<PAGE> 1
Graham-Field Logo (Front)
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Graham-Field Logo (Back)
Dear Shareholders,
In view of the Company's 1998 performance, your Board has responded by
taking decisive steps to stabilize the operations of the Company and ensure that
we maximize shareholder value.
The Board itself has been reduced in size and is committed to carrying out
its duties to the highest standards. We intend to drive the Company forward by
providing strong leadership and making timely and effective decisions in the
light of thorough analysis.
In March 1999, we appointed Jack McGregor as President and CEO. Jack is a
principal with Jay Alix and Associates and has twenty-five years of experience
as a professional turnaround manager.
Jack has recruited some key individuals to Graham-Field to work with a
small Jay Alix team on improving operations. As you will see from his letter,
Jack has begun by working with Graham-Field's associates to focus on the basics
of the business. The Company has made changes to the product mix and sales
strategy and has launched initiatives to reduce unnecessary inventory and
collect delinquent accounts receivable. A new order-entry system has been
successfully installed and a number of manufacturing issues are being addressed.
To ensure that we examine every alternative route to maximizing shareholder
value, we have engaged Warburg Dillon Read to advise the Company on strategic
options.
In the meantime, on behalf of the Board, I would like to thank
Graham-Field's associates for their continuing efforts and our shareholders for
their support over the year. We look forward to delivering better results in
1999.
Sincerely yours,
/s/ Rupert O.H. Morley
--------------------------------------
Rupert O.H. Morley
Chairman of the Board
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Graham-Field Logo (Back)
Dear Shareholders,
1998 was a year of challenge and change for Graham-Field.
The Company's operating results suffered from the challenge of integrating
six acquisitions coupled with multiple management changes and continuing
competitiveness in the healthcare market. Restatement of financial results for
1996 and 1997 provided a distraction to management's attention to return the
Company to profitability.
During the past year, the Company implemented a number of initiatives to
reduce operating costs, and these efforts will continue on an accelerated pace
throughout 1999. These initiatives include consolidating the operations of six
Graham-Field Express distribution facilities to eliminate excess distribution
costs, consolidating certain manufacturing facilities which were duplicative,
and relocating the corporate offices from Hauppauge, New York to offices
available in the Bay Shore, New York facility.
In March 1999, the Board made the decision to enlist the help of Jay Alix &
Associates, professional turnaround managers, and appointed me as President and
Chief Executive Officer to spearhead the implementation of a new strategic plan.
My priorities are to improve profitability and maximize shareholder value. I
will utilize my twenty-five years of turnaround experience to institute
operating controls designed to cut costs, reengineer operating processes,
improve sales margins and restructure corporate debt. I will rely heavily on the
associates of Graham-Field to get these initiatives implemented on a fast-track
basis and from what I have seen in the last few months, they are well up to the
task. Let me share with you the major components of our plan and what has been
accomplished to date.
The Company is implementing a plan to rationalize our product line in order
to reduce inventory investment, which exceeded industry average at the end of
1998. During the first four months of this year, inventory levels were reduced
by $13 million. An additional $12 million reduction is anticipated by year-end
1999. The plan will provide for the proper mix, as well as the proper level of
inventory at each facility to ensure that we can provide superior customer
service. Improved inventory management will result in significantly improved
cash flow as well as an enhanced return on investment.
The failure to integrate the 1997 acquisitions led to a significant
increase in our SG&A. For 1998, SG&A as a percentage of operating revenue
increased to 37%, as compared to 28% in 1997. Lack of integration also resulted
in competing sales forces and duplicative administrative, inventory control and
information management functions. These are costs that Graham-Field will
aggressively seek to reduce.
The first phase of our plan to complete the integration was launched in
May. This phase focused on standardization of many sales and administrative
functions. The Company adopted a company-wide order-entry system, standardized
freight and returned goods policies, and implemented a standardized pricing
strategy. The Company will experience reduced transaction costs and a higher
level of customer service as a result of these steps.
The Company also implemented a uniform credit policy and launched stricter
enforcement procedures. The new credit policy will help the Company manage its
accounts receivable to acceptable levels. Graham-Field has engaged a leading
collection service to address and reduce existing receivable levels. Our
objective is
<PAGE> 4
to meet or be below the industry average by year-end. Accelerating collections
of existing receivables will enhance our cash flow and reduce our borrowing
costs.
In total, the Company has launched a comprehensive program to maximize
shareholder value. The action steps taken -- a new credit policy, pricing
schedule, streamlined product line, the consolidation of manufacturing and
distribution facilities -- are designed to focus on profitability. My philosophy
is to focus on the sale of our core proprietary products, which have
historically higher gross profit margins than our distributed product lines. In
the short term, I anticipate these programs may result in declining revenue
levels; however, they will provide the platform for increasing margins and a
better bottom line performance.
As I look forward to the remainder of 1999, my efforts will be focused on
maximizing shareholder value and achieving improved financial performance.
Significant progress has already been made in reducing costs, streamlining the
business and establishing Graham-Field as a valuable business partner with its
customers and suppliers. Our Consolidation Advantage Program strategy remains
the cornerstone of our sales and marketing efforts. This unique program enables
our extensive and diverse customer base to reduce their operating costs by
consolidating their purchasing procedures, reducing freight costs and
eliminating order minimums. In addition, the Company's time-tested brand name
products, such as Everest & Jennings and Lumex, continue to maintain the image
of quality and professional standards in our very demanding markets.
I would like to acknowledge the extraordinary efforts of our associates and
management team. They have shown an uncommon level of commitment under extremely
challenging conditions. I am convinced that their dedication and loyalty will
enable Graham-Field to achieve its turnaround goals and return the Company to a
leadership role in the healthcare industry.
We all remain dedicated to increasing shareholder value. We know the path
to enhance that value is to keep a sharp eye on our business practices, provide
unparalleled value and service to our customers and nurture the winning attitude
of our associates. Our mandate is clear. Let me close by thanking our
shareholders for their continuing support.
Sincerely yours,
/s/ John G. McGregor
--------------------------------------
John G. McGregor
President and Chief Executive Officer
2
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 1-8801
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK, PAR VALUE $.025 PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NOT APPLICABLE
----------------
(TITLE OF CLASS)
Indicate by check mark whether 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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
Based on the closing price on May 28, 1999, the aggregate market value of
voting stock held by non-affiliates of the registrant was approximately
$53,488,546.
As of the close of business on May 28, 1999, the registrant had 31,501,680
shares of common stock outstanding, of $.025 par value each.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
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<PAGE> 6
GRAHAM-FIELD HEALTH PRODUCTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
ITEM I. BUSINESS:
THE COMPANY
Graham-Field Health Products, Inc. ("Graham-Field" or the "Company") is a
manufacturer and distributor of healthcare products targeting the home
healthcare, medical/surgical, rehabilitation and long-term care markets in North
America, Europe, Central and South America, and Asia. The Company markets and
distributes a broad range of products under its own brand names and under
suppliers' names throughout the world, a significant portion of which is derived
from the United States. The Company maintains manufacturing and distribution
facilities throughout North America. The Company continuously seeks to expand
its product lines by increasing the number of distributorship agreements with
suppliers, and forming strategic alliances with other companies. The Company's
products are marketed principally to hospital, nursing home, physician, home
healthcare and rehabilitation dealers, healthcare product wholesalers and
retailers, including drug stores, catalog companies, pharmacies, home-shopping
related businesses, and certain governmental agencies.
The Company's principal products and product lines include wheelchairs and
power wheelchair seating systems, mobility products and bathroom safety
products, medical beds and patient room furnishings, blood pressure and
diagnostic products, adult incontinence products, specialty seating products,
wound care and urologicals, ostomy products, diabetic products, obstetrical
supplies, nutritional supplements, therapeutic support systems and respiratory
equipment and supplies. By offering a wide range of products from a single
source, the Company enables its customers to reduce purchasing costs, including
transaction, freight and inventory expenses.
The Company's strategic objective is to be a leading provider of medical
products to the rapidly growing home healthcare, medical/surgical,
rehabilitation and long-term care markets by offering a comprehensive product
line, single-source purchasing and technologically advanced, cost-effective
delivery systems. The cornerstone of the Company's sales and marketing strategy
is the Company's Consolidation Advantage Program ("C.A.P."). Through C.A.P., the
Company strives to become the most efficient and reliable low-cost provider of
medical products by offering the Company's customers the ability to reduce their
operating costs significantly by consolidating the purchase of multiple product
lines through a single source. The Company's sales and marketing representatives
consult with the Company's customers to identify the cost efficiencies and
savings that can be derived from purchasing all of their product needs through
the Company. By consolidating the purchase of multiple products through a single
source, the Company's customers can significantly reduce their operating costs
associated with the purchasing process, including the reduction of delivery
expenses, administrative costs and other expenses. The Company believes that its
C.A.P. program significantly improves the level of service to its customers by
streamlining the purchasing process, decreasing order turnaround time, reducing
delivery expenses, and providing inventory on demand.
RECENT DEVELOPMENTS
Management Changes. On March 24, 1999, the Company's Board of Directors
appointed John G. McGregor as President and Chief Executive Officer, and J.
Soren Reynertson as Senior Vice President and Chief Financial Officer. Mr.
McGregor is a principal and Mr. Reynertson is a senior associate with Jay Alix &
Associates ("JA&A"), internationally known experts in corporate turnarounds and
financial restructurings. In connection with such appointments, the Company
entered into an agreement with JA&A dated as of March 24, 1999, pursuant to
which JA&A agreed to provide the Company with the services of Mr. McGregor and
Mr. Reynertson and such other personnel as required from time to time.
Simultaneously with these appointments, the Company's Board of Directors elected
Rupert O.H. Morley, the Operations Director of the Company's largest
shareholder, Brierley Investments Limited, as its new Chairman of the Board.
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Hiring of Arthur D. Little. From January 1999 through April 1999, the
Company retained the services of Arthur D. Little, an international consulting
firm with expertise in manufacturing, distribution, and business strategy in the
healthcare industry, to support the initial implementation of the Company's 1999
strategic operating and business plan. The primary goal of the Company's plan is
to return the Company to profitability through the implementation of a broad
range of initiatives. The Company has identified various priority projects
relating to the rationalization of the Company's distribution and manufacturing
network; the elimination of duplicate distribution and manufacturing facilities;
the realignment and consolidation of the Company's various sales forces; the
development of customer focus differentiation strategies, inventory
management/product profitability programs, and product rationalization programs;
the establishment of new product management and customer service process designs
to revitalize the Company's proprietary product lines; the rationalization of
the Company's product lines; and the development of working capital reduction
programs relating to inventory and accounts receivable. The Company is in the
process of implementing the priority projects.
