<PAGE> 1
FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
(MARK ONE)
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to
Commission file number 1-8801
GRAHAM-FIELD HEALTH PRODUCTS, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2578230
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
81 Spence Street, Bay Shore, New York 11706
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(631) 273-2200
----------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by the court.
Yes No
--- ---
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, $.025 Par Value --- 31,808,324 shares as of November 9, 1999
<PAGE> 2
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Part I. Financial Information: Page
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30,
1999 (Unaudited) and December 31, 1998 (Audited) 3
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1999
and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1999 and 1998
(Unaudited) 5-6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Part II. Other Information:
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
- 2 -
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- -------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,348,000 $ 3,290,000
Accounts receivable - less allowances for doubtful
accounts of $19,504,000 and $20,107,000, respectively 73,274,000 90,969,000
Inventories 45,642,000 63,121,000
Notes receivable and other current assets - less
allowance for doubtful notes of $3,767,000 and
$5,373,000, respectively 7,063,000 9,252,000
Recoverable and prepaid income taxes 941,000 1,441,000
------------- -------------
TOTAL CURRENT ASSETS 130,268,000 168,073,000
PROPERTY, PLANT AND EQUIPMENT - net 40,584,000 40,188,000
EXCESS OF COST OVER NET ASSETS ACQUIRED - net of
accumulated amortization of $26,462,000 and
$20,644,000, respectively 201,851,000 207,554,000
OTHER ASSETS 11,260,000 13,044,000
------------- -------------
TOTAL ASSETS $ 383,963,000 $ 428,859,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Senior Subordinated Notes $ 100,000,000 $ --
Credit facility 23,844,000 27,606,000
Current maturities of long-term debt 875,000 1,235,000
Accounts payable 24,277,000 28,915,000
Accrued expenses 39,071,000 33,941,000
------------- -------------
TOTAL CURRENT LIABILITIES 188,067,000 91,697,000
Senior Subordinated Notes -- 100,000,000
Long-term debt 2,126,000 6,715,000
Other long-term liabilities 10,959,000 10,580,000
------------- -------------
TOTAL LIABILITIES 201,152,000 208,992,000
------------- -------------
STOCKHOLDERS' EQUITY:
Series A preferred stock -- --
Series B preferred stock 28,200,000 28,200,000
Series C preferred stock 3,400,000 3,400,000
Series D preferred stock 4,072,000 --
Common stock 789,000 783,000
Additional paid-in capital 287,267,000 286,503,000
Accumulated deficit (139,469,000) (97,587,000)
Accumulated other comprehensive loss (1,448,000) (1,432,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 182,811,000 219,867,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 383,963,000 $ 428,859,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
- 3 -
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
(As restated, (As restated,
see Note 6) see Note 6)
<S> <C> <C> <C> <C>
NET REVENUES:
Medical equipment and supplies $ 67,647,000 $ 93,158,000 $ 226,718,000 $ 288,279,000
Interest and other income 244,000 685,000 1,170,000 1,620,000
------------ ------------- ------------- -------------
67,891,000 93,843,000 227,888,000 289,899,000
------------ ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of revenues 49,441,000 64,378,000 160,901,000 199,007,000
Selling, general and administrative 28,757,000 31,765,000 88,675,000 91,346,000
Provision for Securities Class
Action (Note 10) -- -- 10,000,000 --
Interest expense 3,062,000 3,412,000 9,395,000 9,219,000
------------ ------------- ------------- -------------
81,260,000 99,555,000 268,971,000 299,572,000
------------ ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (13,369,000) (5,712,000) (41,083,000) (9,673,000)
INCOME TAX BENEFIT -- 1,287,000 -- 1,287,000
------------ ------------- ------------- -------------
NET LOSS (13,369,000) (4,425,000) (41,083,000) (8,386,000)
PREFERRED STOCK DIVIDENDS 266,000 266,000 799,000 799,000
------------ ------------- ------------- -------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $(13,635,000) $ (4,691,000) $ (41,882,000) $ (9,185,000)
============ ============= ============= =============
Net loss per common share -
basic and diluted $ (.43) $ (.15) $ (1.33) $ (.30)
Weighted average number of
common shares outstanding 31,526,000 31,244,000 31,430,000 31,079,000
</TABLE>
See notes to condensed consolidated financial statements.
- 4 -
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
(As restated,
see Note 6)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(41,083,000) $ (8,386,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Provision for Class Action settlement 10,000,000 --
Depreciation and amortization 11,284,000 11,344,000
Provisions for losses on accounts receivable 3,909,000 1,816,000
Deferred income taxes -- (1,287,000)
(Gain) loss on disposal of property, plant and equipment (319,000) 77,000
Non-cash compensation 108,000 3,341,000
Changes in operating assets and liabilities:
Accounts receivable 13,786,000 (13,583,000)
Inventories 17,479,000 5,319,000
Other current assets and recoverable and prepaid income
taxes 2,689,000 (8,121,000)
Accounts payable, accrued expenses and other liabilities (9,350,000) (22,694,000)
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 8,503,000 (32,174,000)
------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment-net (4,223,000) (8,060,000)
Proceeds from sale of asset held for sale -- 60,167,000
Acquisitions, net of cash acquired -- (419,000)
Decrease in excess of cost over net assets acquired -- 2,338,000
Net decrease (increase) in other assets 498,000 79,000
------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (3,725,000) 54,105,000
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
- 5 -
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
(As restated,
see Note 6)
<S> <C> <C>
FINANCING ACTIVITIES:
Net repayments under Credit Facility (3,303,000) (25,861,000)
Principal payments on long-term debt (1,417,000) (1,642,000)
Proceeds from exercise of stock options -- 4,722,000
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (4,720,000) (22,781,000)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 58,000 (850,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,290,000 4,430,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,348,000 $ 3,580,000
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 11,900,000 $ 11,692,000
============ ============
Income taxes (received) paid $ (825,000) $ 135,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Payment of accrued dividends by issuance of
common stock $ 799,000 $ 533,000
============ ============
Repayment of long-term debt by issuance of
preferred stock $ 4,000,000
============
Investment in preferred stock received as
partial proceeds from sale of asset $ 1,539,000
============
Decrease in excess of cost over net assets acquired
offset by increase in other current assets $ 2,385,000
============
Increase in excess of cost over net assets acquired
offset by adjustments to property, plant and
equipment, inventory, prepaid and deferred taxes,
accrued expense and debt $ 375,000
============
</TABLE>
See notes to condensed consolidated financial statements.
- 6 -
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
1. LIQUIDITY AND BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The going concern
basis of presentation assumes the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of business.
The Company has incurred significant losses in 1999 and each of the
three years in the period ended December 31, 1998. These losses have arisen as a
result of declining sales and margins in 1999, a significant amount of merger,
restructuring and other expenses incurred in connection with previous
acquisitions, the failure to integrate effectively these acquisitions and
realize the benefits and synergies to be derived therefrom and the impact of
intense competition within the healthcare industry. The losses also include
significant charges relating to provisions for accounts receivable, inventory
and other asset write-offs in 1997 and 1998, a provision to increase the
valuation allowance on deferred tax assets in 1998, and certain professional,
consulting and other advisory fees and severance charges in 1999. Further, the
Company and certain of its directors and officers have been named as defendants
in at least fifteen putative class action lawsuits which have been consolidated
into an amended complaint (the "Class Action"). In August 1999, the Company
reached an agreement in principle to settle the Class Action, subject to certain
contingencies described herein. However, as further described in Note 10, on
October 25, 1999, the Company determined it would not be in a position to
proceed with the agreement in principle due to changed circumstances.
Management has continued with a program to reduce operating expenses,
reduce the investment in working capital and take other actions to improve its
cash flow. These actions include, but are not limited to, (i) the completion of
the activities contemplated by the Company's restructuring plan as further
described in Note 9; (ii) the initiation of inventory reduction and product
rationalization programs; (iii) the tightening of credit policies and payment
terms; (iv) the reduction in previously budgeted capital expenditures; (v) the
implementation of streamlined product pricing and product return guidelines;
(vi) the initiation of an aggressive program to collect past due accounts
receivable; and (vii) the realignment and consolidation of sales forces and
territories.
