Capital, or there is a change in control of Fuqua, Capital has the
option of taking over the area now occupied by Fuqua on terms favorable to
Capital.
12. RETIREMENT PLANS
Fuqua adopted a qualified defined contribution plan, effective January 1,
1993, covering all of the employees of the parent company and the leather
subsidiaries and incorporating the profit-sharing plans of the leather
subsidiaries. This plan provided a profit-sharing component with contributions
to each employee based on his or her compensation and with the total
contribution determined annually by the Board of Directors. The plan also
permitted employees to make tax-deferred contributions up to the maximum limits
allowed by the Internal Revenue Code, with Fuqua matching a portion of the
employee's contribution under a formula approved annually by the Board of
Directors.
In 1995, Basic had two defined contribution employee benefit plans for the
employees at its manufacturing facility in Fond du Lac, Wisconsin. One plan
allowed employees to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The other plan was a money purchase plan
which provides for employer contributions equal to 4% of eligible employee
salaries. Employees became eligible to participate in the money purchase plan
after 12 months of service.
In 1995, employees at Basic's Georgia facilities participated in a profit
sharing plan. This plan provided for discretionary annual contributions by
Basic. Additionally, Basic adopted an employee benefit plan for its employees at
the Georgia facilities which allowed eligible employees to make contributions by
salary reduction pursuant to Section 401(k) of the Internal Revenue Code.
On April 3, 1996, Fuqua adopted the Fuqua Enterprises, Inc. Savings and
Retirement Plans and Trusts which provided for tax-qualified 401(k) plans for
all of Fuqua's union and non-union employees (the "New Fuqua Plans"). The
non-union employees of the Lumex Division became the first participants in the
New Fuqua Plans concurrent with the acquisition of the Lumex Division in April
1996. All other Fuqua employees became participants in the New Fuqua Plans on
July 1, 1996 or thereafter when the existing plans covering Basic, the Leather
Operations and Fuqua's corporate office were merged into the New Fuqua Plans or
when the union employees of the Lumex Division became eligible to participate.
The New Fuqua Plans contain a profit-sharing component allowed by Internal
Revenue Code Section 401(a), with tax-deferred contributions to each participant
based on his or her compensation and with the total contribution determined
annually by the Board of Directors. The New Fuqua Plans also permit employees to
make tax-deferred contributions up to the maximum limits allowed by Internal
Revenue Code Section 401(k), with Fuqua matching 50% of the first 4% of
participants' contributions to the New Fuqua Plans.
Total expense recognized under all of the above plans was 1996 -- $940,000,
1995 -- $309,000 and 1994 -- $372,000.
F-96
<PAGE> 198
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Fuqua's deferred income tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Tax over book depreciation...................................... $1,540 $1,851
------ ------
Deferred income tax liabilities.............................. $1,540 $1,851
====== ======
Deferred income tax assets:
Accrued liabilities............................................. $3,393 $3,243
Allowance for doubtful accounts................................. 485 80
Accrual for discontinued operations............................. 1,139 3,189
Unrealized investment losses.................................... -- 19
------ ------
Deferred income tax assets................................... 5,017 6,531
------ ------
Net deferred income tax assets.................................. $3,477 $4,680
====== ======
</TABLE>
Significant components of the provisions (benefits) for income taxes for
continuing and discontinued operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Continuing Operations:
Current:
Federal................................................. $2,316 $ 2,016 $2,205
State................................................... 395 457 583
------ ------ ------
$2,711 $ 2,473 $2,788
====== ====== ======
Deferred:
Federal................................................. $1,342 $ 184 $ (100)
State................................................... 156 42 (26)
------ ------ ------
$1,498 $ 226 $ (126)
====== ====== ======
Discontinued Operations:................................ $ -- $(2,856) $1,215
====== ====== ======
</TABLE>
In 1994, Fuqua made a favorable adjustment for amounts that were no longer
considered necessary for contingencies for income taxes resulting in a reduction
in income tax expense of $544,000 ($0.14 per share).
F-97
<PAGE> 199
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes for continuing operations differ from the
amounts computed by applying the U.S. Federal income statutory tax rates as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate................................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit................. 3.2 4.0 4.2
Business tax credits........................................... -- -- (.2)
Dividend credits............................................... (.1) (1.1) (1.0)
Tax-exempt interest............................................ -- (1.5) (.2)
Write-off of intangibles....................................... -- .2 --
Foreign sales corporation benefit.............................. (2.0) (1.7) --
Adjustment of estimated liabilities for prior years............ -- -- (6.4)
Other.......................................................... .6 (1.0) --
---- ---- ----
36.7% 33.9% 31.4%
==== ==== ====
</TABLE>
The provisions (benefits) for income taxes for discontinued operations
differ from those amounts computed by applying the U.S. Federal income statutory
tax rates due principally to tax-free interest income at American Southern.
14. INVESTMENTS
There were no investments at December 31, 1996. All investments at December
31, 1995 were classified as available for sale as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Corporate Debt Securities.............. $ 2,524 $ 7 $ (80) $ 2,451
Debt Securities issued by the U.S.