Hiring of Warburg Dillon Read, LLC. In April 1999, the Company announced
that it had retained the investment banking firm of Warburg Dillon Read, LLC to
work with management to review all strategic alternatives for the Company to
maximize stockholder value, including, but not limited to, the sale of all or
part of the Company. The Company is in the process of analyzing its strategic
alternatives with its investment banker.
Recent Losses. The Company has incurred significant losses in each of the
three years in the period ended December 31, 1998 and in the first quarter of
1999. These losses have arisen as a result of a significant amount of merger,
restructuring and other expenses related to acquisitions completed in 1996 and
1997, 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 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 and other
advisory fees in the first quarter of 1999, all of which management believes to
be substantially non-recurring. 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.
As of June 30, 1998, December 31, 1998, and March 31, 1999, the Company was
not in compliance with certain financial covenants, and other terms and
provisions contained in its Senior Secured Revolving Credit Facility, as amended
(the "Credit Facility"), with IBJ Whitehall Business Credit Corp. (formerly
known as IBJ Schroder Business Credit Corporation), as agent ("IBJ"). On April
22, 1999, the Company entered into an amendment to the Credit Facility, which
was subsequently amended as of May 21 and June 3, 1999 (the "1999 Amendment"),
which provided for, among other things, a waiver of these defaults, an amendment
to certain financial covenants, a new undrawn availability covenant relating to
scheduled interest payments on the Senior Subordinated Notes (as hereinafter
defined), and other terms and provisions consistent with the Company's business
plan for the remainder of 1999, and an extension of the term of the Credit
Facility from December 10, 1999 to May 31, 2000.
In response to the losses incurred in 1997, 1998 and the first quarter of
1999, management has commenced a program to reduce operating expenses, improve
gross margins and reduce the investment in working capital during the remainder
of 1999 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 1997 restructuring plan; (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 currently expects
that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment.
2
<PAGE> 8
Management also believes that, if necessary, it could sell certain assets to
meet cash requirements, which would require the consent of the lenders under the
Credit Facility.
Management believes that such objectives are attainable, however, there can
be no assurance that the Company will be successful in its efforts to improve
its cash flow from operations or that it will be able to obtain such additional
borrowing availability on satisfactory terms in a timely manner to provide
sufficient cash for operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company's consolidated financial
statements do not include any adjustments 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.
Matters Relating to Accounting Errors and Irregularities. 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. 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 financial information contained herein
has been restated to incorporate all relevant information obtained from the
investigation.
The restated loss before income taxes for the years ended December 31, 1997
and 1996 were $37,009,000 and $11,482,000, respectively, as compared to the
originally reported loss before income taxes for the years ended December 31,
1997 and 1996 of $30,228,000, and $8,955,000, respectively. The restated net
loss for the years ended December 31, 1997 and 1996 were $26,417,000 and
$13,574,000, respectively, as compared to the originally reported net loss for
the years ended December 31, 1997 and 1996 of $22,893,000 and $12,609,000,
respectively. In addition, the restated operating revenues for the years ended
December 31, 1997 and 1996 were $261,672,000 and $142,711,000, respectively, as
compared to originally reported operating revenues for the years ended December
31, 1997 and 1996 of $261,981,000 and $143,083,000, respectively.
The Company has also restated the financial results for the first, second
and third quarters of 1998 to correct for certain improperly recorded
transactions. The 1998 adjustments are unrelated to the investigation conducted
by the Company's Audit Committee, which was announced in March 1999.
INDUSTRY OVERVIEW
Graham-Field distributes its medical, surgical and other healthcare
products primarily into the home healthcare, medical/surgical, rehabilitation
and long-term care markets.
Home Healthcare. Graham-Field believes that the home healthcare market is
growing rapidly due to the shift in the provision of healthcare away from more
expensive acute care settings into lower cost home care settings. The rising
cost of healthcare has caused many payors of healthcare expenses to look for
ways to contain costs. Healthcare payors have, in many cases, altered their
reimbursement patterns to encourage home healthcare whenever appropriate.
The over 65 age group represents the vast majority of home healthcare
patients and continues to grow. In 1993, the United States Census Bureau
estimated that by the year 2000 approximately 35 million people, or 13% of the
population in the United States, will be over 65. Graham-Field believes that
growth of the home healthcare market will exceed that of institutional care, as
many medical professionals and patients prefer home healthcare because it allows
greater patient independence, increased patient responsibility and improved
responsiveness to treatment due to the enhanced psychological benefits of
receiving treatment in comfortable and familiar surroundings. Home healthcare is
more cost effective than facility-based care and, in many cases, more desirable
to the patient.
Medical/Surgical. Graham-Field believes that rapid growth in the
medical/surgical distribution industry has resulted primarily from
medical/surgical supply and equipment manufacturers increasing the number and
volume of products sold through distributors and an overall increase in the
volume of medical/surgical supplies being consumed. This overall increase in
consumption is due primarily to the aging of the U.S. population and the
development of new medical procedures.
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<PAGE> 9
Historically, the medical/surgical supply distribution industry has been
highly fragmented. During the past ten years, the overall healthcare market has
been characterized by the consolidation of healthcare providers into larger and
more sophisticated entities which are seeking to lower total product costs and
incremental services from their medical/surgical supply distributors. These
trends have led to a significant and ongoing consolidation of the distribution
industry and the formation of a small number of industry participants with
national capabilities.
Rehabilitation Market. The rehabilitation market includes a broad range of
medical products provided to individuals in order to minimize physical and
cognitive impairments, maximize functional ability and restore lost functional
capacity. The focus of rehabilitation medical products is to improve the
physical and cognitive impairments resulting from illness or injury, and to
restore or improve functional ability so that individuals can return to work and
lead independent and fulfilling lives. Typically, rehabilitation medical
products are provided by a variety of healthcare professionals including
rehabilitation nurses, physical therapists, occupational therapists, speech
language pathologists, respiratory therapists, recreation therapists, social
workers, psychologists, rehabilitation counselors and others.
Graham-Field believes that the demand for rehabilitation medical products
will continue to be driven by advances in medical technologies, an aging
population and the recognition on the part of the payor community (insurers,
self-insured companies, managed care organizations and federal, state and local
governments) that appropriately administered rehabilitation medical products can
lower overall healthcare costs as well as improve the quality of life. Studies
conducted by insurance companies demonstrate the ability of rehabilitation
medical products to significantly reduce the cost of future care. Further,
reimbursement changes have encouraged the rapid discharge of patients from
acute-care hospitals while they remain in need of rehabilitation medical
products.
Long-Term Care Market. The long-term care market encompasses a broad range
of healthcare products provided to the elderly and to other patients with
medically complex needs who can be cared for outside of the acute care hospital
environment and generally cannot be efficiently and effectively cared for at
home. Long-term care facilities offer skilled nursing care, routine
rehabilitation therapy and other support services, primarily to elderly
patients. Long-term care facilities require ongoing medical and nursing
supervision and access to a broad range of medical products. The Company
believes that the demand for medical products provided to the long-term care
market will increase substantially during the next decade due primarily to
demographic trends, advances in medical technology and the impact of cost
containment measures by government and private pay sources. At the same time,
government restrictions and high construction and start-up costs are expected to
limit the supply of long-term care facilities.
Graham-Field believes that the major healthcare industry trends impacting
the markets it serves are as follows:
Consolidation Within the Industry. Continued growth in managed care and
capitated plans have pressured independent home medical equipment suppliers to
find ways of becoming more cost competitive with national providers. This has
also led to consolidations among manufacturers and distributors as smaller
companies with limited product lines seek out partners with potential for
significant synergies. In addition, certain healthcare product suppliers are
consolidating in order to promote better utilization of resources and improve
service to customers, thereby maintaining margin and market share. Graham-Field
believes healthcare supply companies will be required to use size and economies
of scale to their competitive advantage to be successful.
In recent years, concern over the rising cost of healthcare has sparked a
marked shift toward lower priced products and services in the industry. This
shift has resulted in the substitution of simpler and more generic products, as
well as price concessions to payors from healthcare providers. As healthcare
moves from largely fee-for-service reimbursement to prepaid and capitated
payment systems, this trend is expected to intensify. Graham-Field believes that
high-volume, full-line providers will have a competitive advantage over those
servicing only niche markets. These trends are causing significant consolidation
of healthcare providers.
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<PAGE> 10
Increasing Emphasis on Value-Added Services Oriented Towards Total Cost
Reduction. Graham-Field believes that the administrative costs associated with
purchasing, tracking and carrying inventory and distributing medical products
are often greater than the cost of the supplies. As a result, customers are
increasingly evaluating distributors not only on the basis of product cost and
timely and accurate delivery, but also on their ability to provide value-added
services that lower the administrative and other overhead costs associated with
medical and surgical supplies. For example, customers increasingly seek
distributors that can deliver inventory on a "just-in-time" basis. In addition,
certain customers are seeking distributors that can provide programs to assist
in inventory management.
Shift of Healthcare Delivery to Home Healthcare Markets. Graham-Field
believes that the delivery of healthcare is shifting from acute care settings to
alternate sites, such as physician offices and extended care facilities, due to
cost containment pressures from government and private reimbursement sources.
The growth of managed care has resulted in (i) more procedures being performed
in outpatient settings, (ii) the length of stay for inpatient procedures
continuing to fall and (iii) hospitals sharing financial risk as they take on
capitated contracts from managed care entities. These trends have led to a
general increase in the level of care required by alternate-site patients as
well as the emergence of specialized long-term care facilities, leading to
increased demand for home healthcare products. The Company believes that demand
for home healthcare and medical and surgical supplies in the alternate-site
markets will increase at a faster rate than the overall industry.