Notwithstanding the actions described above, the Company's losses have
continued to accelerate during 1999 and sales have continued to decline,
resulting in decreased liquidity. The Company was not in compliance with the net
cash flow covenant contained in its Senior Secured Revolving Credit Facility
(the "Credit Facility") with IBJ Whitehall Business Credit Corporation, as agent
("IBJ") as of September 30, 1999 and also does not expect to be in compliance
with the December 31, 1999 net cash flow covenant. Amounts outstanding under the
Credit Facility (including the Term Loan described in Note 12) were $19.7
million and $23.8 million at November 12, 1999 and September 30, 1999,
respectively. As of November 12, 1999, the Company had unused borrowing
availability under the Credit Facility of $3.6 million.
The Company is currently seeking a waiver of the covenant default from
its lenders and/or an amendment to the financial covenants. Under the terms of
the Credit Facility, the Company's lenders have the right to require immediate
repayment of all amounts borrowed or limit future advances, however as of
November 15, 1999, the lenders have not exercised such rights. In the event of a
demand for repayment by the lenders in the future, such demand would result in a
cross default under the Indenture for the Company's $100 million Senior
Subordinated Notes, resulting in such notes becoming due and immediately
payable. As a result, the Company has classified its $100 million Senior
Subordinated Notes as current liabilities on the September 30, 1999 balance
sheet.
- 7 -
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
In addition to seeking covenant waivers and/or amendments, the Company
is also pursuing alternative financing sources. There can be no assurance that
the Company will be successful in its efforts to receive waivers and/or
amendments, improve its cash flow or that it will be able to obtain alternative
financing on satisfactory terms in a timely manner to provide sufficient cash to
fund its operations. Should the lenders under the agreements described above
begin to exercise their remedies against the Company or if the Company makes a
determination that it will not be able to fund its operations outside a
bankruptcy, the Company would likely seek protection pursuant to a Chapter 11 of
the United States Bankruptcy Code.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
2. GENERAL
As further described in Note 6 to the Condensed Consolidated Financial
Statements, and as previously described in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, the 1998 quarterly results have been
restated to correct for certain improperly recorded transactions.
Inventories at September 30, 1999 have been valued at standard cost for
manufactured goods and at average cost for other inventories based primarily on
perpetual records, each of which approximates actual cost on the first-in,
first-out method.
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 established new rules for the reporting and display of comprehensive
income and its components, however, the adoption of this Statement had no impact
on the Company's net loss or shareholders' equity. During the three and nine
month periods ended September 30, 1999, total comprehensive loss amounted to
$13,434,000 and $41,099,000, respectively. Total comprehensive loss for the
three and nine month periods ended September 30, 1998 (as restated, see Note 6)
amounted to $4,988,000 and $9,066,000, respectively.
In March 1998, Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" was
issued. SOP 98-1 requires certain costs associated with developing or obtaining
software for internal use to be expended as incurred until certain
capitalization criteria are met. The Company has adopted SOP 98-01 as of January
1, 1999. Based on the Company's current information systems plans, which include
completing its Year 2000 remediation program and the upgrade of its order entry
and manufacturing system, adoption of this statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued effective for fiscal years beginning after June
15, 1999, which has subsequently been delayed. SFAS No. 133 requires the
recognition of all derivatives in the consolidated balance sheet as either
assets or liabilities measured at fair value. The Company currently does not use
derivative instruments and therefore, adoption of this statement is not expected
to impact the Company.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting only of
normal recurring adjustments, except for the provision for Class Action
settlement) necessary to present fairly the financial position as of September
- 8 -
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
30, 1999 (unaudited), the results of operations for the three and nine months
ended September 30, 1999 and 1998 (unaudited) and the statements of cash flows
for the nine months ended September 30, 1999 and 1998 (unaudited).
It should be noted that the accompanying financial statements and notes
thereto do not purport to be complete disclosures in conformity with generally
accepted accounting principles. While the Company believes that the disclosures
presented are adequate to make the information contained herein not misleading,
it is suggested that these financial statements be read in conjunction with the
financial statements and the notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
The results of operations for the three and nine months ended September
30, 1999 and 1998 are not necessarily indicative of results for the full year.
3. EARNINGS PER SHARE
Basic and diluted net loss per common share was computed using the
weighted average number of common shares outstanding and by assuming the accrual
of a dividend of 1.5% on the Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock") and Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock") for the quarter and nine months ended
September 30, 1999 and 1998. Conversion of the preferred stock and common
equivalent shares was not assumed since the result would have been antidilutive.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $11,058,000 $10,739,000
Work-in-process 4,467,000 5,412,000
Finished goods 30,117,000 46,970,000
----------- -----------
$45,642,000 $63,121,000
=========== ===========
</TABLE>
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<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Land and buildings $ 20,166,000 $ 18,366,000
Equipment 37,118,000 33,909,000
Furniture and fixtures 3,465,000 3,219,000
Leasehold improvements 3,790,000 3,865,000
Construction in progress 1,171,000 1,923,000
------------ ------------
65,710,000 61,282,000
Accumulated depreciation
and amortization (25,126,000) (21,094,000)
------------ ------------
$ 40,584,000 $ 40,188,000
============ ============
</TABLE>
6. RESTATEMENT
As previously described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, the Company has restated its financial results
for the first, second and third quarters of 1998 to correct for certain
improperly recorded transactions. Such adjustments increased the net loss
reported in the first and second quarters of 1998 by $971,000 and $249,000,
respectively, and decreased the net loss reported in the third quarter of 1998
by $739,000. The adjustments were primarily related to previously unrecognized
stock compensation charges of $954,000 in the first quarter of 1998 and an
$800,000 reduction in the previously recorded estimated separation charges in
the third quarter of 1998.
The following Consolidated Statements of Operations compare the
previously reported and restated financial information for the three and nine
month periods ended September 30, 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
--------------------------- ----------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $94,516,000 $93,843,000 $290,114,000 $289,899,000
Cost of revenues 65,075,000 64,378,000 199,207,000 199,007,000
Selling, general and
administrative 32,505,000 31,765,000 90,954,000 91,346,000
Interest expense 3,387,000 3,412,000 9,145,000 9,219,000
----------- ----------- ------------ ------------
Loss before income taxes (6,451,000) (5,712,000) (9,192,000) (9,673,000)
Income tax benefit (1,287,000) (1,287,000) (1,287,000) (1,287,000)
----------- ----------- ------------ ------------
Net loss (5,164,000) (4,425,000) (7,905,000) (8,386,000)
Preferred stock dividends 266,000 266,000 799,000 799,000
----------- ----------- ------------ ------------
Net loss attributable to
common shareholders $(5,430,000) $(4,691,000) $ (8,704,000) $ (9,185,000)
=========== =========== ============ ============
Net loss per common share -
basic and diluted $ (.17) $ (.15) $ (.28) $ (.29)
=========== =========== ============ ============
</TABLE>
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<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
7. INCOME TAXES
The Company did not record an income tax benefit for the nine months
ended September 30, 1999 due to the uncertainty of the future realization of
such benefits.
At September 30, 1999, the Company had a full valuation allowance
recorded against its net deferred tax assets. The Company will realize these tax
benefits when the Company generates taxable income. Of the $49.8 million
valuation allowance, $12.1 million is attributable to the acquired net operating
loss carryforward and other deferred tax assets of Everest & Jennings
International Ltd. If realized, the tax benefit related to acquired net
operating losses will be recorded as a reduction of the excess of cost over net
assets acquired.
Realization of the future tax benefits related to the deferred tax
assets is dependent upon many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes.
8. DISPOSAL OF ASSETS
In connection with the Company's acquisition of Fuqua Enterprises, Inc.
(currently known as Lumex/Basic American Holdings, Inc.) ("Fuqua") on December
30, 1997, the Company acquired the leather operations of Fuqua (the "Leather
Operations"). It was the Company's intention to dispose of the Leather
Operations as soon as reasonably practicable following the consummation of the
acquisition of Fuqua. Accordingly, the net assets of the Leather Operations were
reflected as "assets held for sale" in the amount of $61,706,000 on the balance
sheet as of December 31, 1997. On January 27, 1998, the Company sold the Leather
Operations for $60,167,400 in cash, 5,000 shares of Series A Preferred Stock of
the buying entity with a stated value of $4,250,000 (valued at $1,539,000) and
the assumption of debt of $2,341,250. The cash proceeds from the sale of the
Leather Operations were used to repay the indebtedness incurred under the terms
of the Credit Facility, which was used to retire the Fuqua indebtedness.