Treasury............................ 6,010 34 -- 6,044
Preferred Stocks....................... 3,964 119 (28) 4,055
------- ---- ----- -------
$12,498 $160 $ (108) $12,550
======= ==== ===== =======
</TABLE>
The proceeds from sales of available for sales securities were $32,798,000
in 1996. In 1996, gross realized gains were $155,000 and gross realized losses
were $209,000 on sales of available for sale securities. The proceeds from sales
of available for sale securities were $3,306,000 during 1995. In 1995, gross
realized gains were $53,000 and gross realized losses were $11,000 on available
for sale investments. The proceeds from sales of available for sale securities
were $100,000 for 1994. There were no gross realized gains or losses on sales of
available for sale securities in 1994. Cost is determined by specific
identification for purposes of calculating realized gains and losses. There were
no transfers of securities to or from the available for sale or trading
categories during 1996 and 1995. There were no sales of securities classified as
held to maturity during 1996 and 1995.
F-98
<PAGE> 200
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. ENVIRONMENTAL CONTINGENCY
In March 1994, the office of the District Attorney of Suffolk County, Long
Island, New York, in conjunction with the Suffolk County Department of Health
Services (collectively, the "Suffolk County Authorities"), initiated an
investigation to determine whether regulated substances had been discharged from
one of the Lumex Division's Bay Shore facilities in excess of permitted levels.
An environmental consulting firm was engaged by the Lumex Division to conduct a
more comprehensive site investigation, develop a remediation work plan and
provide a remediation cost estimate. These activities were performed to
determine the nature and extent of contaminants present on the site and to
evaluate their potential off-site extent.
In connection with Fuqua's April 1996 acquisition of the Lumex Division,
Fuqua assumed the obligations associated with this environmental matter. In late
1996, Fuqua conducted surficial soil remediation at the Bay Shore facility and
reported the results to the Suffolk County Authorities. A ground water work plan
was submitted concurrently with the soil remediation report and Fuqua is waiting
for the necessary approvals from the Suffolk County Authorities before
proceeding with execution of the ground water work plan. Fuqua is not currently
able to determine when any required remediation and monitoring efforts with
respect to the ground water contamination will be completed. At December 31,
1996, the Lumex Division had $1,713,000 in reserves for ground water remediation
costs, including additional investigation costs which will be required. Such
reserves are established when it is probable that a liability has been incurred
and such costs can be reasonably estimated. The Lumex Division's estimates of
these costs were based upon currently enacted laws and regulations and the
professional judgment of independent consultants and counsel. Where available
information was sufficient to estimate the amount of liability, that estimate
has been used. Where information was only sufficient to establish a range of
probable liability and no point within the range is more likely than another,
the lower end of the range has been used. The Lumex Division has not assumed
that any such costs would be recoverable from third parties nor has the Lumex
Division discounted any of its cost estimates, although a portion of the ground
water remediation work plan will be performed over a period of years.
The amounts of environmental liabilities are difficult to estimate due to
such factors as the extent to which remedial actions may be required, laws and
regulations change or the actual costs of remediation differ when the final work
plan is performed. The estimate of the costs, which are not probable but for
which there exists at least a reasonable possibility of occurrence, exceeds the
reserves recorded by the Lumex Division at December 31, 1996 by $1,600,000.
F-99
<PAGE> 201
SUMMARY OF QUARTERLY DATA
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30(2) SEPTEMBER 30(2) DECEMBER 31(2) FOR THE YEAR
--------- ---------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1996
Net sales........................ $30,500 $ 46,898 $49,655 $ 54,490 $181,543
Income before interest and
taxes......................... 2,960 3,530 4,136 3,326 13,952
Income from continuing
operations.................... 1,600 1,838 2,087 1,748 7,273
Income from continuing operations
per share..................... 0.36 0.40 0.46 0.38 1.60
Net income per share............. 0.36 0.40 0.46 0.38 1.60
1995
Net sales........................ $24,050 $ 33,692 $27,923 $ 31,463 $117,128
Income before interest and
taxes......................... 1,293 2,496 2,227 2,827 8,843
Income from continuing
operations.................... 662 1,349 1,321 1,918 5,250
Income from continuing operations
per share..................... 0.17 0.35 0.34 0.45 1.32
Net income (loss) per share...... 0.37 0.47 0.17 (0.33) 0.63
</TABLE>
- ---------------
NOTES:
(1) No cash dividends were paid in either year. In 1996 and 1995, per share
amounts are calculated on a discrete quarterly basis and for the year are
based on the weighted-average shares for the four quarters of the year.
(2) Includes Basic for the two-month period ended December 31, 1995 and the
Lumex Division for the nine-month period ended December 31, 1996.
F-100
<PAGE> 202
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. C
-----------------------
ADDITIONS
COL. B ----------------------- COL. E
------------ (1) (2) ----------
COL. A BALANCE AT CHARGED CHARGED COL. D BALANCE AT
- -------------------------------------------------- BEGINNING OF TO COSTS TO OTHER ---------- CLOSE OF
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------------- ------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Trade accounts receivable....................... $200,000 $ 98,005 -- $ 48,005(a) $250,000
Lease receivables............................... -- -- $350,000(b) -- $350,000
Year ended December 31, 1995:
Allowance for doubtful accounts:
Trade accounts receivable....................... $350,000 -- -- $150,000(a) $200,000
Year ended December 31, 1994:
Allowance for doubtful accounts:
Trade accounts receivable....................... $335,000 $ 74,483 -- $ 59,483(b) $350,000
</TABLE>
- ---------------
(a) Write-off of uncollectible accounts, net of recoveries.