BUSINESS STRATEGY
The Company's strategic objective is to become a leading provider of
low-cost, high-quality medical products to the rapidly growing home healthcare,
medical/surgical, rehabilitation and long-term care markets by offering a
comprehensive product line, single source purchasing and technologically
advanced, cost-effective delivery systems. To achieve this objective and to
improve its profitability, the Company is pursuing the following strategies:
Offer Comprehensive Product Line. The Company markets and distributes a
broad range of products under its own brand names and under suppliers' names
throughout the world, and believes that it provides one of the most extensive
product offerings in each of the markets it serves. Through the breadth of its
product offerings and its competitive pricing, the Company strives to be a
single source supplier to the home healthcare, medical/surgical, rehabilitation
and long-term care markets. As a result of recent acquisitions, the Company has
expanded its product line through enhanced manufacturing and out-sourcing
capabilities, which furthers the Company's objective to become the most
efficient and reliable low-cost provider of medical products. The Company
continuously seeks to expand its product lines by increasing the number of
distributorship agreements it has with suppliers, and forming strategic
alliances with other companies.
Focus on Value-Added Services. In order to differentiate itself from its
competitors and gain a competitive advantage in the industry, the Company
focuses on providing its customers with value-added services. Currently, the
Company has the following three programs in place which it believes furthers
this objective:
Consolidation Advantage Program. The C.A.P. program offers customers
the ability to significantly reduce their operating costs by consolidating
the purchase of multiple product lines through a single source. C.A.P.
significantly improves the level of service to the Company's customers by
streamlining the purchasing process, decreasing order turnaround time,
reducing delivery expenses, lowering administrative costs, and providing
inventory on demand. See "Value Added Services -- Consolidation Advantage
Program".
Graham-Field Express. The Graham-Field Express Program enables the
Company to provide "same-day" and "next-day" service to home healthcare
dealers of strategic home healthcare products, including Temco patient
aids, adult incontinence products, Everest & Jennings wheelchairs, Smith &
Davis homecare beds, nutritional supplements, and other freight intensive
and time sensitive products through its satellite Graham-Field Express
facilities. The Company intends to moderate the growth of the
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Graham-Field Express Program and may further consolidate the Graham-Field
Express distribution network. See "Value-Added Services -- Graham-Field
Express".
Seamless Distribution Program. The Seamless Distribution Program
enables orders to be shipped from the Company's distribution facilities to
home healthcare end-users on behalf of the Company's customers. This
program enables these customers to realize significant reductions in their
operating costs by eliminating the receiving and shipping process and
inventory carrying costs, while reducing the product delivery time to end
users. See "Value-Added Services -- Seamless Distribution Program".
ACQUISITIONS
Although Graham-Field has historically pursued acquisitions on an
opportunistic basis, the Company does not intend to pursue any acquisitions in
the near future. Set forth below is a summary of acquisitions completed in 1996
and 1997:
<TABLE>
<CAPTION>
DATE COMPANY LINE OF BUSINESS
- ---- ------- ----------------
<S> <C> <C>
September 1996.... V.C. Medical Distributors, Inc. Medical products distributor in
Puerto Rico.
November 1996..... Everest & Jennings International Manufacturer and distributor of
Ltd. wheelchairs and homecare beds.
February 1997..... Motion 2000 Inc. and Motion 2000 Independent wholesalers of
Quebec Inc. rehabilitation medical
products in Canada.
March 1997........ Kuschall of America, Inc. Manufacturer of pediatric
wheelchairs, high performance
adult wheelchairs and other
rehabilitation products.
June 1997......... LaBac Systems, Inc. Manufacturer of custom power
wheelchair seating systems and
manual wheelchairs.
August 1997....... Medi-Source, Inc. Wholesaler of medical sundry
products.
August 1997....... Medical Supplies of America, Distributor of home healthcare
Inc. products.
December 1997..... Fuqua Enterprises, Inc. Manufacturer and distributor of
(currently, Lumex/Basic American durable medical products and
Holdings, Inc.) furnishings.
</TABLE>
V.C. Medical. In September 1996, Graham-Field acquired V.C. Medical
Distributors, Inc. ("V.C. Medical"), a wholesale distributor of medical products
in Puerto Rico. V.C. Medical currently operates under the name "GF Express
(Puerto Rico)," and provides "same-day" and "next-day" service to home
healthcare dealers of certain strategic home healthcare products, including
patient aids, Everest & Jennings wheelchairs and homecare beds, adult
incontinence products and nutritional supplements. Through GF Express (Puerto
Rico), Graham-Field has increased its presence in Puerto Rico.
Everest & Jennings. In November 1996, Graham-Field acquired Everest &
Jennings International Ltd. ("Everest & Jennings"). Through its subsidiaries,
Everest & Jennings manufactures a broad line of wheelchairs and distributes
homecare beds. Everest & Jennings' principal manufacturing and distribution
facilities are located in Earth City, Missouri; Toronto, Canada and Guadalajara,
Mexico.
Motion 2000 and Motion Quebec. In February 1997, Graham-Field acquired
Motion 2000 and its wholly-owned subsidiary, Motion Quebec. Motion 2000 and
Motion Quebec (collectively, "Motion 2000") currently operate as a division of
Everest & Jennings Canadian Limited, a wholly-owned subsidiary of the Company
("Everest & Jennings Canada"). Motion 2000 distributes a line of rehabilitation
products, including walkers, rollators, cushion products and pediatric
wheelchair products, and manufactures seating products. The strategic
combination of Motion 2000 with the operations of Everest & Jennings Canada,
along with Graham-Field's broad product lines, has positioned Graham-Field as
one of the leading suppliers of the
6
<PAGE> 12
broadest range of products available from a single source in Canada, and as a
leading supplier of rehabilitation products, including high performance adult
and pediatric wheelchairs, home care wheelchairs, patient aids and other
wheelchair products.
Kuschall. In March 1997, Everest & Jennings, a wholly-owned subsidiary of
the Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products. The acquisition of Kuschall has expanded Graham-Field's
presence in the rehabilitation and pediatric wheelchair market. The pediatric
wheelchair product line of Kuschall has broadened Everest & Jennings'
rehabilitation product lines, and provided Graham-Field with the ability to
market and distribute its products into Japan, New Zealand and Australia through
Kuschall's established distributor relationships.
LaBac. In June 1997, Graham-Field acquired LaBac Systems, Inc. ("LaBac"),
a manufacturer and distributor of custom power wheelchair seating systems and
manual wheelchairs. The acquisition of LaBac has provided Graham-Field with one
of the premier custom power wheelchair seating product lines in the healthcare
industry, expanded the Everest & Jennings power wheelchair product lines and
enhanced the manufacturing and research and development capabilities of
Graham-Field. The LaBac products, which have a reputation for excellence and
quality, have broadened the Everest & Jennings and Kuschall product lines and
provided additional support and expertise to Graham-Field in the rehabilitation
market.
Medi-Source. In August 1997, Graham-Field acquired Medi-Source, Inc.
("Medi-Source"), a wholesale distributor of medical sundry products to the
medical/surgical market. The acquisition of Medi-Source has expanded
Graham-Field's presence in the medical/surgical market.
Medapex. In August 1997, Graham-Field acquired Medical Supplies of
America, Inc. ("Medapex"), a wholesale distributor of home healthcare products.
The acquisition of Medapex has provided Graham-Field with additional
distribution capabilities in the Southeast region of the United States, and
enabled Graham-Field to utilize Medapex's telemarketing operations to provide
increased customer service to the combined customer base.
Fuqua. In December 1997, Graham-Field acquired Fuqua Enterprises, Inc.
(currently, Lumex/Basic American Holdings, Inc.) ("Fuqua"), which consisted of
two (2) separate and distinct businesses: a medical products business and
leather tanning business. The leather tanning business was subsequently sold by
Graham-Field on January 27, 1998. The medical products business of Fuqua,
through its subsidiaries, Lumex Medical Products, Inc. ("Lumex"), Basic American
Medical Products, Inc. ("Basic American") and Prism Enterprises, Inc. ("Prism"),
manufactures and distributes a variety of products, including medical beds,
patient room furnishings, bathroom safety products, mobility products, specialty
seating products, vacuum pumps, heat and cold packs, and therapeutic support
systems. The acquisition of Fuqua has provided Graham-Field with additional
manufacturing capabilities, with the well-established medical product brand
names of Lumex, Basic American and Prism, and expanded Graham-Field's presence
in the long-term, acute care and consumer markets.
PRODUCTS
Graham-Field markets and distributes a broad range of healthcare products
under its own brand names and under suppliers' names. Graham-Field's products
are marketed to dealers and other customers, principally hospital, nursing home,
physician, home healthcare and rehabilitation dealers, healthcare product
wholesalers and retailers, including drug stores, catalog companies, pharmacies,
home-shopping related businesses, and certain governmental agencies.
Product lines marketed by Graham-Field include wheelchairs and power
wheelchair seating systems, mobility products and bathroom safety products,
medical beds and patient room furnishings, blood pressure and diagnostic
products, adult incontinence products, specialty seating products, wound care
and urologicals, ostomy products, diabetic products, obstetrical supplies,
nutritional supplements, therapeutic support systems and respiratory equipment
and supplies.
7
<PAGE> 13
Basic American operates through its divisions, Simmons Health Care, Omni
Manufacturing and SSC Medical, which manufacture and distribute medical beds,
patient room furnishings, patient aids and mobility products primarily for the
long-term and acute care markets. Basic American serves as one-stop shopping for
a customer looking to refurbish or newly construct a long-term care patient
room. Consistent with the one-stop shopping approach, Basic American maintains
several in-house interior designers who provide design services to customers
looking to refurbish or construct long-term care facilities.
Prism manufactures and distributes therapeutic heat and cold pack products,
and obstetrical vacuum pump systems for the acute care, long-term care and
consumer markets. Prism also sells heat and cold packs through a "show dealer"
network, which includes cart/kiosk retailing programs located in consumer
outlets.
Graham-Field's principal manufactured and proprietary products include the
following:
<TABLE>
<CAPTION>
PRODUCT LINE PRIMARY PRODUCTS
- ------------ ----------------
<S> <C>
Everest & Jennings....................... Wheelchairs
Lumex.................................... Mobility products, bathroom safety
products, and specialty seating products
Smith & Davis............................ Homecare beds
LaBac.................................... Power wheelchair seating systems
Omni..................................... Medical beds and furnishings
Simmons.................................. Medical beds and furnishings
SSC Medical.............................. Medical beds and furnishings
Prism.................................... Obstetrical supplies, heat and cold packs
Temco.................................... Mobility products, bathroom safety
products, and specialty seating products
Labtron.................................. Blood pressure and diagnostic products
John Bunn................................ Respiratory products
</TABLE>
The following is a summary of the Company's revenues from its principal
product lines or products:
<TABLE>
<CAPTION>
% OF TOTAL REVENUE
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Wheelchairs and related positioning products................ 22% 33% 7%
Ambulatory and patient aids................................. 12% 8% 5%
Incontinence products....................................... 6% 7% 8%
Sphygmomanometers........................................... 3% 3% 5%
Wound care and ostomy products.............................. 4% 4% 6%
</TABLE>
No other product line or product accounted for more than 5% of annual
revenues in each of the years during the three year period ended December 31,
1998.