9. ACQUISITION INTEGRATION AND RESTRUCTURING PLAN
In connection with the acquisition of Fuqua on December 30, 1997, the
Company adopted a plan to implement certain strategic restructuring initiatives
(the "Restructuring Plan") and recorded $18,151,000 of restructuring charges and
$4,393,000 of indirect merger charges. The plan consists of a broad range of
efforts, including the consolidation of the Company's Temco manufacturing
operations in New Jersey into Fuqua's Lumex manufacturing facility in New York,
relocation of the Company's corporate headquarters to the Lumex facility, and
the closure and/or consolidation of certain other distribution facilities and
operations. The Company has substantially completed the initiatives contemplated
in the Restructuring Plan.
During the third quarter of 1999, the Company announced the closures of
its Boston and Cleveland distribution centers and recorded a charge of $625,000
(included in selling, general and administrative expenses) for facility exit
costs.
The following summarizes the activity in the restructuring and merger
related accrual for the nine months ended September 30, 1999:
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<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE CASH RESTRUCTURING BALANCE
DECEMBER 31, PAYMENTS IN PROVISIONS IN SEPTEMBER 30,
1998 1999 1999 1999
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Facility exit and lease costs $ 11,898,000 $(1,456,000) $ 670,000 $11,112,000
Severance 144,000 (104,000) -- 40,000
Merger related 120,000 -- -- 120,000
------------ ----------- ----------- -----------
$ 12,162,000 $(1,560,000) $ 670,000 $11,272,000
============ =========== =========== ===========
</TABLE>
10. LEGAL PROCEEDINGS
Following the Company's public announcement on March 23, 1998 of its
financial results for the fourth quarter and year ended December 31, 1997, the
Company and certain of its directors and officers were named as defendants in at
least fifteen putative class action lawsuits filed primarily in the United
States District Court for the Eastern District of New York (the "Court") on
behalf of all purchasers of Common Stock of the Company (the "Company Common
Stock"), including former Fuqua shareholders who received shares of the Company
Common Stock when the Company acquired Fuqua in December 1997, during various
periods within the time period May 1997 to March 1998. The class actions were
consolidated into an amended consolidated class action complaint as of January
29, 1999 (the "Class Action"), and lead counsel was selected. The amended
consolidated class action complaint asserts claims against the Company and the
other defendants for violations of Sections 11, 12(2) and 15 of the Securities
Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
the Company's business, results of operations, financial condition and future
prospects, as a result of which, it is alleged, the market price of the Company
Common Stock was artificially inflated during the putative class periods. The
amended consolidated class action complaint focuses on statements made
concerning the Company's integration of its various recent acquisitions, as well
as statements about the Company's inventories, accounts receivable, expected
earnings and sales levels. The plaintiffs seek unspecified compensatory damages
and costs (including attorneys and expert fees), expenses and other unspecified
relief on behalf of the putative classes.
In August 1999, the Company reached an agreement in principle to settle
the Class Action, subject to certain contingencies described below. By letter
dated October 25, 1999, the Company advised the Court that the Company would not
be in a position to proceed with the agreement in principle because, due to
changed circumstances, the sale of the Company contemplated thereby would likely
not occur and the Company lacks the funds to pay its portion of the proposed
settlement. The Court has scheduled a status conference regarding this matter to
be held on November 29, 1999.
Under the terms of the agreement in principle, the Class Action would
have been settled for a payment of $20 million, of which $10 million would have
been funded by the Company's insurance carrier and $10 million by the Company.
The agreement in principle contemplated that the Company's $10 million
contribution would be paid either from the proceeds of the sale of the Company
or, at the Company's option, from funds otherwise available. Under the terms of
the agreement in principle, in the event the shares of the common stock of the
Company had been sold for an amount in excess of $3 per share pursuant to a
definitive sale/merger agreement, the shareholder class would also have been
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<PAGE> 13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
entitled to 25% of the premium in excess of $3 per share upon terms and
conditions to be agreed upon between the parties. The plaintiffs may terminate
the settlement if the Company does not enter into a definitive sale/merger
agreement on or before December 31, 1999, unless the Company had funded its $10
million contribution to the settlement prior to an election to terminate the
settlement by the plaintiffs. The Company recorded a provision of $10 million
during the second quarter of 1999 reflecting the Company's share of the proposed
settlement.
In March 1999, the Company reported that an investigation conducted by
the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had
found certain accounting errors and irregularities with respect to the Company's
financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting
firm of Arthur Andersen LLP to assist in conducting the investigation and in
providing advice on accounting matters. Based on the results of the
investigation, the Company has restated its financial results for 1996 and 1997.
The staff of the SEC has commenced a formal investigation with respect to the
aforementioned accounting irregularities and, in connection with that
investigation, has issued a document subpoena to the Company. The impact of the
investigation on the Company cannot yet be assessed.
On March 27, 1998, agents of the U.S. Customs Service and the Food and
Drug Administration arrived at the Company's principal headquarters and one
other Company location and retrieved several documents pursuant to search
warrants. The Company has subsequently been advised by an Assistant United
States Attorney for the Southern District of Florida that the Company is a
target of an ongoing grand jury investigation involving alleged fraud by one or
more of the Company's suppliers relating to the unauthorized diversion of
medical products intended for sale outside of the United States into United
States markets. The Company has also been advised that similar search warrants
were obtained with respect to approximately 14 other participants in the
distribution of medical products. The Company does not know when the grand jury
investigation will conclude or what action, if any, may be taken by the
government against the Company or any of its employees. Accordingly, the impact
of this investigation on the Company cannot yet be assessed. The Company intends
to cooperate fully with the government in its investigation.
In March 1994, Suffolk County Authorities initiated an investigation to
determine whether regulated substances had been discharged in excess of
permitted levels from the Lumex division (the "Lumex Division") located in Bay
Shore, New York, which was acquired by Fuqua in April 1996. An environmental
consulting firm was engaged by the Lumex Division to conduct a more
comprehensive site investigation, develop a remediation work plan and provide a
remediation cost estimate. These activities were performed to determine the
nature and extent of contaminants present on the site and to evaluate their
potential off-site extent. In connection with the acquisition of the Lumex
Division, Fuqua assumed by contract the obligations associated with this
environmental matter. In late 1996, Fuqua conducted surficial soil remediation
at the Bay Shore facilities and reported the results to the Suffolk County
Authorities in March 1997. A ground water work plan was submitted concurrently
with the soil remediation report. In May 1997, the Suffolk County Authorities
stated that they were satisfied with the soil remediation that had been
conducted by Fuqua and provided comments on the ground water work plan.
In November 1997, the Lumex Division received the results of additional
ground water testing that had been performed in August and September 1997. The
results revealed significantly lower concentrations of contaminants than were
known at the time the "Ground Water Work Plan" was prepared in March 1997. Due
to the relatively low levels of contaminants detected, the Lumex Division
proposed sampling the groundwater on a quarterly basis for two years to ensure
that the groundwater was not significantly affected and deferred implementing
the ground water work plan. The results of the quarterly ground-water sampling
undertaken during 1998 and 1999 provide further support that the
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<PAGE> 14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
groundwater is not significantly contaminated. The Company will continue to
monitor the quality of the groundwater to confirm that it remains acceptable. If
the quality of the groundwater remains acceptable after the two year period
expires, the Company will seek to withdraw its groundwater work plan.
At September 30, 1999, the Company had reserves for the remediation
costs and additional investigation costs which will be required. Reserves are
established when it is probable that a liability has been incurred and such
costs can be reasonably estimated. The Company's estimates of these costs were
based upon currently enacted laws and regulations and the professional judgment
of independent consultants and counsel. Where available information was
sufficient to estimate the amount of liability, that estimate has been used.
Where information was only sufficient to establish a range of probable liability
and no point within the range is more likely than another, the lower end of the
range has been used. The Company has not assumed that any such costs would be
recoverable from third parties nor has the Company discounted any of its
estimated costs, although a portion of the remediation work plan will be
performed over a period of years. The amount of environmental liabilities is
difficult to estimate due to such factors as the extent to which remedial
actions may be required, laws and regulations change or the actual costs of
remediation differ when the final work plan is performed.