(b) Recorded in the acquisition of the Lumex Division.
F-101
<PAGE> 203
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................... $ 2,072 $ 4,616
Receivables
Trade accounts, less allowance of $250 (1996, $250).............. 42,419 33,871
Lease receivables, less allowance of $350 (1996, $350)........... -- 1,147
Inventories........................................................ 46,433 42,059
Prepaid expenses and other assets.................................. 3,594 2,620
Deferred income taxes.............................................. 4,802 3,477
-------- --------
Total Current Assets.......................................... 99,320 87,790
Property, plant and equipment...................................... 52,710 48,927
Less accumulated depreciation...................................... (18,546) (15,166)
-------- --------
Net Property, Plant and Equipment............................. 34,164 33,761
-------- --------
Intangible assets, less accumulated amortization of $923 (1996,
$399)............................................................ 37,655 20,014
Lease receivables.................................................. -- 3,503
Other assets....................................................... 1,746 1,408
-------- --------
Total Assets of Continuing Operations......................... 172,885 146,476
Total Assets of Discontinued Operations....................... 3,637 4,935
-------- --------
Total Assets............................................. $ 176,522 $151,411
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.............................. $ 26,905 $ 29,992
Current portion of debt............................................ 589 1,453
-------- --------
Total Current Liabilities..................................... 27,494 31,445
Long-term liabilities.............................................. 54,444 30,686
-------- --------
Total Liabilities............................................. 81,938 62,131
-------- --------
Stockholders' equity
Preference stock, $1 par value: authorized 8,000,000 shares; none
issued........................................................ --
Common stock, $2.50 par value: authorized 20,000,000 shares;
issued 4,528,669 (1996 -- 4,523,669) shares................... 11,322 11,309
Additional paid-in capital......................................... 24,902 24,847
Retained earnings.................................................. 59,233 53,971
-------- --------
95,457 90,127
Treasury stock, at cost: 45,960 (1996 -- 44,822) shares............ (873) (847)
-------- --------
Total Stockholders' Equity.................................... 94,584 89,280
-------- --------
Total Liabilities and Stockholders' Equity............... $ 176,522 $151,411
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-102
<PAGE> 204
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THREE MONTHS
ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Net Sales....................................... $60,372 $49,655 $178,701 $127,053
Investment income............................... 104 572 187 1,839
------- ------- -------- -------
Total revenues.................................. 60,476 50,227 178,888 128,892
COSTS AND EXPENSES:
Cost of sales................................... 47,377 38,210 141,655 98,584
Selling, general and administrative expenses.... 8,968 7,881 26,982 19,682
Interest expense................................ 776 862 2,307 1,956
------- ------- -------- -------
Total costs and expenses........................ 57,121 46,953 170,944 120,222
------- ------- -------- -------
INCOME BEFORE INCOME TAXES........................ 3,355 3,274 7,944 8,670
INCOME TAXES...................................... 1,040 1,187 2,682 3,145
------- ------- -------- -------
NET INCOME........................................ $ 2,315 $ 2,087 $ 5,262 $ 5,525
======= ======= ======== =======
PER SHARE:
Net Income...................................... $ .51 $ .46 $ 1.16 $ 1.21
Common shares and equivalents..................... 4,563 4,565 4,530 4,556
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-103
<PAGE> 205
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in continuing operations................................ $(6,266) $ (6,584)
Net cash provided by discontinued operations.......................... 1,298 3,759
------- --------
Net Cash Used In All Operations............................... (4,968) (2,825)
------- --------
INVESTING ACTIVITIES
Purchase of business, net of cash acquired............................ 1,058 (41,300)
Sales of available for sale investments............................... -- 21,465
Purchases of available for sale investments........................... -- (20,341)
Purchase of property, plant and equipment............................. (2,070) (2,041)
Total from discontinued operations.................................... -- (165)
------- --------
Net Cash Used In Investing Activities......................... (1,012) (42,382)
------- --------
FINANCING ACTIVITIES
Net increase in notes payable......................................... -- 20,200
Payment of long-term liabilities...................................... (1,193) (2,064)
Additional long-term liabilities...................................... 4,587 --
Exercise of stock options............................................. 68 974
Acquired shares for treasury.......................................... (26) (827)
------- --------
Net Cash Provided By Financing Activities..................... 3,436 18,283
------- --------
Increase (Decrease) in Cash and Cash Equivalents
Continuing Operations................................................. (2,559) (30,518)
Discontinued Operations............................................... 15 3,594
Cash and Cash Equivalents, Beginning of Period.......................... 4,616 29,000
------- --------
Cash and Cash Equivalents, End of Period................................ $ 2,072 $ 2,076
======= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-104
<PAGE> 206
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CORPORATE DEVELOPMENT ACTIVITIES
Merger: On September 5, 1997, Fuqua Enterprises, Inc. ("Fuqua") entered
into an Agreement and Plan of Merger whereby Fuqua would be acquired by
Graham-Field Health Products, Inc. ("Graham-Field") in a tax free exchange of
2.1 shares of Graham-Field common stock for each share of Fuqua common stock
(the "Merger"). The exchange ratio is subject to upward adjustment in the event
that Graham-Field's average stock price for the 10-day period ending two days
prior to the Merger falls below $13.5714 and to downward adjustment in the event
that the average stock price exceeds $17.6190. Accordingly, Fuqua stockholders
are assured of receiving Graham-Field stock valued at not less than $28.50 nor
more than $37.00 in exchange for each Fuqua share.