During the year ended December 31, 1998, approximately 42% of
Graham-Field's revenues were derived from products manufactured by Graham-Field,
approximately 26% were derived from imported products (designed and/or
manufactured to Graham-Field's specifications by third parties), and
approximately 32% were derived from products purchased from domestic sources.
VALUE-ADDED SERVICES
Consolidation Advantage Program. The C.A.P. program is the cornerstone of
Graham-Field's sales and marketing strategy. Through C.A.P., Graham-Field
strives to become the most efficient and reliable low-cost provider of medical
products. Graham-Field's sales and marketing representatives consult with
Graham-Field's customers to identify the purchasing efficiencies and cost
savings that can be derived from consolidating their purchases of medical
products with Graham-Field. By consolidating the purchase of multiple product
lines through a single source, Graham-Field's customers can significantly reduce
their operating costs. Graham-Field believes that C.A.P. significantly improves
the level of service to Graham-Field
8
<PAGE> 14
customers by streamlining the purchasing process, decreasing order turnaround
time, reducing delivery expenses, and providing inventory on demand.
Graham-Field Express. In 1996, as part of Graham-Field's commitment to
providing superior customer service, Graham-Field introduced its Graham-Field
Express Program in the Bronx, New York. This program enables Graham-Field to
provide "same-day" and "next-day" service to home healthcare dealers of
strategic home healthcare products, including Temco and Lumex patient aids,
adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis
homecare beds, nutritional supplements, and other freight intensive and time
sensitive products through its Graham-Field Express satellite facilities. The
Graham-Field Express Program differs from Graham-Field's standard distribution
model in that the Graham-Field Express Program focuses on "same-day" and
"next-day" service to home healthcare dealers of a limited number of strategic
home healthcare products. The Company intends to moderate the growth of the
Graham-Field Express Program and may further consolidate the Graham-Field
Express distribution network.
As of March 31, 1999, Graham-Field Express facilities were operating from
distribution facilities located in the Bronx, New York; Puerto Rico; Baltimore,
Maryland; Cleveland, Ohio; and Boston, Massachusetts.
Seamless Distribution Program. Graham-Field has recently developed a
seamless distribution program which enables Graham-Field to ship orders directly
from its distribution facilities to home healthcare end-users on behalf of
Graham-Field's customers. The Seamless Distribution Program enables customers to
realize significant reductions in their operating costs by eliminating costs
associated with receiving, shipping and inventory management, while reducing the
product delivery time to end-users. This program currently operates from the
Company's distribution facility located in St. Louis, Missouri.
SALES AND MARKETING
Graham-Field's sales and marketing strategies are developed on a
market-by-market basis through each of its business units -- Home
Healthcare/Rehabilitation, Medical/Surgical, Basic American, Prism and
International. While Graham-Field's sales and marketing strategies are developed
and conducted on a business unit basis, the sale of Graham-Field's products
generally overlap all business units. Each of the business units has a dedicated
sales force consisting of direct, full-time sales employees and independent
sales representatives. The full-time sales employees receive both salary and
commission, while the independent sales representatives work solely on
commission. The rehabilitation specialists representing the Home
Healthcare/Rehabilitation business unit conduct training activities for the
benefit of dealers and their personnel, physical and occupational therapists,
and other healthcare professionals. The training primarily focuses on the
features and benefits of Graham-Field's rehabilitation products, including the
products of Everest & Jennings, Kuschall, LaBac, Lumex and other rehabilitation
product lines of Graham-Field, and also covers the proper fitting and use of
such rehabilitation products. As a result of recent acquisitions, Graham-Field
has expanded its telemarketing program to enhance the sales and marketing
efforts of its sales forces. Graham-Field employs an extensive telemarketing
program, consisting of telemarketing sales personnel located in Atlanta, Georgia
and Bay Shore, New York, which targets approximately 8,000 customers nationwide.
The international sales group consists of in-house sales employees, as well
as representatives located overseas. In order to expand its presence in the
European market, Graham-Field entered into a five-year exclusive European
distribution agreement in September 1997 for a wide range of its products with
Thuasne, a manufacturer and supplier of medical products throughout Europe. The
European distribution agreement with Thuasne was converted into a non-exclusive
distribution arrangement in January 1999.
Graham-Field markets its products using a variety of programs and materials
including print advertising, product brochures, an extensive library of product
line video tapes, cooperative advertising programs and sales promotions to
reinforce Graham-Field's ongoing commitment to satisfy the needs of its
customers. A CD-ROM version of Graham-Field's catalog and an Internet
interactive website are currently being developed. In 1998, Graham-Field
continued the implementation of its new marketing programs, which include
several high-visibility marketing programs, including a new strategic
advertising campaign, packaging designs, and new logos and catalogs.
9
<PAGE> 15
CUSTOMERS
Graham-Field's products are marketed principally to hospital, nursing home,
physician, home healthcare and rehabilitation dealers, healthcare product
wholesalers and retailers, including drug stores, catalog companies, pharmacies,
home-shopping related businesses, and certain governmental agencies. No single
customer or buying group accounted for more than 10% of Graham-Field's revenues
in 1998. Graham-Field has supply arrangements with a number of customers,
including Baxter Healthcare Corporation, Allegiance Healthcare Corporation,
General Medical (a subsidiary of McKesson), Owens & Minor, The Med Group,
Homecare Providers Co-Op, Physician Sales and Services, Sysco Corporation, U.S.
Rehab., Henry Schein, Inc, Equipnet, Inc., VGM Associates, Inc., and Binson's
Home Healthcare Center.
The Home Healthcare/Rehabilitation business unit markets and sells its
products to durable medical equipment suppliers, home healthcare equipment
suppliers, respiratory supply dealers, specialty retailers and independent
pharmacies. Graham-Field believes that it transacts business with substantially
all significant home healthcare dealers in the United States. The Home
Healthcare/Rehabilitation business unit also markets and sells its products to
the consumer market consisting of drug store chains, mass merchandisers, and
department stores. Consumers who purchase from such customers of Graham-Field
usually do so upon the advice of physicians, hospital discharge planners, nurses
or other professionals. The Medical/Surgical business unit markets and sells its
products to medical and surgical supply dealers. Graham-Field believes that it
sells to substantially all significant medical and surgical supply dealers in
the United States. In general, the dealers, wholesalers and retailers to whom
Graham-Field markets its products also sell other medical products, some of
which compete with Graham-Field's products.
Basic American and Prism market and sell their products primarily to the
long-term, acute care, and consumer markets. Graham-Field believes that the
existing relationships of Basic American and Prism in the long-term, acute care
and consumer markets may present growth opportunities for Graham-Field to market
and distribute its products into such markets.
DISTRIBUTION NETWORK
Graham-Field provides same-day and next-day services to its customers
through its distribution network. Graham-Field believes that its ability to
continue to grow its revenue base depends in part upon its ability to provide
its customers with efficient and reliable service. As of March 31, 1999,
Graham-Field distributes its products through six (6) primary points of
distribution located in St. Louis, Missouri; Bronx, New York; Santa Fe Springs,
California; Atlanta, Georgia; Bay Shore, New York; and Toronto, Canada. As of
March 31, 1999, secondary points of distribution include four (4) facilities
located in Cleveland, Ohio; Baltimore, Maryland; Boston, Massachusetts; and
Puerto Rico. Graham-Field also distributes its products from nine (9)
manufacturing facilities located in Earth City, Missouri; Central Falls, Rhode
Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bay Shore, New
York; Fond du Lac, Wisconsin; Lawrenceville, Georgia; and San Antonio, Texas.
MANUFACTURING AND PRODUCT SOURCING
Principal manufactured and proprietary products (designed and/or
manufactured by Graham-Field or manufactured to its specifications by third
parties) include EVEREST & JENNINGS(R) wheelchairs, LUMEX(R) bathroom safety
products, mobility products and specialty seating systems, AKROS(R) therapeutic
support systems, ORTHOBIOTIC(R) specialty seating systems, POSTURE GLIDE(R)
specialty seating systems, MITYVAC(R) vacuum pumps, ZAPPAC(R) heating packs, EZ
HEAT(R) heating packs, AQUA COOL(R) cooling scarves, SMITH & DAVIS(R) homecare
beds, LABTRON(R) stethoscopes and blood pressure instruments, JOHN BUNN(R)
respiratory aid products, MEDICOPASTE(R) medicated bandages, rubber elastic
bandages, SURVALENT(R) electronic thermometry systems, silver nitrate
applicators, examination lamps and sterile packages under the MSP(R) label,
GRAFCO(R) medical supplies, including silver nitrate applicators and examination
lamps, the TEMCO(R) product line of patient aids, bathroom safety equipment and
patient room equipment, Simmons beds, and Aquatherm specialty cushions and
mattresses for the treatment and prevention of pressure sores.
10
<PAGE> 16
Graham-Field purchases products from a large number of domestic and foreign
suppliers. Graham-Field has entered into exclusive and non-exclusive
distribution agreements with a number of its domestic and foreign suppliers.
Under such agreements, suppliers may designate the markets into which
Graham-Field can sell the products and may stipulate minimum annual sales
volumes which are to be achieved by Graham-Field. Most of the distribution
agreements are cancelable by either party upon one to six months' notice. Except
as is described in the following paragraph, Graham-Field does not believe that
cancellation of any such agreements would have a material adverse effect on
Graham-Field, because comparable products are obtainable from alternative
sources upon acceptable terms.
Graham-Field is dependent on the maintenance of its wheelchair supply
agreement (the "Wheelchair Supply Agreement") with P.T. Dharma Polimetal ("P.T.