On August 3, 1998, the Company and another defendant, one of the
Company's employees, were served with a lawsuit initiated by JOFRA Enterprises,
Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The
derivative complaint, seeking damages of $25,000,000, alleged that the Company's
hiring of a certain officer and employees of JOFRA constituted, among other
things, unfair competition and wrongful appropriation of business opportunities.
The Company defended this lawsuit vigorously and recently agreed to pay JOFRA
$87,500 in full settlement for all claims made against the Company and its
employee.
On November 3, 1998, the Company and certain of its directors were
named as defendants in a derivative suit commenced in the Court of Chancery of
the State of Delaware, New Castle County. The lawsuit seeks to rescind a
separation agreement dated as of July 29, 1998 (the "Separation Agreement"),
pursuant to which Irwin Selinger resigned as Chairman of the Board, Chief
Executive Officer and President of the Company. The lawsuit also seeks
unspecified damages as well as the recovery of all sums paid to Mr. Selinger
pursuant to the Separation Agreement. The plaintiff alleges that by approving
the terms of the Separation Agreement, the defendants breached their fiduciary
duties of loyalty and care to the Company by obligating the Company to pay Mr.
Selinger substantially more than his former employment agreement had required.
The Company considers the plaintiff's allegations to be without merit, and filed
a motion to dismiss the complaint on various grounds in February 1999. The
motion was argued in September 1999, and the parties are awaiting the Court's
decision.
In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"),
a company acquired by Graham-Field in June 1997, asserted certain claims in the
aggregate amount of approximately $3.2 million (inclusive of prejudgment
interest) against Graham-Field relating to alleged material misrepresentations
and omissions contained in the purchase agreement, certain press releases and
other public filings made by the Company with the Securities and Exchange
Commission relating to the Company's business, results of operations and
financial condition. Under the terms of the purchase agreement pursuant to which
Graham-Field acquired LaBac for approximately $9.1 million in common stock of
Graham-Field, all claims that are not resolved between the parties are to be
submitted to arbitration. The Company intends to defend the claims vigorously,
but the Company is not currently able to evaluate the likelihood of success in
this case or the range of potential loss.
On June 28, 1999, the Irving Tanning Company ("ITC"), a company
acquired as part of the acquisition of Fuqua on December 30, 1997 and sold by
Graham-Field on January 27, 1998 to a group including the former management of
ITC, asserted a claim for indemnification in the amount of $6.75
- 14 -
<PAGE> 15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
million, plus attorney's fees and costs, against Graham-Field for certain
alleged misrepresentations contained in the purchase agreement. The claim
relates to an alleged material adverse change in the business of ITC from
November 22, 1997 through January 27, 1998 and possibly prior to November 22,
1997. Under the terms of the purchase agreement, all claims that are not
resolved between the parties may be submitted to arbitration and no indemnity
payments shall be made unless all indemnity claims exceed $1.3 million. The
Company considers the indemnity claims to be without merit and intends to defend
the claims vigorously. The parties have selected a panel of arbitrators and are
beginning discovery.
The Company and its subsidiaries are parties to lawsuits and other
proceedings, including those relating to product liability and the sale and
distribution of its products. Except as discussed above, while the results of
such lawsuits and other proceedings cannot be predicted with certainty,
management does not expect that the ultimate liabilities, if any, will have a
material adverse effect on the consolidated financial position or results of
operations or cash flows of the Company.
11. SERIES D PREFERRED STOCK
Effective as of May 12, 1999, BIL Securities (Offshore) Ltd. ("BIL")
waived certain events of default under a $4 million note owing by the Company to
BIL (the "BIL Note") and exchanged all of its right, title and interest under
the BIL Note, in consideration of the issuance of 2,036 fully paid, validly
issued, non-assessable shares of the Company's Series D Preferred Stock (the
"Series D Preferred Stock"). The shares of Series D Preferred Stock are
non-voting, but have substantially the same economic rights as 2,036,000 shares
of Common Stock. Based on the closing price of the Common Stock on May 12, 1999,
that number of shares would have a market value of $4,072,000, which equals the
aggregate of the unpaid principal amount and accrued interest on the BIL Note.
Simultaneously with the closing of such transaction, Graham-Field and BIL
entered into an agreement dated as of May 12, 1999, which provided Graham-Field
with the sole and exclusive option for a period of one year following May 12,
1999, to convene a meeting of its stockholders or take such other corporate
action, in accordance with applicable laws and regulatory requirements, as may
be required to obtain applicable corporate approval to exchange each share of
Series D Preferred Stock for 1,000 shares of Common Stock.
12. CREDIT FACILITY
On August 12, 1999, the Company entered into the August 1999 Amendment
to its Credit Facility. Under the terms of the August 1999 Amendment, the
Company was provided with a Term Loan of $4.5 million, secured by certain real
estate and the existing collateral under the Credit Facility. The Term Loan
bears interest at IBJ's prime rate plus 2% and provides for the repayment of
principal at the rate of $250,000 per month commencing on September 1, 1999, and
increasing to $500,000 on January 1, 2000, with a balloon payment due upon the
maturity date of the Credit Facility. In addition, the August 1999 Amendment
provides for, among other things, a reduction in the maximum revolving advance
amount under the Credit Facility from $50 million to $35 million, the
elimination of certain availability borrowing base reserves through December 31,
1999, and an amendment to certain financial covenants. Under the terms of the
August 1999 Amendment, the interest rate on borrowings was increased from IBJ's
prime rate (8.25% at September 30, 1999) plus one percent to IBJ's prime rate
plus two percent. In connection with the August 1999 Amendment, the Company paid
a commitment fee of $300,000 and a waiver fee of $400,000, which was provided
for under the terms of the 1999 Amendments (as hereinafter defined).
Under the terms of the August 1999 Amendment, the Company is required
to pay an additional waiver fee (the "Waiver Fee") in the amount of $200,000 on
or before December 31, 1999, unless the
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<PAGE> 16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
Company either presents an acceptable business plan to the banks on or before
December 31, 1999, or repays in full all outstanding obligations under the
Credit Facility on or before December 31, 1999. Notwithstanding the foregoing,
in the event the Company is in receipt on or before December 31, 1999, of a
commitment letter, letter of intent or agreement to (i) sell substantially all
or a part of the assets or equity securities of the Company in a sale, merger,
consolidation or other similar transaction, which results in the repayment of
all of the outstanding obligations under the Credit Facility, or (ii) refinance
the indebtedness under the Credit Facility (the transactions referred to in
clauses (i) and (ii) are individually referred to as a "Significant
Transaction"), the payment date for the Waiver Fee will be extended until the
earlier to occur of the consummation of a Significant Transaction, which results
in the repayment of all outstanding obligations under the Credit Facility, or
March 31, 2000. The Credit Facility is secured by substantially all of the
assets of the Company, including the capital stock of certain of the Company's
subsidiaries and certain real estate.
The Company was not in compliance with the net cash flow covenant
contained in the Credit Facility as of September 30, 1999 and also does not
expect to be in compliance with the December 31, 1999 covenant. Amounts
outstanding under the Credit Facility were $19.7 million and $23.8 million at
November 12, 1999 and September 30, 1999, respectively. As of November 12, 1999,
the Company had unused borrowing availability under the Credit Facility of $3.6
million.
The Company is currently seeking a waiver of the covenant default from
its lenders and/or an amendment to the financial covenants. Under the terms of
the Credit Facility, the Company's lenders have the right to require immediate
repayment of all amounts borrowed or limit future advances, however as of
November 15, 1999, the lenders have not exercised such rights. In the event of a
demand for repayment in the future, such demand would result in a cross default
under the Indenture for the Company's $100 million Senior Subordinated Notes,
resulting in such notes becoming due and immediately payable. As a result, the
Company has classified its $100 million Senior Subordinated Notes as current
liabilities on the September 30, 1999 balance sheet.