The closing of the Merger, which currently is expected to occur in December
1997, is subject to customary conditions, including approval by the stockholders
of both Graham-Field and Fuqua and the receipt of all necessary governmental and
regulatory approvals. The principal stockholders of Fuqua, which own
approximately 46% of the outstanding shares (including the Fuqua family which
owns 32%), have entered into voting agreements with Graham-Field pursuant to
which they have agreed to vote their shares in favor of the Merger. Graham-Field
stockholders owning shares representing approximately 37% of the outstanding
voting power have entered into similar voting agreements. The waiting period
required by Hart-Scott-Rodino Antitrust Improvements Act expired October 25,
1997. The Merger is expected to close in December 1997.
Acquisitions: On April 3, 1996, Fuqua acquired the medical products
operations of Lumex, Inc. (the "Lumex Division") from Cybex International, Inc.
(formerly Lumex, Inc., the "Seller"). The purchase price for the Lumex Division
was $40.7 million subject to a final adjustment as provided in the asset sale
agreement. The final purchase price adjustment is in dispute and is being
resolved through arbitration. Fuqua submitted its initial position statement to
the arbitrator in March 1997, which claimed that net assets at the closing date
were overstated by $9.3 million. In March 1997, Fuqua gave notice to the Seller
to preserve Fuqua's indemnification rights provided in the asset sale agreement.
On April 18, 1997, the Seller obtained an interim stay of the arbitration
proceedings, pending a hearing on May 9, 1997. On May 9, 1997, the New York
County Supreme Court vacated its stay of the arbitration proceedings and
directed Fuqua and the Seller to proceed to arbitration forthwith. On June 10,
1997, the Seller filed a motion for a stay of arbitration pending the hearing
and determination of the Seller's appeal with the Appellate Division of the New
York County Supreme Court. On June 24, 1997, the Appellate Division denied the
Seller's motion to stay the arbitration proceedings pending appeal. Accordingly,
Fuqua and the Seller are continuing with the arbitration proceedings which are
expected to be completed by December 1997. On August 4, 1997, the Seller filed
its brief with the Appellate Division in connection with the Seller's appeal of
the May 9, 1997 Order of the New York County Supreme Court. The appeal is
scheduled to be considered by the Appellate Division in the December 1997 term
of court.
On February 26, 1997, Fuqua acquired 100% of the outstanding common stock
and warrants of Prism Enterprises, Inc. ("Prism"). Prism, whose 1996 net sales
were $12.0 million, is a manufacturer of therapeutic heat and cold packs for
medical and consumer uses and vacuum systems for obstetrical and other
applications. Prism's operating facilities are located in San Antonio, Texas and
Rancho Cucamonga, California. The purchase price was $19.5 million and was
financed with borrowings under Fuqua's Revolving Credit Facility. Based on the
preliminary allocation of purchase price, the excess purchase price over the net
assets acquired of $16.2 million was assigned to goodwill and is being amortized
on a straight-line basis over 30 years.
The results of operations of the Lumex Division are included in the
Condensed Consolidated Financial Statements for the three months and nine months
ended September 30, 1997. The results of operations of Prism are included in the
Condensed Consolidated Financial Statements for the period from acquisition
date, February 26, 1997, through September 30, 1997. The following pro forma
summary presents Fuqua's consolidated results from operations as if these
acquisitions had occurred on the first day of each of the respective three and
nine month periods for Prism and on January 1, 1996 for the Lumex Division.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what
F-105
<PAGE> 207
FUQUA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would have occurred had the acquisitions actually been made as of those dates or
the results which may occur in the future.
<TABLE>
<CAPTION>
FOR THREE MONTHS FOR THREE MONTHS FOR NINE MONTHS FOR NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------------- ---------------- --------------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............ $ 60,372 $ 52,959 $ 179,278 $ 149,810
Net income (loss).... 2,315 2,473 5,225 (1,260)
Net income (loss) per
share.............. .51 .54 1.15 (.28)
</TABLE>
2. PER SHARE CALCULATIONS
Per share calculations are based on the average number of shares
outstanding plus common stock equivalents, if dilutive. Common stock equivalents
include the effect of options granted to key employees under Fuqua's Stock
Option Plans. Fully diluted per share calculations are not significantly
different from those reported.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Finished goods.................................... $16,663 $ 16,238
Work in progress.................................. 11,238 12,338
Raw materials and supplies........................ 18,532 13,483
------- -------
$46,433 $ 42,059
======= =======
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Interest payments....................................... $ 2,220 $ 2,179
======= =======
Income tax payments..................................... $ 1,364 $ 2,095
======= =======
Issuance of debt in connection with business
acquisition........................................... $ 19,500 $ 33,000
======= =======
</TABLE>
5. CAPITAL STOCK
During the three months ended September 30, 1997, options for 27,000 and
2,000 shares of common stock were granted at $21.188 and $24.50 per share,
respectively, no options were exercised and Fuqua acquired no shares of common
stock for the treasury. During the nine months ended September 30, 1996, options
for 25,000 shares of common stock were granted at $24.00 per share, no options
were exercised and Fuqua acquired no shares of common stock for its treasury.
------------------------
The unaudited condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of the results for the interim
periods. However, interim period results are not necessarily indicative of
results for the year, taken as a whole. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Proxy Statement/Consent Solicitation Statement/Prospectus.