Dharma"). The term of the Wheelchair Supply Agreement extends until June 30,
2000, and on each June 30 thereafter automatically renews for an additional one
year, unless the Company elects not to extend the agreement or the Company fails
to order at least 50% of the contractually specified minimums and P.T. Dharma
elects to terminate the agreement, or either party terminates the agreement as a
result of a material breach of the agreement after notice and the expiration of
the applicable cure period. If the Wheelchair Supply Agreement is terminated,
there can be no assurance that Graham-Field will be able to enter into a
suitable supply agreement with another manufacturer. The termination of this
agreement in combination with the failure to secure an alternative source of
supply on acceptable terms would result in a material adverse effect on
Graham-Field's business and financial condition. In February 1998, the Company
advanced $3.5 million to P.T. Dharma (the "P.T. Dharma Advance") in
consideration of the grant of a six month option to purchase the wheelchair
assets of P.T. Dharma for a price to be determined. In March 1999, the P.T.
Dharma Advance was converted into a three (3) year loan agreement (the "P.T.
Dharma Loan Agreement"). Under the terms of the P.T. Dharma Loan Agreement, P.T.
Dharma is required to repay the P.T. Dharma Advance to Graham-Field over a
period of three (3) years, with interest at Graham-Field's borrowing rate, as
adjusted from time to time, in monthly installments ranging from $50,000 to
$100,000 per month. The P.T. Dharma Loan Agreement is secured by the shares of
the capital stock of P.T. Dharma and guaranteed by the principal stockholders of
P.T. Dharma.
Graham-Field currently purchases a substantial portion of its
sphygmomanometers and stethoscopes from a limited number of suppliers in the Far
East. In addition, Graham-Field sources component parts for sphygmomanometers
and stethoscopes and assembles such products in its facility located in Bay
Shore, New York.
PATENTS AND TRADEMARKS
Graham-Field believes that its business is dependent in part on its ability
to establish and maintain patent protection for its proprietary technologies,
products and processes, and the preservation of its trade secrets. Graham-Field
currently holds a number of United States patents relating to the EVEREST &
JENNINGS(R), LUMEX(R), TEMCO(R), and PRISM(R) product lines. Other companies may
provide similar products which may not be covered by Graham-Field's issued
patents. There can be no assurance that any United States or international
patents issued or licensed to Graham-Field will provide any significant
competitive advantages to Graham-Field or will not be successfully challenged,
invalidated or circumvented or that patents will be issued in respect of patent
applications to which Graham-Field currently holds rights. In addition,
Graham-Field distributes certain patented products pursuant to licensing
arrangements. In the event a licensing arrangement is terminated, Graham-Field
may not be able to continue to distribute the patented product.
Graham-Field is involved in the ordinary course of business in
patent-related lawsuits or other actions, none of which Graham-Field believes is
material. However, defense and prosecution of patent claims is costly and time
consuming, regardless of an outcome favorable to Graham-Field, and can result in
the diversion of substantial financial and managerial resources from
Graham-Field's primary business activities. Additionally, adverse outcomes of
such claims could have a material adverse effect on Graham-Field's business and
financial condition.
Graham-Field has registered a significant number of trademarks in the
United States, including "GRAHAM-FIELD," "EVEREST & JENNINGS," "LUMEX," "AKROS,"
"ORTHOBIOTICS,"
11
<PAGE> 17
"POSTURE GLIDE," "MITYVAC," "ZAPPAC," "EZ HEAT," "AQUA COOL," "SMITH & DAVIS,"
"JOHN BUNN," "BRISTOLINE," "SURVALENT," "MEDICOPASTE," "HEALTHTEAM," "LABTRON,"
"GRAFCO," "TEMCO" and "TENDERCLOUD". The registered trademarks are significant
to Graham-Field because they provide Graham-Field with name and market
recognition for its products and distinguish Graham-Field's proprietary products
from its competitors' products.
PRODUCT LIABILITY
The sale, manufacture and distribution of healthcare products involve an
inherent risk of product liability claims and related adverse publicity.
Although Graham-Field maintains product liability insurance, there can be no
assurance that such coverage will be adequate to protect Graham-Field from
liabilities it may incur. Product liability insurance is expensive, and there
can be no assurance that Graham-Field will be able to continue to obtain and
maintain insurance at acceptable premium rates. Potential losses from liability
claims and the effect which product liability litigation may have on the
reputation and marketability of Graham-Field's products could have a material
adverse effect on Graham-Field's business and financial condition.
GOVERNMENTAL REGULATION
The healthcare industry is affected by extensive government regulation at
the Federal and state levels. In addition, through the Medicare, Medicaid and
other programs the Federal and state governments are responsible for the payment
of a substantial portion of United States healthcare expenditures. Changes in
regulations and healthcare policy occur frequently and may impact the current
results of the growth potential for and the profitability of products sold by
Graham-Field in each market. Although Graham-Field is not a direct provider
under Medicare and Medicaid, many of Graham-Field's customers are providers
under these programs and depend upon Medicare and/or Medicaid reimbursement for
a portion of their revenue. Changes in Medicare and Medicaid regulations may
adversely impact Graham-Field's revenues and collections indirectly by reducing
the reimbursement rate received by Graham-Field's customers and consequently
placing downward pressure on prices charged for Graham-Field's products.
Graham-Field's C.A.P. program is designed in part to enable customers to respond
to the reduction in reimbursement rates by consolidating the purchase of
multiple product lines through Graham-Field. There can be no assurance, however,
that this program will offset any such reduction in reimbursement rates.
In certain cases, the ability of the Company's customers to pay for the
products supplied by the Company depends upon governmental and private insurer
reimbursement policies. Consequently, those policies have an impact on the level
of the Company's sales and its ability to collect receivables on a timely basis.
Continuing governmental and private third-party payor cost-cutting efforts have
led and may continue to lead to significant reductions in the reimbursement
levels. Furthermore, governmental reimbursement programs, such as the Medicare
and Medicaid programs, are subject to substantial regulation by Federal and
state governments, which are continually reviewing and revising the programs and
their regulations. There can be no assurance that changes to governmental
reimbursement programs will not have a material adverse effect on the Company.
The Federal Food, Drug and Cosmetic Act and regulations issued or proposed
thereunder provide for regulation by the Food and Drug Administration ("FDA") of
the marketing, manufacturing, labeling, packaging and distribution of medical
devices and drugs, including Graham-Field's products. Among these regulations
are requirements that medical device manufacturers register with the FDA, list
devices manufactured by them and file product incident reports, product labeling
requirements, and premarket notification filings for certain product classes.
Graham-Field is also required to comply with the FDA's "Current Good
Manufacturing Practices for Medical Devices" regulations, which set forth
requirements for, among other things, Graham-Field's quality system for the
manufacturing and distribution operations.
The majority of products marketed by Graham-Field constitute Class I
products under FDA regulations. Class I products are generally exempt from
premarketing testing and other filing requirements with the FDA. The balance of
the medical products marketed by Graham-Field are generally classified as Class
II products under FDA regulations, which requires a determination that
substantially equivalent products are already being legally marketed and could
require potentially expensive and time-consuming testing to assure that such
12
<PAGE> 18
products meet recognized performance standards for safety and efficacy, which
may include clinical testing. Unscheduled FDA inspections of Graham-Field's
facilities may occur from time to time to determine compliance with FDA
regulations.
Graham-Field is in the process of implementing a quality management system
to comply with the requirements of ISO9000/EN46000 ("ISO") and the MDD 93/42/EEC
("CE Marking") on a company-wide basis, which will enhance Graham-Field's
overall standard quality systems and enable Graham-Field to comply with European
regulatory requirements. As of March 15, 1999, Graham-Field had obtained ISO
certification for its manufacturing facilities located in Rhode Island and
Toronto, Canada, and its distribution facility located in Bay Shore, New York.
ISO audits have been conducted at Graham-Field's manufacturing facilities
located in Guadalajara, Mexico, Bay Shore, New York and Earth City, Missouri.
Graham-Field is awaiting the results of the ISO audits conducted at the
manufacturing facilities located in Guadalajara, Mexico, Bay Shore, New York and
Earth City, Missouri, however, there can be no assurance that such audits were
successfully completed for purposes of obtaining ISO certification.
Graham-Field engages the services of an outside consulting firm to monitor
the effectiveness of Graham-Field's quality management system to ensure that
manufactured and distributed products comply with ISO9000/EN46000, the MDD
93/42/EEC and FDA requirements.
The impact of FDA regulation on Graham-Field has increased in recent years
as Graham-Field has increased its manufacturing operations. To date,
Graham-Field has not experienced any significant difficulty in complying with
the requirements imposed by the FDA or other government agencies. Graham-Field
believes that the manufacturing and quality control procedures it employs
substantially conform to the requirements of the FDA and does not anticipate
having to make any material expenditures as a result of these requirements.
Graham-Field competes with many other manufacturers and distributors who
offer one or more products competitive with Graham-Field's products; however,
Graham-Field believes that no single competitor serving Graham-Field's markets
offers as broad a product range as Graham-Field. Graham-Field's principal means
of competition are the breadth of its product range, quality, price and speed of
delivery, and value-added services, including attractive financing programs and
delivery and service alternatives. The C.A.P. program enables Graham-Field to
compete by offering customers reduced operating costs associated with purchasing
by consolidating purchases of multiple products. With respect to Graham-Field's
manufactured and proprietary products, Graham-Field's primary competitors
include Invacare Corporation and Sunrise Medical Corporation. Competition for
the sale of such products is intense and is based on a number of factors,
including quality, reliability, price, financing programs, delivery and service.
Graham-Field believes that the quality, reputation and technological advances
relating to its manufactured and proprietary products are favorable factors in
competing with other manufacturers. Graham-Field purchases certain products from
its competitors and supplies certain of its products to its competitors. Many of
Graham-Field's competitors have substantially greater financial and other
resources than Graham-Field. There can be no assurance that Graham-Field will be
able to compete effectively in its industry or that competitive pressures will
not adversely affect Graham-Field's financial position or results of operations.
EMPLOYEES
As of December 31, 1998, Graham-Field had 2,023 employees, of which eight
(8) were executive officers, 429 were administrative and clerical personnel, 367
were sales, marketing and customer service personnel and 1,219 were
manufacturing and warehousing personnel.
Graham-Field is a party to four (4) collective bargaining agreements
covering Graham-Field's facilities located in Bay Shore, New York; Earth City,
Missouri; Toronto, Canada; and Guadalajara, Mexico. The collective bargaining
agreements cover approximately 642 employees. The collective bargaining
agreements for Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and
Guadalajara, Mexico are scheduled to expire on October 19, 2001, September 13,
1999, July 24, 2003 and December 31, 1999, respectively.