In addition to seeking covenant waivers and/or amendments, the Company
is also pursuing alternative financing sources. There can be no assurance that
the Company will be successful in its efforts to receive waivers and/or
amendments, improve its cash flow or that it will be able to obtain alternative
financing on satisfactory terms in a timely manner to provide sufficient cash to
fund its operations. Should the lenders under the agreements described above
begin to exercise their remedies against the Company or if the Company makes a
determination that it will not be able to fund its operations outside a
bankruptcy, the Company would likely seek protection pursuant to Chapter 11 of
the United States Bankruptcy Code.
On April 22, 1999, the Company entered into an amendment to the Credit
Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999
Amendments"). The 1999 Amendments provided for, among other things, the waiver
of certain financial covenant defaults, an amendment to certain financial
covenants, a new undrawn availability covenant relating to scheduled interest
payments on the Senior Subordinated Notes, and other terms and provisions
contained in the Credit Facility, and an extension of the term of the Credit
Facility from December 10, 1999 to May 31, 2000. The 1999 Amendments reduced the
maximum revolving advance amount under the Credit Facility from $80 million to
$50 million, and reduced and/or eliminated certain availability and borrowing
base reserves.
- 16 -
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward-Looking Statements
This report on Form 10-Q and the Company's report on Form 10-K for the
year ended December 31, 1998 contains forward-looking statements as defined by
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements include, but are not
limited to, statements relating to (i) the Company's ability to continue as a
going concern (ii) the Company's ability to reduce operating expenses and
working capital investment and obtain additional financing to operate the
business, (iii) the expansion of the Company's market share, (iv) the Company's
growth into new markets, (v) the development of new products and product lines
to appeal to the needs of the Company's customers, (vi) the consolidation of the
Graham-Field Express distribution network, (vii) obtaining regulatory and
governmental approvals, (viii) the upgrading of the Company's technological
resources and systems, and (ix) the ability of the Company to implement its Year
2000 remediation plan and address the risk related to Year 2000 compliance.
Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the Company's ability to continue as a going concern, the
effect of economic and market conditions, the impact of the consolidation of
healthcare practitioners, the impact of healthcare reform, the Company's ability
to effectively integrate acquired companies, and realize certain manufacturing,
operational and distribution efficiencies and cost savings, the termination of
the Company's Wheelchair Supply Agreement with P.T. Dharma Polimetal ("P.T.
Dharma"), an Indonesian company, the ability of the Company to maintain its
gross profit margins, the ability to obtain financing and vendor credit support
necessary to operate the Company's business, the ability of the Company to
implement its Year 2000 remediation plan and address the risks related to Year
2000 compliance, the ability of the Company to successfully defend the class
actions arising out of the Company's public announcement on March 23, 1998 of
its financial results for the fourth quarter and year ended December 31, 1997,
the failure of the Company to successfully compete with the Company's
competitors that have greater financial resources, the loss of key management
personnel or the inability of the Company to attract and retain qualified
personnel, adverse litigation results, the acceptance and quality of new
software and hardware products which will enable the Company to expand its
business, the acceptance and ability to manage the Company's operations in
foreign markets, possible disruptions in the Company's computer systems or
distribution technology systems, possible increases in shipping rates or
interruptions in shipping service, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and
regulation, as well as the risks described from time to time in the Company's
filings with the Securities and Exchange Commission, which include this report
on Form 10-Q, the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and the Company's Registration Statement on Form S-4 dated as
of December 19, 1997.
The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, expressed or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
- 17 -
<PAGE> 18
Operating Revenues
Operating revenues for the three and nine month periods ended September
30, 1999 were $67,647,000 and $226,718,000, respectively, representing a
decrease of approximately 27% and 21%, respectively, from the same periods in
the prior year. The decrease is primarily due to the implementation of more
stringent credit policies, intense competition in the healthcare industry, the
effect of the Company's product rationalization programs to eliminate
unprofitable product lines, the negative impact of certain customers
experiencing financial difficulty, reduced vendor credit support on certain
distributed products and general market concerns regarding the future direction
of the Company.
Interest and Other Income
Interest and other income for the three and nine month periods ended
September 30, 1999 was $246,000 and $1,170,000, respectively, as compared to
$685,000, and $1,620,000, respectively, for the same periods in the prior year.
The net decrease is primarily due to interest income not recognized under a loan
arrangement with P.T. Dharma and dividends not received from Irving Tanning in
1999.
Cost of Revenues
Cost of revenues as a percentage of operating revenues was 73.1% and
71.0%, respectively, for the three and nine month periods ended September 30,
1999, as compared to 69.1% and 69.0%, respectively, recorded in the same periods
in the prior year. Gross margin decreased primarily due to intense competition
and pricing pressures within the healthcare industry and lower factory
utilization during 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
operating revenues for the three and nine month periods ended September 30, 1999
were 42.5% and 39.1%, respectively, as compared to 34.1% and 31.7%,
respectively, in the same periods in the prior year. The increase in selling,
general and administrative expenses as a percentage of operating revenue is
primarily the result of accounting, audit and other professional expenses
associated with the accounting investigation conducted by the Company's Audit
Committee relating to the Company's restatement of its financial results for
1996 and 1997, consulting fees incurred in connection with the initial
implementation of the Company's strategic and operating business plan, certain
severance charges and facility exit costs related to distribution center
closures (collectively, the "Non-Recurring Expenses"), a significant decrease in
operating revenues, higher bad debt expense in 1999, and costs related to the
services rendered by Jay Alix & Associates.
Excluding the Non-Recurring Expenses, selling, general and
administrative expenses for the three and nine month periods ended September 30,
1999 were $27,425,000 and $82,568,000, respectively, as compared to $29,217,000
and $88,798,000, respectively, in the same periods in the prior year. The
reduction in selling, general and administrative expenses is primarily related
to (i) lower distribution and warehousing costs as a result of cost savings from
certain distribution center closures in the first half of 1999 and lower
variable distribution expenses (principally outbound freight) due to reduced
revenues and (ii) lower selling and marketing expenses as a result of lower
personnel costs, cost reduction programs and reduced commissions due to lower
revenues.
Class Action Settlement
In August 1999, the Company reached an agreement in principle to settle
the Class Action, subject to certain contingencies described below. By letter
dated October 25, 1999, the Company advised the Court that the Company would not
be in a position to proceed with the agreement in principle due to changed
circumstances. Under the terms of the agreement in principle, the Class
- 18 -
<PAGE> 19
Action would have been settled for a payment of $20 million, of which $10
million would have been funded by the Company's insurance carrier and $10
million by the Company. The agreement in principle contemplated that the
Company's $10 million contribution would be paid either from the proceeds of the
sale of the Company or, at the Company's option, from funds otherwise available.
Under the terms of the agreement in principle, in the event the shares of the
common stock of the Company had been sold for an amount in excess of $3 per
share pursuant to a definitive sale/merger agreement, the shareholder class
would also be entitled to 25% of the premium in excess of $3 per share upon
terms and conditions to be agreed upon between the parties. The plaintiffs may
terminate the settlement if the Company does not enter into a definitive
sale/merger agreement on or before December 31, 1999, unless the Company has
funded its $10 million contribution to the settlement prior to an election to
terminate the settlement by the plaintiffs. The Company recorded a provision of
$10 million during the second quarter of 1999 reflecting the Company's share of
the proposed settlement.
Interest Expense
Interest expense for the three and nine month periods ended September
30, 1999 was $3,062,000 and $9,395,000, respectively, as compared to $3,412,000
and $9,219,000, respectively, for the same periods in the prior year. The
decrease for the three month period is the result of lower average borrowings
under the Credit Facility for the period, partially offset by higher interest
rates. The increase for the nine month period is due to a higher cost of
borrowings under the Credit Facility, partially offset by a decreased level of
borrowings.
Net Loss
Loss before income taxes for the three and nine month periods ended
September 30, 1999 was $13,369,000 and $41,083,000, respectively, as compared to
a loss before income taxes of $5,712,000 and $9,673,000 for the same periods in
the prior year.
The increase in the loss before income taxes was primarily due to a
decrease in operating revenues, an increase in cost of revenues as a percentage
of sales, an increase in selling, general and administrative expenses and a $10
million provision recorded for the proposed settlement of the Class Action.
For the three and nine month periods ended September 30, 1999, the
Company did not record an income tax benefit because a full valuation allowance
was recorded against the net deferred tax assets. The Company recorded an income
tax benefit of $1,287,000 for the third quarter of 1998.