F-106
<PAGE> 208
FINANCIAL STATEMENTS OF
THE LUMEX DIVISION OF LUMEX, INC.
F-107
<PAGE> 209
REPORT OF INDEPENDENT AUDITORS
Fuqua Enterprises, Inc.
We have audited the accompanying balance sheets of the Lumex Division of
Lumex, Inc. (the "Lumex Division") as of December 31, 1995 and 1994, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of, and all references to management in the accompanying
footnotes refer to, the management of Fuqua Enterprises, Inc. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Lumex Division at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
March 13, 1996, except for Note 1,
as to which the date is
March 13, 1997
F-108
<PAGE> 210
LUMEX DIVISION OF LUMEX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 7,182 $ 7,184 $ 4,927
Trade accounts receivable............................ 10,229,774 12,281,563 11,295,873
Inventories.......................................... 10,390,732 9,410,029 5,410,024
Net lease receivables................................ 2,878,099 3,298,111 1,603,271
Prepaid expenses and other current assets............ 576,113 532,522 1,219,479
----------- ----------- -----------
Total Current Assets....................... 24,081,900 25,529,409 19,533,574
Property, plant and equipment
Land............................................... 308,594 308,594 308,594
Buildings and improvements......................... 10,275,867 9,748,671 7,159,034
Machinery and equipment............................ 15,012,948 14,633,519 11,401,736
Construction in progress........................... -- 230,913 97,662
----------- ----------- -----------
25,597,409 24,921,697 18,967,026
Less accumulated depreciation...................... (12,627,735) (12,163,167) (10,427,990)
----------- ----------- -----------
Net property, plant and equipment.................... 12,969,674 12,758,530 8,539,036
Net lease receivables................................ 3,545,736 6,807,398 6,311,204
Intangible assets, less accumulated amortization of
$2,703,001, $2,630,174 and $1,777,750,
respectively....................................... 1,761,301 4,862,776 2,362,193
Other................................................ 235,181 232,522 52,517
----------- ----------- -----------
Total Assets............................... $ 42,593,792 $ 50,190,635 $ 36,798,524
=========== =========== ===========
LIABILITIES AND PARENT COMPANY'S EQUITY AND ADVANCES,
NET
Accounts payable..................................... $ 6,750,294 $ 8,277,504 $ 5,555,212
Accrued liabilities.................................. 4,866,176 5,053,803 4,153,257
----------- ----------- -----------
Total Current Liabilities.................. 11,616,470 13,331,307 9,708,469
Parent Company's Equity and Advances, Net............ 30,977,322 36,859,328 27,090,055
----------- ----------- -----------
Total Liabilities and Parent Company's
Equity and Advances, Net................. $ 42,593,792 $ 50,190,635 $ 36,798,524
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE> 211
LUMEX DIVISION OF LUMEX, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ---------------------------------------
1996 1995 1994 1993
------------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.............................. $ 13,570,190 $60,590,972 $60,777,293 $54,188,695
Costs and Expenses:
Costs of sales....................... 11,207,393 41,902,102 40,203,960 34,907,042
Shipping............................. 843,874 3,420,064 3,259,905 2,937,482
Selling.............................. 1,428,520 6,921,030 6,439,939 5,746,782
Marketing............................ 564,716 2,942,021 3,058,884 2,728,101
Product development.................. 230,047 2,019,318 783,208 961,013
Administrative....................... 7,313,820 4,708,558 4,013,040 3,890,393
Other (income)....................... (394,460) (874,720) (510,300) (49,499)
Provision for environmental costs.... -- -- -- 2,000,000
----------- ----------- ----------- -----------
Total Costs and Expenses..... 21,193,910 61,038,373 57,248,636 53,121,314
----------- ----------- ----------- -----------
(Loss) Income Before Income Taxes...... (7,623,720) (447,401) 3,528,657 1,067,381
Income Tax (Provision) Benefit......... 3,049,488 178,960 (1,411,462) (426,952)
----------- ----------- ----------- -----------
Net (Loss) Income...................... $ (4,574,232) $ (268,441) $ 2,117,195 $ 640,429
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE> 212
LUMEX DIVISION OF LUMEX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------------------
1996 1995 1994 1993
------------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................... $ (4,574,232) $ (268,441) $ 2,117,195 $ 640,429
Noncash items included in net (loss)
income:
Depreciation and amortization....... 766,005 2,590,748 1,568,912 1,256,338
Write-off of intangible assets...... 2,964,117 900,000 -- --
Write-off of lease receivables...... 3,397,382 3,359,868 -- --
Warranty provision.................. 543,000 107,000 -- --
Write-off of trade accounts
receivable....................... 222,500 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable................. 1,829,289 (985,690) (2,250,944) (716,202)
Inventories......................... (1,203,571) (4,000,005) (1,172,839) 845,387
Other current assets................ (43,591) 686,957 (1,580) (868,123)
Lease receivables................... 420,012 (1,694,840) (889,439) (713,832)
Accounts payable.................... (1,527,210) 2,722,292 254,405 1,734,149
Accrued liabilities................. (730,627) 793,546 (2,264,865) 3,869,059
----------- ------------ ----------- -----------
Net Cash (Used in) Provided By
Operating Activities................ 2,063,074 4,211,435 (2,639,155) 6,047,205
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment........................... (675,712) (5,957,818) (1,527,959) (1,485,175)
Increase in intangible assets......... (164,079) (4,253,007) (665,475) (114,132)
----------- ------------ ----------- -----------
Net Cash Used In Investing