13
<PAGE> 19
Graham-Field has never experienced an interruption or curtailment of
operations due to labor controversy that had a material adverse effect on
Graham-Field's operations. Graham-Field considers its employee relations to be
satisfactory.
ITEM 2. PROPERTIES:
The Company's principal executive offices are located in Bay Shore, New
York.
As of March 31, 1999, Graham-Field distributes its products through six (6)
primary points of distribution located in St. Louis, Missouri; Bronx, New York;
Santa Fe Springs, California; Atlanta, Georgia; Bay Shore, New York; and
Toronto, Canada. As of March 31, 1999, secondary points of distribution include
four (4) facilities located in Cleveland Ohio; Baltimore, Maryland; Boston,
Massachusetts; and Puerto Rico. Graham-Field also distributes its products from
nine (9) manufacturing facilities located in Earth City, Missouri; Central
Falls, Rhode Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bay
Shore, New York; Fond du Lac, Wisconsin; Lawrenceville, Georgia; and San
Antonio, Texas. The manufacturing facilities located in Toronto, Canada;
Guadalajara, Mexico; Bay Shore, New York; Fond du Lac, Wisconsin; and
Lawrenceville, Georgia are owned by the Company. The distribution facility
located in Bay Shore, New York is owned by the Company.
Graham-Field believes that its facilities are in good repair and provide
adequate capacity for the near term growth of the Company's business.
Owned and leased properties for Graham-Field's principal facilities are
summarized in the following table.
A. PRINCIPAL MANUFACTURING FACILITIES:
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR LEASE
LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE
- -------- -------------- --------------- ------------------
<S> <C> <C> <C>
100 Spence Street............................ 170,000 Owned Manufacturing,
Bay Shore, NY Distribution
3601 Rider Trail............................. 147,000 7/31/02 Manufacturing,
Earth City, MO Distribution
336 Trowbridge Drive......................... 133,000 Owned Manufacturing
Fond du Lac, WI
125 South Street............................. 120,000 12/31/04 Manufacturing,
Passaic, NJ Distribution(1)
111 Snidercroft Road......................... 118,000 Owned Manufacturing,
Concord, Ontario, Canada Distribution,
Research &
Development
400 Rabro Drive East......................... 105,000 12/31/06 Manufacturing,
Hauppauge, NY Distribution(2)
6952 Fair Grounds Parkway.................... 70,000 5/31/02 Manufacturing
San Antonio, TX
Calle 3 #631................................. 64,839 Owned Manufacturing,
Zona Industrial Distribution
C.P. 44940
Guadalajara, Jalisco
Mexico
362 Industrial Park Drive.................... 50,000 Owned Manufacturing
Lawrenceville, GA
5 Clermont Street............................ 42,000 12/31/99 Manufacturing,
Johnstown, NY Distribution(3)
</TABLE>
14
<PAGE> 20
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR LEASE
LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE
- -------- -------------- --------------- ------------------
<S> <C> <C> <C>
3535 South Kipling Street.................... 30,300 6/25/07 Manufacturing,
Lakewood, CO Distribution
Calle 26 #2256A.............................. 28,399 12/31/99 Manufacturing,
Zona Industrial Distribution
Guadalajara, Jalisco
Mexico
131 Clay Street.............................. 21,467 12/31/02 Manufacturing,
Central Falls, RI Distribution
</TABLE>
- ---------------
(1) As of June 1998, the Company consolidated the manufacturing and distribution
operations located in Passaic, NJ with its manufacturing facility located in
Bay Shore, NY. The existing Passaic, NJ lease remains in effect.
(2) The Company is in the process of consolidating the manufacturing and
distribution operations located in Hauppauge, NY with its distribution
facility located in Bay Shore, NY. As of June 1998, the Company's corporate
offices in Hauppauge, NY were relocated to the corporate offices located in
Bay Shore, NY. The existing Hauppauge, NY lease remains in effect.
(3) The Company is in the process of ceasing operations at the manufacturing
facility located in Johnstown, NY. The Johnstown, NY lease is scheduled to
expire on December 31, 1999.
B. PRINCIPAL DISTRIBUTION FACILITIES:
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR LEASE
LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE
- -------- -------------- --------------- ------------------
<S> <C> <C> <C>
12055 Missouri Bottom Road.............. 144,000 3/31/07 Warehouse,
St. Louis County, MO Distribution
81 Spence Street........................ 130,000 Owned Corporate Offices,
Bay Shore, NY Warehouse,
Distribution
711 Brush Avenue........................ 86,152 4/30/02 Warehouse,
Bronx, NY Distribution
11954 East Washington Blvd. ............ 80,000 2/1/02 Warehouse,
Santa Fe Springs, CA Distribution
120 Royal Woods Court................... 60,000 9/30/08 Warehouse,
Atlanta, GA Distribution
144 East Kingsbridge.................... 48,000 Month-to-Month Warehouse,
Mount Vernon, NY Lease Distribution
2935 Bankers Industrial Drive........... 50,000 Owned Showroom,
Atlanta, GA Warehouse
11725 Missouri Bottom Road.............. 43,989 3/31/03 Warehouse,
Hazelwood, MO Distribution
Lot 1.0................................. 35,472 3/14/03 Office, Warehouse,
Northboro Road Distribution
Southboro, MA
10145 Philipp Parkway................... 30,000 11/14/04 Warehouse,
Streetsboro, OH Distribution
135 Fell Court.......................... 30,000 12/21/06 Warehouse,
Hauppauge, NY Distribution(1)
8921 Forshee Drive...................... 28,255 (2) Warehouse,
Jacksonville, FL Distribution
4880 Hammermill Road.................... 25,000 Owned Warehouse,
Tucker, GA Distribution(3)
</TABLE>
15
<PAGE> 21
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR LEASE
LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE
- -------- -------------- --------------- ------------------
<S> <C> <C> <C>
Kilometer 29.4.......................... 21,600 10/8/99 Warehouse,
Road #1 Distribution
Entrando por Ferrero
Caguas, PR
7447 New Ridge Road..................... 20,147 4/30/02 Warehouse,
Hanover, MD Distribution
</TABLE>
- ---------------
(1) The Company is in the process of consolidating its warehouse and
distribution operations located in Hauppauge, NY with its distribution
facility located in Bay Shore, NY. The existing Hauppauge, NY lease remains
in effect.
(2) As of February 1999, the Company consolidated its warehouse and distribution
operations in Jacksonville, FL with its distribution operations located in
Atlanta, GA. The Jacksonville, FL lease has been terminated.
(3) As of January 1999, the Company consolidated its warehouse and distribution
operations located in Tucker, GA with its distribution operations located in
Atlanta, GA. In May 1999, the Company executed an agreement to sell the
distribution facility located in Tucker, GA.
ITEM 3. LEGAL PROCEEDINGS
Following the Company's public announcement on March 23, 1998 of its
financial results for the fourth quarter and year ended December 31, 1997, the
Company and certain of its directors and officers were named as defendants in at
least fifteen putative class action lawsuits filed primarily in the United
States District Court for the Eastern District of New York on behalf of all
purchasers of common stock of the Company (including former Fuqua shareholders
who received shares of 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, 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 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.
While the accounting errors and irregularities are not presently the basis for
the pending class actions, counsel to the class plaintiff have informed the
Company's counsel that plaintiffs may seek to amend the consolidated complaint
to allege claims based on such items.
The Company intends to defend the lawsuit vigorously, but the Company is
not currently able to evaluate the likelihood of success in this case or the
range of potential loss. However, if the foregoing proceeding were determined
adversely to the Company, management believes that such a judgment could have a
material adverse effect on the Company's financial condition, results of
operations and/or cash flows. In addition, the
16
<PAGE> 22
staff of the SEC has advised the Company that the SEC may conduct an
investigation with respect to the aforementioned accounting errors and
irregularities.
On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug
Administration arrived at the Company's principal headquarters and one other
Company location and retrieved several documents pursuant to search warrants.
The Company has subsequently been advised by an Assistant United States Attorney
for the Southern District of Florida that the Company is a target of an ongoing
grand jury investigation involving alleged fraud by one or more of the Company's
suppliers relating to the unauthorized diversion of medical products intended
for sale outside of the United States into United States markets. The Company
has also been advised that similar search warrants were obtained with respect to
approximately 14 other participants in the distribution of medical products. The
Company is presently investigating these matters. The Company does not know when
the grand jury investigation will conclude or what action, if any, may be taken
by the government against the Company or any of its employees. 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, the 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. In January, April, July and October 1998, and in
January 1999, additional confirmatory samples were taken and analyzed. These
analytic results provide further support that the 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 December 31, 1998, the Company had reserves for remediation costs and
additional investigation costs which will be required. Reserves are established
when it is probable that a liability has been incurred and such costs can be
reasonably estimated. The 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.
In April 1996, Fuqua acquired the Lumex Division from Cybex International,
Inc. (formerly Lumex, Inc.) for a purchase price of $40.7 million, subject to a
final purchase price adjustment in the asset sale agreement. The final purchase
price adjustment was disputed and, pursuant to the asset sale agreement was
resolved through arbitration. On July 30, 1998, Fuqua received a payment of
$2,468,358 (inclusive of interest)
17
<PAGE> 23
from Cybex, of which $2,384,606 was recorded as a reduction of the excess of
cost over net assets acquired at September 30, 1998.
In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights as provided under the terms of the asset sale agreement.
In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit
against the seller and certain former officers stating claims for fraud, breach
of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees.
Defendants filed an answer and counterclaim on April 7, 1998, denying liability
and asserting fifteen defenses. On February 18, 1999, Cybex paid Fuqua $2.6
million in settlement of all of Fuqua's claims. As part of the settlement, Cybex
released Fuqua from all liability in connection with Cybex's counterclaim.
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 complaint
seeking damages of $25,000,000 alleges 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. Pursuant to
the defendant-employee's employment agreement, the defendant-employee is seeking
indemnification with respect to such claims. Discovery is proceeding in the
action. The Company considers the plaintiff's allegations to be without merit
and intends to defend this lawsuit vigorously.
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, the former Chairman of the Board and Chief Executive
Officer, 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 parties are presently in the
process of briefing the motion to dismiss.