The Company's business has not been materially affected by inflation.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended
September 30, 1999 was $8,503,000 compared to cash used in operating activities
of $32,174,000 in the same period in the prior year. This improvement is
primarily due to a reduction in receivables, inventories and other current
assets in 1999 and an increase in accounts payable and accruals in 1999, offset
by a reduction in earnings before non-cash items in 1999. The reduction in
inventories and receivables is the result of the implementation of initiatives
to reduce inventory and collect past due receivables as well as a significant
decline in sales.
On August 12, 1999, the Company entered into the August 1999 Amendment
to its Credit Facility, which provides for borrowings including letters of
credit and bankers acceptances. Under the terms of the August 1999 Amendment,
the Company was provided with a Term Loan of $4.5 million, secured by certain
real estate and the existing collateral under the Credit Facility. The Term Loan
bears interest at IBJ's prime rate plus 2% and provides for the repayment of
principal at the rate of $250,000
- 19 -
<PAGE> 20
per month commencing on September 1, 1999, and increasing to $500,000 on January
1, 2000, with a balloon payment due upon the maturity date of the Credit
Facility. In addition, the August 1999 Amendment provides for, among other
things, a reduction in the maximum revolving advance amount under the Credit
Facility from $50 million to $35 million, the elimination of certain
availability borrowing base reserves through December 31, 1999, and an amendment
to certain financial covenants. Under the terms of the August 1999 Amendment,
the interest rate on borrowings was increased from IBJ's prime rate (8.25% at
September 30, 1999) plus one percent to IBJ's prime rate plus two percent. In
connection with the August 1999 Amendment, the Company paid a commitment fee of
$300,000 and a waiver fee of $400,000, which was provided for under the terms of
the 1999 Amendment (as hereinafter defined).
Under the terms of the August 1999 Amendment, the Company is required
to pay an additional Waiver Fee in the amount of $200,000 on or before December
31, 1999, unless the Company either presents an acceptable business plan to the
banks on or before December 31, 1999, or repays in full all outstanding
obligations under the Credit Facility on or before December 31, 1999.
Notwithstanding the foregoing, in the event the Company is in receipt on or
before December 31, 1999, of a commitment letter, letter of intent or agreement
to (i) sell substantially all or a part of the assets or equity securities of
the Company in a sale, merger, consolidation or other similar transaction, which
results in the repayment of all of the outstanding obligations under the Credit
Facility, or (ii) refinance the indebtedness under the Credit Facility (the
transactions referred to in clauses (i) and (ii) are individually referred to as
a "Significant Transaction"), the payment date for the Waiver Fee will be
extended until the earlier to occur of the consummation of a Significant
Transaction, which results in the repayment of all outstanding obligations under
the Credit Facility, or March 31, 2000. The Credit Facility is secured by
substantially all of the assets of the Company, including the capital stock of
certain of the Company's subsidiaries and certain real estate.
The Company has incurred significant losses in 1999 and each of the
three years in the period ended December 31, 1998. These losses have arisen as a
result of declining sales and margins in 1999, a significant amount of merger,
restructuring and other expenses incurred in connection with previous
acquisitions, the failure to integrate effectively these acquisitions and
realize the benefits and synergies to be derived therefrom and the impact of
intense competition within the healthcare industry. The losses also included
significant charges relating to provisions for accounts receivable, inventory
and other asset write-offs in 1997 and 1998, a provision to increase the
valuation allowance on deferred tax assets in 1998, and certain professional,
consulting and other advisory fees and severance charges in 1999. Further, the
Company and certain of its directors and officers have been named as defendants
in at least fifteen putative class action lawsuits (the "Class Action") which
have been consolidated into an amended complaint. In August 1999, the Company
reached an agreement in principle to settle the Class Action, subject to certain
contingencies described herein. However, as further described in Note 10, on
October 25, 1999, the Company determined it would not be in a position to
proceed with the agreement in principle due to changed circumstances.
Management has continued with a program to reduce operating expenses,
reduce the investment in working capital and take other actions to improve its
cash flow. These actions include, but are not limited to, (i) the completion of
the activities contemplated by the Company's restructuring plan as further
described in Note 9; (ii) the initiation of inventory reduction and product
rationalization programs; (iii) the tightening of credit policies and payment
terms; (iv) the reduction in previously budgeted capital expenditures; (v) the
implementation of streamlined product pricing and product return guidelines;
(vi) the initiation of an aggressive program to collect past due accounts
receivable; and (vii) the realignment and consolidation of sales forces and
territories.
Notwithstanding the actions described above, the Company's losses have
continued to accelerate during 1999 and sales have continued to decline,
resulting in decreased liquidity. The Company was not in compliance with the net
cash flow covenant contained in its Credit Facility as of September 30, 1999 and
also does not expect to be in compliance with the December 31, 1999 net cash
- 20 -
<PAGE> 21
flow covenant. Amounts outstanding under the Credit Facility (including the Term
Loan described in Note 12) were $19.7 million and $23.8 million at November 12,
1999 and September 30, 1999, respectively. As of November 12, 1999, the Company
had unused borrowing availability under the Credit Facility of $3.6 million.
The Company is currently seeking a waiver of the covenant default from
its lenders and/or an amendment to the financial covenants. Under the terms of
the Credit Facility, the Company's lenders have the right to require immediate
repayment of all amounts borrowed or limit future advances, however as of
November 15, 1999, the lenders have not exercised such rights. In the event of a
demand for repayment in the future, such demand would result in a cross default
under the Indenture for the Company's $100 million Senior Subordinated Notes,
resulting in such notes becoming due and immediately payable. As a result, the
Company has classified its $100 million Senior Subordinated Notes as current
liabilities on the September 30, 1999 balance sheet.
In addition to seeking covenant waivers and/or amendments, the Company
is also pursuing alternative financing sources. There can be no assurance that
the Company will be successful in its efforts to receive waivers and/or
amendments, improve its cash flow or that it will be able to obtain alternative
financing on satisfactory terms in a timely manner to provide sufficient cash to
fund its operations. Should the lenders under the agreements described above
begin to exercise their remedies against the Company or if the Company makes a
determination that it will not be able to fund its operations outside a
bankruptcy, the Company would likely commence a Chapter 11 bankruptcy case under
the United States Bankruptcy Code.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
On April 22, 1999, the Company entered into an amendment to the Credit
Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999
Amendments"). The 1999 Amendments provided for, among other things, the waiver
of certain financial covenant defaults, an amendment to certain financial
covenants, a new undrawn availability covenant relating to scheduled interest
payments on the Senior Subordinated Notes, and other terms and provisions
contained in the Credit Facility, and an extension of the term of the Credit
Facility from December 10, 1999 to May 31, 2000. The 1999 Amendments reduced the
maximum revolving advance amount under the Credit Facility from $80 million to
$50 million, and reduced and/or eliminated certain availability and borrowing
base reserves.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Senior Subordinated Notes, the incurrence of
additional debt, liens, transactions with affiliates and certain consolidations,
mergers and acquisitions and sales of assets. In addition, Graham-Field is
prohibited from declaring or paying any dividend or making any distribution on
any shares of common stock or preferred stock of Graham-Field (other than
dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or applying any of its funds, property or assets
to the purchase, redemption or other retirement of any such shares, or of any
options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field is permitted
to pay cash dividends in any fiscal year in an amount not to exceed the greater
of (i) the amount of dividends due BIL under the terms of the Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends.
On August 4, 1997, Graham-Field issued its $100 million Senior
Subordinated Notes (the
- 21 -
<PAGE> 22
"Senior Subordinated Notes") under Rule 144A of the Securities Act of 1933, as
amended (the "Securities Act"). On February 9, 1998, Graham-Field completed its
exchange offer to exchange the outstanding Senior Subordinated Notes for an
equal amount of the new Senior Subordinated Notes, which have been registered
under the Securities Act. The new Senior Subordinated Notes are identical in all
material respects to the previously outstanding Senior Subordinated Notes. The
Senior Subordinated Notes bear interest at the rate of 9.75% per annum and
mature on August 15, 2007. The Senior Subordinated Notes are general unsecured
obligations of Graham-Field, subordinated in right of payment to all existing
and future senior debt of Graham-Field, including indebtedness under the Credit
Facility. The Senior Subordinated Notes are guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a senior subordinated basis by all
existing and future restricted subsidiaries of Graham-Field (the "Guaranteeing
Subsidiaries"). The Subsidiary Guarantees are subordinated in right of payment
to all existing and future senior debt of the Guaranteeing Subsidiaries,
including any guarantees by the Guaranteeing Subsidiaries of Graham-Field's
obligations under the Credit Facility.