Activities.......................... (839,791) (10,210,825) (2,193,434) (1,599,307)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Parent company advances, net.......... (1,307,774) 10,037,714 9,489,420 (2,756,087)
Increase in lease receivables......... 87,148 (3,856,062) (4,702,757) (1,608,447)
Other................................. (2,659) (180,005) 45,158 (84,325)
----------- ------------ ----------- -----------
Net Cash (Used in) Provided By
Financing Activities................ (1,223,285) 6,001,647 4,831,821 (4,448,859)
----------- ------------ ----------- -----------
Net (Decrease) Increase In Cash And
Cash Equivalents.................... (2) 2,257 (768) (961)
Cash And Cash Equivalents at Beginning
of Period........................... 7,184 4,927 5,695 6,656
----------- ------------ ----------- -----------
Cash And Cash Equivalents at End of
Period.............................. $ 7,182 $ 7,184 $ 4,927 $ 5,695
=========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE> 213
LUMEX DIVISION OF LUMEX, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE FINANCIAL STATEMENTS AT MARCH 31, 1996
AND FOR THE PERIOD THEN ENDED IS UNAUDITED)
1. ACQUISITION AND BASIS OF PRESENTATION
On April 3, 1996, Fuqua Enterprises, Inc. ("Fuqua") acquired the Lumex
Division of Lumex, Inc. for approximately $40,700,000 in cash, subject to a
final purchase price adjustment as provided in the asset sale agreement.
The 1995 financial statements include charges totaling $3,045,000 which
relate to trade accounts and lease receivables ($1,904,000), warranty reserves
($107,000), intangible assets ($900,000) and inventory obsolescence ($134,000).
Subsequent to March 13, 1996, these charges were determined appropriate to be
included in the 1995 financial statements.
The accompanying financial statements reflect the financial position and
results of operations and cash flows of the Lumex Division of Cybex
International, Inc. (formerly Lumex Inc., the "Parent") and the lease
receivables related to low air loss bed systems sold by the Lumex Division and
financed by Cybex Financial Corp., an affiliated company (collectively, the
"Lumex Division") and have been prepared to meet the requirements of Regulation
S-X for the financial statements of a business acquired. These financial
statements do not reflect any adjustments related to the Fuqua allocation of the
purchase price which Fuqua paid for the Lumex Division.
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
OTHER MATTERS
The Lumex Division develops and markets a wide range of health care
products including specialty seating, bath safety, mobility products, health
care beds and therapeutic support systems for the acute, long-term and home care
markets.
Cash and cash equivalents: All highly liquid investments with an original
maturity of three months or less when purchased are considered to be cash
equivalents.
Inventories: Inventories are stated at the lower of cost or market.
Inventory costs have been determined by the last-in first-out (LIFO) method.
Property, plant and equipment: Property, plant and equipment, including
expenditures for renewals and betterments, are recorded at cost. Depreciation is
computed using the straight-line method over the assets estimated useful lives
(buildings -- 40 years; building improvements -- 15 years; machinery and
equipment -- 3 to 10 years).
Intangibles: Intangibles consist principally of patents, excess cost over
assets acquired and trademarks which are recorded at cost and amortized over the
estimated useful lives by the straight-line method for periods ranging from 5 to
30 years. The amounts of recorded intangibles determined to be unrecoverable are
charged to results of operations in the period such determination is made (See
Note 7).
Advertising costs: The Lumex Division expenses advertising costs when
incurred. The amounts of such costs were insignificant in each of the periods
presented in these financial statements.
Revenue recognition: Sales are recorded when goods are shipped.
Product development: Product development costs are expensed as they are
incurred. During 1995, the Lumex Division expensed $900,000 of the amounts paid
to Airbed Corporation, representing purchased research and development costs.
Income taxes: The Lumex Division's deferred tax assets/liabilities are
recorded at the Parent Company level. The provision/benefit for income taxes has
been determined on a Lumex Division stand alone basis.
F-112
<PAGE> 214
LUMEX DIVISION OF LUMEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent pronouncements: In March 1995, the Financial Accounting Standards
Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Lumex Division adopted SFAS 121 in the first quarter of 1996.
The adoption of SFAS 121 did not impact the financial results of the Lumex
Division. As described in Note 7, the $2,864,000 adjustment to certain
intangibles in the first quarter of 1996 was required by generally accepted
accounting principles which applied before the adoption of SFAS 121.
Allocation of corporate charges: The Lumex Division's financial statements
reflect operating expenses incurred by the Parent which have been allocated to
the Lumex Division for each of the periods presented. These allocated expenses
represent costs for executive management services and were determined based on
the proportion of the Lumex Division sales and staff levels to the total
incurred by Parent on a consolidated basis for 1993 and 1994. For the calendar
year 1995, the Parent modified the method of estimating the amount to be
allocated to reflect the expenses incurred by Parent that were directly related
and incremental to the Lumex Division. The amounts allocated to the Lumex
Division were $135,682, $781,143 and $820,730 for December 31, 1995, 1994 and
1993, respectively. Management believes that the resulting allocated expenses
are not materially different than what such expenses would have been on a stand
alone basis.