In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a
company acquired by Graham-Field in June 1997, asserted certain claims 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not Applicable.
18
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
(a) The common stock of the Company is traded on the New York Stock
Exchange (Symbol: GFI). The following provides the high and low sales prices for
the period from January 1, 1997 through May 28, 1999 as reported on the New York
Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
SALES SALES
PRICE PRICE
----- -----
<S> <C> <C>
1997
First Quarter............................................. 13 3/4 8 1/2
Second Quarter............................................ 13 3/4 8 3/8
Third Quarter............................................. 17 7/8 12 9/16
Fourth Quarter............................................ 18 3/4 14
1998
First Quarter............................................. 19 12/16 7 5/16
Second Quarter............................................ 8 1/16 4
Third Quarter............................................. 6 4/16 2 5/16
Fourth Quarter............................................ 3 13/16 1 13/16
1999
First Quarter............................................. 3 9/16 2 5/16
Second Quarter (through May 28, 1999)..................... 2 8/16 1 10/16
</TABLE>
(b) As of the close of business on May 28, 1999, the number of holders of
record of common stock of the Company was 1,486.
The New York Stock Exchange (the "Exchange") has certain continued listing
financial criteria. The Company currently does not meet the Exchange's continued
listing criteria and is in discussions with the Exchange concerning its plans to
bring the Company in line with such criteria. There can be no assurance that the
discussions with the Exchange will be successful, or that the Company will be
able to continue to maintain its listing on the Exchange. In the event the
Company's common stock is delisted from the Exchange, the Company would seek to
list its common stock on another exchange or market, however, there can be no
assurance that such efforts would be successful. The delisting of the Company's
common stock on the Exchange may result in reduced liquidity for the Company's
stockholders, which could have a material adverse effect on the Company's
stockholders.
Under the terms of the Company's Credit Facility with IBJ, which provides
for borrowings, including letters of credit and bankers' acceptances, the
Company is prohibited from declaring, paying or making any dividend or
distribution on any shares of the common stock or preferred stock of the Company
(other than dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of common or preferred
stock of the Company. Notwithstanding the foregoing restrictions, the Company is
permitted to pay cash dividends in any fiscal year in an amount not to exceed
the greater of (i) the amount of dividends due to BIL (Far East Holdings)
Limited and BIL Securities (Offshore) Ltd. (collectively, "BIL") under the terms
of the Series B Cumulative Convertible Preferred Stock (the "Series B Preferred
Stock") and Series C Cumulative Convertible Preferred Stock (the "Series C
Preferred Stock") in any fiscal year, or (ii) 12.5% of net income of the Company
on a consolidated basis, provided, that no event of default shall have occurred
and be continuing or would exist after giving effect to the payment of the
dividends.
19
<PAGE> 25
As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was
not in compliance with certain financial covenants and other terms and
provisions contained in the Credit Facility. On April 22, 1999, the Company
entered into an amendment to the Credit Facility, which was subsequently amended
as of May 21 and June 3, 1999 (the "1999 Amendment"), which provided for, among
other things, the waiver of these defaults, an amendment to certain financial
covenants 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
In addition, the Company's Indenture dated as of August 4, 1997 (the
"Indenture") governing the issuance of its $100 million Senior Subordinated
Notes (the "Senior Subordinated Notes") prohibits the Company from declaring or
paying any dividend or making any distribution or restricted payment as defined
in the Indenture (collectively, the "Restricted Payments") (other than dividends
or distributions payable in capital stock of the Company), unless, at the time
of such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.
The Company anticipates that for the foreseeable future any earnings will
be retained for use in its business and accordingly, does not anticipate the
payment of cash dividends, other than to BIL in accordance with the terms and
provisions of the Series B and Series C Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA:
The following selected financial data of the Company should be read in
conjunction with the Company's consolidated financial statements and notes
thereto appearing herein. The financial data for 1997 and 1996 has been
restated. See Note 16 to the consolidated financial statements. All amounts in
the table are expressed in thousands, except per share amounts.
20
<PAGE> 26
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998(1) 1997(2) 1996(3) 1995(4) 1994
-------- ------------- ------------- -------- --------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $380,866 $262,834 $143,270 $112,414 $106,026
(Loss) income before extraordinary
item................................ $(48,992) $(26,417) $(12,838) $ 1,047 $ (1,979)
Extraordinary item.................... -- -- (736) -- --
-------- -------- -------- -------- --------
Net (loss) income..................... $(48,992) $(26,417) $(13,574) $ 1,047 $ (1,979)
======== ======== ======== ======== ========
PER COMMON SHARE DATA:
(Loss) income before extraordinary
item................................ $ (1.61) $ (1.33) $ (.82) $ .07 $ (.14)
Extraordinary item.................... -- -- (.05) -- --
-------- -------- -------- -------- --------
Net (loss) income..................... $ (1.61) $ (1.33) $ (.87) $ .07 $ (.14)
======== ======== ======== ======== ========
Weighted average number of common and
dilutive shares outstanding......... 31,111 20,600 15,557 14,315 13,862
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Total assets.......................... $428,859 $537,337 $204,286 $103,011 $102,454
Working capital....................... 76,376 99,132 14,316 35,061 29,389
Total long-term liabilities, excluding
current portion and Senior
Subordinated Notes.................. 6,715 7,733 6,535 20,462 22,107
Senior Subordinated Notes............. 100,000 100,000 -- -- --
Stockholders' equity.................. 219,867 265,109 113,450 60,970 56,152
</TABLE>
- ---------------
(1) 1998 includes a charge of $18,310,000 to write-off the Company's deferred
tax asset, a provision for uncollectible accounts receivable of $11,047,000,
an allowance of $3,000,000 for the P.T. Dharma Loan Agreement, separation
charges of $2,548,000, a charge of $2,389,000 for inventory write-downs,
charges of $2,320,000 related principally to other asset write-offs and
accrual adjustments, a charge for impairment in excess of cost over net
assets acquired of $1,873,000, a charge of $954,000 for stock compensation
and reversals of restructuring and merger accruals no longer required of
$3,547,000.
(2) 1997 includes restructuring charges of $18,151,000, indirect merger charges
related to the acquisition of Fuqua of $4,393,000, inventory write-downs of
$7,732,000, charges of $5,000,000 to increase allowances for accounts and
notes receivable, $3,300,000 associated with the write-off of purchased
in-process research and development and a charge of $838,000 for stock
compensation.
On December 30, 1997, Graham-Field acquired Fuqua in a transaction pursuant
to which Graham-Field issued 9,413,689 shares of common stock (excluding
shares of common stock of Graham-Field to be issued in connection with Fuqua
stock options assumed by Graham-Field) in exchange for the common stock of
Fuqua. The acquisition was accounted for as a purchase and, accordingly,
assets and liabilities were recorded at fair value at the date of
acquisition and the results of operations are included subsequent to that
date. The excess of the purchase price over net assets acquired was
approximately $121.2 million.
In connection with the acquisition of Fuqua, Graham-Field acquired the
Leather Operations. It was Graham-Field's intention to dispose of the
Leather Operations as soon as reasonably practicable following the
consummation of the acquisition of Fuqua. Accordingly, the net assets of the
Leather Operations 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, Graham-Field sold the Leather Operations for $60,167,400 in cash,
5,000 shares of Series A Preferred Stock of the buying entity with a stated
value of $4,250,000 (valued at $1,539,000), and the assumption of debt of
$2,341,250.
On August 17, 1997, Graham-Field acquired substantially all of the assets
and certain liabilities of Medi-Source, a privately-owned distributor of
medical supplies, for $4,500,000 in cash. Graham-Field also
21
<PAGE> 27
entered into a five (5) year non-competition agreement with the previous
owner in the aggregate amount of $301,000 payable over the five (5) year
period. The acquisition was accounted for as a purchase and, accordingly,
assets and liabilities were recorded at fair value at the date of
acquisition and the results of operations are included subsequent to that
date. The excess of the purchase price over net assets acquired was
approximately $3.7 million.
On August 28, 1997, Graham-Field acquired all of the issued and outstanding
shares of the capital stock of Medapex in a transaction accounted for as a
pooling of interests.
On June 25, 1997, Graham-Field acquired all of the capital stock of LaBac,
in a merger transaction. LaBac manufactures and distributes custom power
wheelchair seating systems and manual wheelchairs throughout North America.
In connection with the acquisition, LaBac became a wholly-owned subsidiary
of Graham-Field, and the selling stockholders of LaBac received in the
aggregate 772,557 shares of common stock of Graham-Field valued at $11.77
per share in exchange for all of the issued and outstanding shares of the
capital stock of LaBac. Graham-Field also entered into a three year
consulting agreement with the selling stockholders and an entity controlled
by the selling stockholders, and non-competition agreements with each of the
selling stockholders. The acquisition was accounted for as a purchase and,
accordingly, assets and liabilities were recorded at fair value at the date
of acquisition and the results of operations are included subsequent to that
date. The excess of cost over net assets acquired amounted to approximately
$7.3 million.
On March 7, 1997, Everest & Jennings acquired Kuschall, a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for a purchase price of $1,510,000, representing
the net book value of Kuschall. The purchase price was paid by the issuance
of 116,154 shares of common stock of Graham-Field valued at $13.00 per
share. The acquisition was accounted for as a purchase and, accordingly,
assets and liabilities were recorded at fair value at the date of
acquisition and the results of operations are included subsequent to that
date.
On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary
of Graham-Field acquired substantially all of the assets and certain
liabilities of Motion 2000 Inc. and its wholly-owned subsidiary, Motion 2000
Quebec Inc., for a purchase price equal to Cdn. $2,900,000 (Canadian
Dollars) (approximately U.S. $2,150,000). The purchase price was paid by the
issuance of 187,733 shares of common stock of Graham-Field valued at
U.S.$11.437 per share. The acquisition was accounted for as a purchase and,
accordingly, assets and liabilities were recorded at fair value at the date
of acquisition and the results of operations are included subsequent to that
date. The excess of cost over the net assets acquired amounted to
approximately U.S.$2.5 million. In 1998, the Company recorded a charge of
$1,873,000 to reflect an impairment in this asset.
(3) In March 1996, Graham-Field sold its Gentle Expressions breast pump product
line, and recorded a gain of $360,000.