The Company is a holding company with no assets or operations other
than its investments in its subsidiaries. The subsidiary guarantors are
wholly-owned subsidiaries of the Company and comprise all of the direct and
indirect subsidiaries of the Company. Accordingly, the Company has not presented
separate financial statements and other disclosures concerning each subsidiary
guarantor because management has determined that such information is not
material to investors.
Under the terms of the Indenture, the Senior Subordinated Notes are not
redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the
Senior Subordinated Notes are redeemable, in whole or in part, at the option of
Graham-Field, at certain redemption prices plus accrued and unpaid interest to
the date of redemption. In addition, prior to August 15, 2000, Graham-Field may,
at its option, redeem up to 25% of the aggregate principal amount of Senior
Subordinated Notes originally issued with the net proceeds from one or more
public offerings of common stock at a redemption price of 109.75% of the
principal amount, plus accrued and unpaid interest to the date of redemption;
provided that at least 75% of the aggregate principal amount of Senior
Subordinated Notes originally issued remain outstanding after giving effect to
any such redemption.
The Indenture contains customary covenants including, but not limited
to, covenants relating to limitations on the incurrence of additional
indebtedness, the creation of liens, restricted payments, the sales of assets,
mergers and consolidations, payment restrictions affecting subsidiaries and
transactions with affiliates. In addition, in the event of a change of control
of Graham-Field as defined in the Indenture, each holder of the Senior
Subordinated Notes will have the right to require Graham-Field to repurchase
such holder's Senior Subordinated Notes, in whole or in part, at a purchase
price of 101% of the principal amount thereof plus accrued and unpaid interest
to the date of repurchase. In addition, Graham-Field will be required in certain
circumstances to make an offer to purchase Senior Subordinated Notes at a
purchase price equal to 100% of the principal amount thereof plus accrued and
unpaid interest to the date of purchase, with the net cash proceeds of certain
asset sales. The Credit Facility, however, prohibits Graham-Field from
purchasing the Senior Subordinated Notes without the consent of the lenders
thereunder.
In addition, the Indenture prohibits the Company from declaring or
paying any dividend or making any distribution or restricted payment as defined
in the Indenture (collectively, the "Restricted Payments") (other than dividends
or distributions payable in capital stock of the Company), unless, at the time
of such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of
- 22 -
<PAGE> 23
such Restricted Payment (or, if such consolidated net income for such period is
a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash
proceeds received by the Company from contributions of capital or the issue or
sale since the date of the Indenture of capital stock of the Company or of debt
securities of the Company that have been converted into capital stock of the
Company.
Effective as of May 12, 1999, BIL waived certain events of default
under a $4 million note owing by the Company to BIL (the "BIL Note") and
exchanged all of its right, title and interest under the BIL Note, in
consideration of the issuance of 2,036 fully paid, validly issued,
non-assessable shares of the Company's Series D Preferred Stock. The shares of
Series D Preferred Stock are non-voting, but have substantially the same
economic rights as 2,036,000 shares of Common Stock. Based on the closing price
of the Common Stock on May 12, 1999, that number of shares would have a market
value of $4,072,000, which equals the aggregate of the unpaid principal amount
and accrued interest on the BIL Note. Simultaneously with the closing of such
transaction, Graham-Field and BIL entered into an agreement dated as of May 12,
1999, which provided Graham-Field with the sole and exclusive option for a
period of one year following May 12, 1999, to convene a meeting of its
stockholders or take such other corporate action, in accordance with applicable
laws and regulatory requirements, as may be required to obtain applicable
corporate approval to exchange each share of Series D Preferred Stock for 1,000
shares of Common Stock.
Year 2000
The following disclosure is a "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
Graham-Field has developed, and is in the process of implementing, a Year 2000
("Y2K") remediation plan, in an attempt to address the risks related to the Y2K
readiness of information technology ("IT") systems, non-IT systems and products,
and relationships with third parties. The Company has three major IT application
environments: distribution, manufacturing and warehouse automation. Management
has selected application packages that the Company believes are Y2K ready based
upon representations from the supplier of such application packages.
The distribution package includes the corporate general ledger,
accounts payable, accounts receivable, purchasing, inventory control and order
entry functions. General ledger, accounts payable and accounts receivable
upgrades were completed in 1997. Purchasing and inventory control functions were
completed in 1998, and the order entry and manufacturing system upgrades were
all completed in 1999.
Management believes, subject to completion of its review of the Y2K
readiness of its critical business partners (as discussed below) and completion
of testing, that the Distribution, Manufacturing, and Warehouse automation
systems should be Y2K ready. With respect to each of these application
environments, the Company is relying on the representations of suppliers and
other third parties whose activities may impact the Company's business
operations that they are Y2K ready.
The Company has engaged external resources to perform independent Y2K
evaluation and remediation of critical systems. The independent readiness
testing and remediation for the Distribution and Warehouse Automation systems
have been completed. The independent readiness testing for the Manufacturing
system is in process and is expected to be completed not later than December
1999.
The Company is in the process of reviewing its relationships with
high-priority business partners, including such areas as payroll, electronic
banking, EDI links, and freight systems, to determine their Y2K readiness
status. The Company is relying primarily on the representations of these
external parties about their Y2K readiness. The inability of the Company's
high-priority business partners to be Y2K ready could have a material adverse
effect on the business, financial position, and results of operations of the
Company.
With respect to non-IT system issues, the Company is in the process of
assessing the Y2K readiness of its products to determine if there are any
material issues associated with the Y2K problem, including any issues related to
embedded technology in these products. Towards that end, the Company has
identified its at-risk products (which include date data processing),
prioritized these products, and identified and addressed pertinent Y2K concerns.
- 23 -
<PAGE> 24
The Company is assessing the Y2K readiness representations made by suppliers.
Since the Company's Y2K plan is dependent in part upon these suppliers and
other key third parties being Y2K ready, there can be no assurance that the
Company's efforts in this area will be able to prevent a material adverse
effect on the Company's business, financial position, and results of operations
in future periods should a significant number of suppliers and customers
experience business disruptions as a result of their lack of Y2K readiness. The
Y2K readiness of the Company's products is posted on the Graham-Field web site
(www.grahamfield.com).
In the event that the Company's IT and non-IT systems are not Y2K
ready, the most reasonably likely worst case scenario is a material adverse
effect on the Company's business, financial position, and results of operations
in future periods. The Company is creating a contingency plan to address
potential Y2K failures of its critical IT and non-IT systems. This contingency
plan will include, but not be limited to, identification and mitigation of
potentially serious business interruptions, adjustment of inventory levels to
meet customer needs, and establishment of crisis response processes to address
unexpected problems. In developing the contingency plan, the Company will be
prioritizing its applications and developing emergency measures to address
potential failures of applications that are deemed significant to the Company's
business operations. Moreover, the Company's contingency plans will attempt to
address Y2K risks in connection with potential Y2K failures experienced by third
parties such as suppliers.
A Y2K program manager has been assigned to coordinate the computer
system upgrades and the Company's Y2K readiness plan. In 1998, the Company
expended approximately $150,000 on its Y2K plan, primarily related to the costs
of outside consulting and review services. In 1999, the Company expects to
expend approximately $250,000 for outside consulting assistance, and $250,000 in
the form of capital equipment leases to replace equipment that is determined not
to be Y2K ready. In addition, in 1999, the Company expects to expend $150,000
for an independent Y2K audit, and approximately $350,000 to undertake and
complete system testing. The Company's upgrades of IT systems were not
accelerated because of Y2K issues, and accordingly, such costs are not included
in the costs of the Y2K plan. With respect to non-IT system issues, the Company
is unable to estimate its remediation costs since it does not have information
available upon which to measure the cost of Y2K readiness in the non-IT system
areas. At this time, Management does not believe that such costs will have a
material effect on the business, financial position, and results of operations
of the Company.