Parent Company's Equity and Advances, Net: The Parent Company's Equity and
Advances, Net, represents the Parent's accumulated equity in the Lumex Division
as well as the net payable/receivable balances due to/from the Parent resulting
from cash transfers and allocated expenses.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results inevitably will differ from
those estimates and such differences may be material to the financial
statements.
3. LEASES
As Lessor: The Lumex Division offers lease financing to distributors of
its low air loss bed systems under the terms of either a fixed payment lease or
shared revenue lease contract, both of which are accounted for as sales type
leases. Standard lease contracts contain fixed monthly payments and are
generally for 36-48 months at which time title transfers to the lessee. Under
shared revenue lease contracts the lessee pays the greater of a fixed percentage
of monthly revenue collected from rentals of the equipment or a minimum monthly
payment. Shared revenue lease contracts are generally for 60 months at which
time title does not pass to the lessee. Leases are secured by the equipment
leased including any revenues derived therefrom. Lease receivables at December
31, 1995 and 1994 and March 31, 1996 was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Gross minimum lease payments receivable..... $16,615,724 $17,168,793 $10,830,660
Less unearned interest income............... (3,307,398) (3,576,172) (2,649,240)
Less reserve for returns.................... (6,034,382) (2,799,000) --
Less allowance for uncollectible accounts
and lease receivables..................... (850,109) (688,112) (266,945)
----------- ----------- -----------
6,423,835 10,105,509 7,914,475
Current portion............................. (2,878,099) (3,298,111) (1,603,271)
----------- ----------- -----------
Non-current portion......................... $ 3,545,736 $ 6,807,398 $ 6,311,204
=========== =========== ===========
</TABLE>
F-113
<PAGE> 215
LUMEX DIVISION OF LUMEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Gross minimum lease payments receivable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, TOTAL
------------------------------------------------ -----------
<S> <C>
1996............................................ $ 4,241,969
1997............................................ 4,293,068
1998............................................ 4,189,388
1999............................................ 3,122,378
2000............................................ 1,252,162
Thereafter...................................... 69,828
----------
$17,168,793
==========
</TABLE>
As Lessee: The Lumex Division has lease commitments expiring at various
dates through 2000, principally for facilities and data processing equipment
under non-cancelable operating leases. Future minimum payments under these
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, TOTAL
------------------------------------------------ -----------
<S> <C>
1996............................................ $ 645,829
1997............................................ 506,675
1998............................................ 472,620
1999............................................ 471,072
2000............................................ 292,284
----------
$ 2,388,480
==========
</TABLE>
Rent expense under operating leases for the years 1995, 1994 and 1993 was
$458,406, $335,448 and $316,782, respectively, and for the three months ended
March 31, 1996 was $173,640.
4. OTHER INFORMATION
Receivables: Trade accounts receivable are stated net of allowances for
doubtful accounts of $195,983 at December 31, 1995 and $106,449 at December 31,
1994 and $440,344 at March 31, 1996. The provision for bad debts for the years
ended December 31, 1995, 1994 and 1993 was $158,822, $236,414 and $81,498,
respectively, and was $327,851 for the three months ended March 31, 1996.
Inventories: Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Finished goods.............................. $ 8,657,092 $ 5,487,990 $ 2,947,058
Work in process............................. 4,746,188 1,495,147 1,662,524
Raw materials............................... 359,046 5,798,486 3,920,527
LIFO reserve................................ (3,371,594) (3,371,594) (3,120,085)
----------- ----------- -----------
$10,390,732 $ 9,410,029 $ 5,410,024
=========== =========== ===========
</TABLE>
F-114
<PAGE> 216
LUMEX DIVISION OF LUMEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Liabilities: Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Salaries, bonuses and commissions.............. $ 222,359 $ 392,321 $ 427,250
Accrued vacation............................... 500,669 443,568 419,651
Retirement contributions....................... 282,526 282,529 212,550
Self insurance obligations..................... 1,026,600 1,026,600 1,256,213
Payable under Airbed Assets Purchase
Agreement.................................... 522,551 1,212,551 --
Environmental remediation...................... 1,308,994 1,331,546 1,663,000
Warranty Obligations........................... 794,200 204,000 --
Other.......................................... 208,277 160,688 174,593
---------- ---------- ----------
$4,866,176 $5,053,803 $4,153,257
========== ========== ==========
</TABLE>
5. ENVIRONMENTAL COSTS
In March 1994, the Office of the District Attorney Suffolk County, Long
Island, New York, in conjunction with the Suffolk County Department of Health
Services (collectively, the "Suffolk County Authorities"), initiated an
investigation to determine whether regulated substances had been discharged from
one of the Lumex Division's Bay Shore facilities in excess of permitted levels.
An environmental consulting firm was engaged by the Lumex Division to conduct a
more comprehensive site investigation, develop a remediation work plan and
provide a remediation cost estimate. These activities were performed to
determine the nature and extent of contaminants present on the site and to
evaluate their potential off-site extent.
At December 31, 1995, the Lumex Division had $1.3 million in reserves for
remediation costs, including additional investigation costs which are probable
of occurring. Reserves are established when it is probable that a liability has
been incurred and such costs can be reasonably estimated. The Lumex Division's
estimates of these costs were based upon currently enacted laws and regulations
and the professional judgement of consultants and counsel. Where the available
information was sufficient to estimate the amount of the liability, that
estimate has been used. Where the information was only sufficient to establish a
range of probable liability and no point within the range was more likely than
another, the lower end of the range has been used. The Lumex Division has not
assumed any such costs will be recoverable from third parties nor has the Lumex
Division discounted any of its cost estimates although a portion of the
remediation work plan would be performed over a period of years.
The amounts of these liabilities are difficult to estimate due to such
factors as the extent to which remedial actions may be required, laws and
regulations change or the actual costs of remediation differ when the final work
plan is performed. The estimate of the costs, which is not probable but for
which there exists at least a reasonable possibility of occurrence, exceeds the
current reserves by $2.2 million.
6. BENEFIT PLANS
The Lumex Division has a non-contributory defined contribution retirement
plan (the "Retirement Plan") covering substantially all employees. Contributions
to the Retirement Plan are based upon annual compensation for those persons
employed (as defined) at December 31 and are funded annually. The Retirement
Plan expense was $282,528, $259,755 and $237,116 for the years 1995, 1994 and
1993, respectively.
F-115
<PAGE> 217
LUMEX DIVISION OF LUMEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INTERIM FINANCIAL INFORMATION -- INTANGIBLE ASSETS AND LEASE RECEIVABLES
The accompanying unaudited interim financial information of the Lumex
Division reflects all adjustments which are, in the opinion of Management,
necessary for a fair presentation of the financial position and results of
operations at and for the three months ended March 31, 1996. Such interim
results are not necessarily indicative of the results which may be expected for
the entire fiscal year. The accompanying unaudited interim financial information
does not include comparative information for the three months ended March 31,
1995 because sufficient data are not available to Management to enable it to
prepare the financial information for such interim period.
In February 1995, the Lumex Division acquired certain assets of Airbed
Corporation ("Airbed") ("Acquisition Agreement") including all the rights, title
and interest in the technology utilized in the Akrotech bed systems distributed
by the Lumex Division under existing distributor agreements. Concurrently, the
Lumex Division and Airbed entered into an exclusive Manufacturing Agreement
pursuant to which Airbed would continue to manufacture the air control unit of
the bed systems subject to certain conditions of product quality, delivery terms
and pricing. The purchase price for these assets was $2.25 million plus certain
contingent payments.
Contingent payments were payable based upon the occurrence of certain
events as described in the Acquisition Agreement. At December 31, 1995,
contingent payments totaling $150,000 had been paid. A dispute arose between the
Lumex Division and Airbed over the remaining contingent payments which was
resolved under the terms of a Settlement Agreement entered into on March 29,
1996. In accordance with the Settlement Agreement, the Lumex Division agreed to
make payments totaling $1,900,000, less amounts previously loaned to Airbed of
$497,449. The balance due was payable in weekly installments through April 29,
1996 totaling $1,160,000 with the balance due the earlier of three days after
closing of the sale of the Lumex Division or May 3, 1996. The payments made
pursuant to the Acquisition Agreement and Settlement Agreement, which were not
related to purchased research and development, were included in intangible
assets in the accompanying December 31, 1995 balance sheet.
Subsequent to December 31, 1995, Management determined that the
distributors through which Lumex sold the low air loss bed systems were
returning large numbers of the bed systems. As a result, Management evaluated
the recoverability of the intangible asset arising from the Acquisition and
Settlements Agreements and, in accordance with Accounting Principles Board
Opinion No. 17, wrote-off the remaining unamortized intangible asset balance of
approximately $2,864,000 in the first quarter of 1996. Additionally, Management
also determined that an intangible asset totaling $100,000, representing a
license paid for rights to incorporate certain technology into a product line,
was not feasible and was written off in the first quarter of 1996.
Additionally, subsequent to December 31, 1995, Management identified
distributors who were not going to be able to pay their lease obligations to the
Lumex Division or would be able to do so only after adjustment of the terms of
the lease or return of low air loss bed systems. As a result, an allowance for
doubtful accounts was established in the first quarter of 1996 to reserve for
net lease receivables ($3,397,382) and trade accounts receivable ($222,500)
which were outstanding at December 31, 1995.
F-116
<PAGE> 218
======================================================
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation by Reference............ 3
Prospectus Summary.................... 5
The Company........................... 12
Risk Factors.......................... 12
Use of Proceeds of New Notes.......... 20
Use of Proceeds of Old Notes.......... 20
Recent Developments................... 20
Capitalization........................ 22
The Exchange Offer.................... 23
Selected Consolidated Financial
Information and Operating Data...... 30
Pro Forma Combined Condensed Financial
Information......................... 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 46
Business.............................. 51
Management............................ 62
Principal Stockholders................ 65
Security Ownership of Management...... 66
Certain Transactions.................. 69
Description of Credit Facility........ 70
Description of New Notes.............. 71
Old Notes; Registration Rights........ 96
Certain Federal Income Tax
Considerations Relating to the
Exchange Offer...................... 98
Plan of Distribution.................. 100
Legal Matters......................... 100
Experts............................... 100
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$100,000,000
LOGO
GRAHAM-FIELD HEALTH
PRODUCTS, INC.
9 3/4% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A
------------------------
PROSPECTUS
January 9, 1998
------------------------
OFFER TO EXCHANGE
9 3/4% SENIOR SUBORDINATED
NOTES DUE 2007, SERIES A
FOR
9 3/4% SENIOR SUBORDINATED
NOTES DUE 2007
======================================================