The Company's statements regarding its Y2K readiness are
forward-looking and, therefore, subject to change as a result of known and
unknown factors. The estimates and expected completion dates described above are
based on information available at this time and may change as additional
information and assessment phase results become available.
- 24 -
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 1999, the Company did not hold any derivative
financial or commodity instruments. The Company is subject to interest rate risk
and certain foreign currency risk relating to its operations in Mexico and
Canada; however, the Company does not consider its exposure in such areas to be
material. The Company's interest rate risk is related to its Senior Subordinated
Notes, which bear interest at a fixed rate of 9.75%, and borrowings under its
Credit Facility, as further described in Note 12 to the Condensed Consolidated
Financial Statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 to the Condensed Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The 1999 annual meeting of shareholders was held on August 16, 1999.
Directors elected at the meeting were Rupert O.H. Morley and Louis A. Lubrano.
In addition, a proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the 1999 fiscal year was approved. The
tabulation of votes for these matters is as follows:
1. Election of Directors
<TABLE>
<CAPTION>
DIRECTOR FOR % AGAINST % ABSTAINED
-------- --- -- ------- -- ---------
<S> <C> <C> <C> <C> <C>
Rupert O.H. Morley 30,755,696 85 459,366 1 0
Louis A. Lubrano 30,753,407 85 461,655 1 0
</TABLE>
2. Appointment of Ernst & Young LLP
<TABLE>
<CAPTION>
FOR % AGAINST % ABSTAINED %
--- -- ------- -- --------- --
<S> <C> <C> <C> <C> <C> <C>
28,090,784 78 3,052,575 8 71,703 *
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. 3.6 - Amendment to Graham-Field's By-Laws, dated October 21, 1999.
Reports on Form 8-K:
Not applicable.
- -------------
*less than 1%.
- 25 -
<PAGE> 26
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Registrant)
<TABLE>
<S> <C>
Date: November 16, 1999 /s/ John G. McGregor
---- -------------------------------------
John G. McGregor
President and Chief Executive Officer
Date: November 16, 1999 /s/ Robert J. Gluck
---- -------------------------------------
Robert J. Gluck
Senior Vice President and
Chief Financial Officer
</TABLE>
- 26 -
<PAGE> 1
Exhibit 3.6
AMENDMENT TO BY-LAWS
OF
GRAHAM-FIELD HEALTH PRODUCTS, INC.
OCTOBER 21, 1999
The By-laws of Graham-Field Health Products, Inc. are hereby
amended as follows:
Article V of the By-laws shall be amended in its entirety to
read as follows:
"ARTICLE V
INDEMNIFICATION
A. The Corporation shall, to the fullest extent permitted by the
General Corporation Law of Delaware, indemnify any and all persons whom it shall
have power to indemnify against any and all expenses, liabilities or other
matters.
B. In addition to Article V A., the following provisions shall also be
effective as of October 21, 1999:
Section 1. Indemnity Undertaking. To the extent not prohibited
by law, the Corporation shall indemnify any person who is or was made, or
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or
investigative, including, without limitation, an action by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
such person, or a person of whom such person is the legal representative, is or
was a Director or Officer of the Corporation, or, at the request of the
<PAGE> 2
Corporation, is or was serving as a Director or Officer of any other corporation
or in a capacity with comparable authority or responsibilities for any
partnership, joint venture, trust, employee benefit plan or other enterprise (an
"Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid
in settlement and costs, charges and expenses (including attorneys' fees,
disbursements and other charges). Persons who are not directors or officers of
the Corporation (or otherwise entitled to indemnification pursuant to the
preceding sentence) may be similarly indemnified in respect of service to the
Corporation or to an Other Entity at the request of the Corporation to the
extent the Board at any time specifies that such persons are entitled to the
benefits of this Article V.
Section 2. Advancement of Expenses. From and after October 21,
1999, the Corporation shall, from time to time, reimburse or advance to any
Director or Officer or other person entitled to indemnification hereunder the
funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding ("Advances"); provided, however, that, if
required by the General Corporation Law of Delaware (the "General Corporation
Law"), such expenses incurred by or on behalf of any Director or Officer or
other person may be paid in advance of the final disposition of a Proceeding
only upon receipt by the Corporation of an undertaking, by or on behalf of such
Director or Officer (or other person indemnified hereunder), to repay any such
Advances
<PAGE> 3
if it shall ultimately be determined by final judicial decision from which there
is no further right of appeal that such Director, Officer or other person is not
entitled to be indemnified for such expenses. Notwithstanding the foregoing, the
making of any Advances to any person who is not a Director or Officer of the
Corporation as of October 21, 1999, shall be in the discretion of the
Corporation and subject to the provisions of Section 145(e) of the General
Corporation Law.
Section 3. Rights Not Exclusive. The rights to indemnification
and Advances provided by, or granted pursuant to, this Article V shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or reimbursement or advancement of expenses may have or hereafter be entitled
under any statute, the Certificate of Incorporation, these Bylaws, any
agreement, any vote of stockholders or disinterested Directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office.
Section 4. Continuation of Benefits. The rights to
indemnification and Advances provided by, or granted pursuant to, this Article V
shall continue as to a person who has ceased, or who after October 21, 1999
ceases, to be a Director or Officer (or other person indemnified hereunder) and
shall inure to the benefit of the executors, administrators, legatees and
distributees of such person.
Section 5. Binding Effect. The provisions of this Article V
shall be a contract between the Corporation, on the
<PAGE> 4
one hand, and each Director and Officer who serves in such capacity at any time
while this Article V is in effect and any other person entitled to
indemnification hereunder, on the other hand, pursuant to which the Corporation
and each such Director, Officer or other person intend to be, and shall be,
legally bound. No repeal or modification of this Article V shall affect any
rights or obligations with respect to any state of facts then or theretofore
existing or thereafter arising or any proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
Section 6. Procedural Rights. The rights to indemnification
and Advances provided by, or granted pursuant to, this Article V shall be
enforceable by any person entitled to such indemnification or Advances in any
court of competent jurisdiction. The burden of proving that such indemnification
or Advances is not appropriate shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such action that such indemnification or Advances is proper in
the circumstances nor an actual determination by the Corporation (including its
Board of Directors, its independent legal counsel and its stockholders) that
such person is not entitled to such indemnification or Advances shall constitute
a defense to the action or create a presumption that such person is not so
entitled. Such a person shall also be indemnified for any expenses incurred in
connection with successfully establishing
<PAGE> 5
his or her right to such indemnification or Advances, in whole or in part, in
any such proceeding.
Section 7. Service Deemed at Corporation's Request. Any
Director or Officer of the Corporation serving in any capacity (a) another
corporation of which a majority of the shares entitled to vote in the election
of its Directors is held, directly or indirectly, by the Corporation or (b) any
employee benefit plan of the Corporation or any corporation referred to in
clause (a) shall be deemed to be doing so at the request of the Corporation.
Section 8. Election of Applicable Law. Any person entitled to
be indemnified or to Advances as a matter of right pursuant to this Article V
may elect to have the right to indemnification or Advances interpreted on the
basis of the applicable law in effect at the time of the occurrence of the event
or events giving rise to the applicable Proceeding, to the extent permitted by
law, or on the basis of the applicable law in effect at the time such
indemnification or Advances is sought. Such election shall be made, by a notice
in writing to the Corporation, at the time indemnification or Advances is
sought; provided, however, that if no such notice is given, the right to
indemnification or Advances shall be determined by the law in effect at the time
indemnification or Advances is sought."
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AS INCLUDED IN THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,348
<SECURITIES> 0
<RECEIVABLES> 73,274
<ALLOWANCES> 0
<INVENTORY> 45,642
<CURRENT-ASSETS> 130,268
<PP&E> 40,584
<DEPRECIATION> 0
<TOTAL-ASSETS> 383,963
<CURRENT-LIABILITIES> 188,067
<BONDS> 2,126
0
35,672
<COMMON> 789
<OTHER-SE> 146,350
<TOTAL-LIABILITY-AND-EQUITY> 383,963
<SALES> 226,718
<TOTAL-REVENUES> 228,053
<CGS> 160,901
<TOTAL-COSTS> 160,901
<OTHER-EXPENSES> 88,840
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 9,395
<INCOME-PRETAX> (41,083)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,083)
<EPS-BASIC> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