On November 27, 1996, the Company acquired Everest & Jennings pursuant to
the terms and provisions of the Amended and Restated Agreement and Plan of
Merger dated as of September 3, 1996 and amended as of October 1, 1996, by
and among Graham-Field, Everest & Jennings, Everest & Jennings Acquisition
Corp., and BIL. The acquisition was accounted for under the purchase method
of accounting and, accordingly, the operating results of Everest & Jennings
have been included in Graham-Field's consolidated financial statements since
the date of acquisition. The excess of the aggregate purchase price over the
estimated fair market value of the net deficiency acquired was approximately
$54.2 million.
On September 4, 1996, Graham-Field acquired substantially all of the assets
of V.C. Medical, a wholesale distributor of medical products in Puerto Rico,
for a purchase price consisting of $1,703,829 in cash, and the issuance of
32,787 shares of common stock of Graham-Field, valued at $7.625 per share.
In addition, Graham-Field assumed certain liabilities of V.C. Medical in the
amount of $296,721. The acquisition was accounted for as a purchase and,
accordingly, assets and liabilities were recorded at fair value at the date
of acquisition and the results of operations are included subsequent to that
date. The excess of cost over the net assets acquired amounted to
approximately $988,000.
22
<PAGE> 28
During 1996, Graham-Field recorded charges of $15,146,000 related to the
acquisition of Everest & Jennings. The charges included $12,500,000
associated with the write-off of purchased in-process research and
development costs and $2,646,000 of merger-related expenses.
The extraordinary item is related to the early retirement of the
indebtedness underlying the John Hancock Mutual Life Insurance Note and
Warrant Agreement dated as of March 12, 1992, as amended (the "John Hancock
Indebtedness"), and represents a "make-whole" payment and the write-off of
unamortized deferred financing costs associated with this indebtedness.
(4) Effective July 1, 1995, Graham-Field acquired substantially all of the
assets and liabilities of National Medical Excess Corp. The acquisition was
accounted for under the purchase method of accounting and accordingly, the
results of operations are included in the consolidated financial statements
of Graham-Field subsequent to that date.
Net income per common share for 1995, which was the same for basic and
diluted, was computed using the weighted average number of common shares
(14,278,000 shares) and dilutive common equivalent shares outstanding
(37,000 shares) during the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include plans and objectives of management for future operations,
including plans and objectives relating to the future economic performance and
financial results of the Company. The forward-looking statements 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, (ix) the ability of the Company to implement its Year
2000 remediation plan and address the risks related to Year 2000 compliance, and
(x) the retention of the Company's earnings for use in the operation and
expansion of the Company's business.
Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the 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, the ability of the
Company to maintain its gross profit margins, the ability to obtain financing 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 the section entitled "Risk Factors" in the Company's Registration
Statement on Form S-4 dated as of December 19, 1997.
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The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, express or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and that in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
RESTATEMENT
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 financial information contained herein has been restated to incorporate all
relevant information obtained from the investigation.
The restated loss before income taxes for the years ended December 31, 1997
and 1996 were $37,009,000 and $11,482,000, respectively, as compared to the
originally reported loss before income taxes for the years ended December 31,
1997 and 1996 of $30,228,000, and $8,955,000, respectively. The restated net
loss for the years ended December 31, 1997 and 1996 were $26,417,000 and
$13,574,000, respectively, as compared to the originally reported net loss for
the years ended December 31, 1997 and 1996 of $22,893,000 and $12,609,000,
respectively. In addition, the restated operating revenues for the years ended
December 31, 1997 and 1996 were $261,672,000 and $142,711,000, respectively, as
compared to originally reported operating revenues for December 31, 1997 and
1996 of $261,981,000 and $143,083,000, respectively.
RESULTS OF OPERATIONS
On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medapex, which was accounted for as a "pooling of
interests." Accordingly, the Company's financial statements for periods prior to
the combination have been restated to include the results of Medapex for all
periods.
Operating Revenues
1998 compared to 1997. Operating revenues were $378,840,000 for the year
ended December 31, 1998, representing an increase of 45% from the prior year.
The increase in operating revenues was primarily attributable to the acquisition
of Fuqua in December 1997, five other acquisitions completed in 1997, the growth
of Graham-Field's innovative Graham-Field Express program, and the expansion of
the C.A.P. program. On a pro forma basis (as if all acquisitions completed in
1997 were recorded as of January 1, 1997), the Company's revenues increased
approximately 1% for the year ended December 31, 1998. Revenues for the year
ended December 31, 1998 fell below management's expectations primarily due to
intense competition within the healthcare industry and management's focus on the
integration of the acquisitions and the merging of diverse manufacturing and
distribution facilities, information and technology systems, sales forces and
product lines. Management believes that intense competition within the
healthcare industry will continue in 1999.
In March 1996, Graham-Field Express was introduced to offer "same-day" and
"next-day" service to home healthcare dealers of certain strategic home
healthcare products, including patient aids, adult incontinence products,
Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional
supplements and other freight and time sensitive products. As of December 31,
1998, Graham-Field Express facilities were operating from seven (7) distribution
facilities located in the Bronx, New York; Puerto Rico; Dallas, Texas;
Baltimore, Maryland, Cleveland, Ohio, Boston, Massachusetts and Louisville,
Kentucky, as compared to six (6) Graham-Field Express facilities which were
operating as of December 31, 1997. As of
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March 31, 1999, the Company had eliminated Graham-Field Express facilities
operating in Louisville, Kentucky and Dallas, Texas. Revenues attributable to
Graham-Field Express were approximately $79,051,000 and $50,512,000 for the
years ended December 31, 1998 and 1997, respectively. The Company intends to
moderate the growth of the Graham-Field Express Program and may further
consolidate the Graham-Field Express distribution network.
1997 compared to 1996. Operating revenues were $261,672,000 for the year
ended December 31, 1997, or 83% higher than the year ended December 31, 1996.
The increase in operating revenues was primarily attributable to Graham-Field's
expansion of its C.A.P. program, the introduction of the Graham-Field Express
program, the addition of new product lines and the acquisition of Everest &
Jennings in November 1996.
For the year ended December 31, 1997, revenues attributable to the
Graham-Field Express program were approximately $50,512,000. Revenues of Everest
& Jennings for the period from the date of acquisition to December 31, 1996 were
approximately $3,634,000.
The increase in operating revenues was achieved despite the decline in
sales to Apria Healthcare Group, Inc. ("Apria") of approximately $5,905,000 for
the year ended December 31, 1996 as compared to the prior year. Graham-Field's
supply agreement with Apria expired on December 31, 1995.
Interest and Other Income
1998 compared to 1997. Interest and other income for the year ended
December 31, 1998 was $2,026,000, as compared to $1,162,000 for the prior year.
The increase is primarily due to interest earned in the amount of $247,000 on
the P.T. Dharma Advance, dividends earned in the amount of $187,500 on preferred
stock acquired in connection with the sale of Fuqua's leather operations in
January 1998, and net sublease income in the amount of $237,000 attributable to
certain Fuqua properties.
1997 compared to 1996. Interest and other income increased from $559,000
in 1996 to $1,162,000 in 1997. The increase is primarily due to interest earned
on the unused proceeds from Graham-Field's sale of its Senior Subordinated Notes
on August 4, 1997 and interest earned on customer financing programs.
Cost of Revenues
1998 compared to 1997. Cost of revenues as a percentage of operating
revenues decreased for the year ended December 31, 1998 to 70%, as compared to
74% for the prior year. The Fuqua entities and LaBac contributed higher gross
profit margins, offset in a large part by a higher mix of redistributed
products, primarily through the Graham-Field Express Program, which historically
operates at lower gross profit margins, and by operating inefficiencies incurred
during the integration of acquired companies. As part of Graham-Field's
strategic initiatives relating to product rationalization, charges of $2,389,000
and $7,732,000 are included in cost of revenues for 1998 and 1997, respectively,
for inventory write-downs for certain obsolete and excess inventory. Excluding
the charge associated with the inventory write-downs in 1998 and 1997, cost of
revenues as a percentage of operating revenues would have been approximately 69%
for 1998 and 71% for 1997. Management believes that cost of revenues as a
percentage of operating revenues was adversely affected in 1998 due to intense
competition and pricing pressures within the healthcare industry, which trend is
expected to continue. In addition, the delays associated with the integration of
the acquisitions completed in 1997 negatively impacted Graham-Field's ability to
realize certain manufacturing and operating efficiencies and cost savings.
1997 compared to 1996. Cost of revenues as a percentage of operating
revenues increased for the year ended December 31, 1997 to 74%, as compared to
71% for the prior year. As part of Graham-Field's strategic restructuring
initiatives related to product rationalization, a charge of $7,732,000 is
included in cost of revenues for 1997 related to inventory write-downs
associated with the elimination of certain non-strategic inventory and product
lines. Excluding the charge associated with the inventory write-downs, cost of
revenues as a percentage of operating revenues for 1997 would have been 71%.
Nevertheless, management believes that
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<PAGE> 31
cost of revenues as a percentage of operating revenues was adversely affected in
the fourth quarter of 1997 due to intense competition and pricing pressures
within the healthcare industry.
Selling, General and Administrative Expenses
1998 compared to 1997. Selling, general and administrative expenses as a
percentage of operating revenues for the year ended December 31, 1998 increased
to 37%, as compared to 28% in the prior year. In the fourth quarter of 1998, a
provision for uncollectible accounts and notes receivable of $11,047,000 was
recorded to reflect anticipated losses from one customer in financial difficulty
and several other customer accounts being placed in collection and a provision
of $3,000,000 was recorded related to the P.T. Dharma Loan Agreement. Selling,
general and administrative expense in 1998 also includes separation charges of
$2,548,000, a charge of $2,320,000 principally for other asset write-offs and
accrual adjustments, a charge of $1,873,000 for impairment of excess of cost
over net assets and a charge of $954,000 for stock compensation. Excluding these
items, selling, general and administrative expenses as a percentage of operating
revenues would have been 31% in 1998. The increase in selling, general and
administrative expenses was primarily attributable to higher corporate office
and administrative overhead; increased amortization related to the acquisitions
completed in 1997; the inability of the Company to realize certain cost savings
associated with acquisitions completed in 1997 relating to the consolidation of
corporate offices, manufacturing and distribution facilities, the streamlining
of information and technology systems and the merging of sales forces and
product lines; and the contribution of revenue by the Fuqua entities and LaBac
at a higher percentage of selling, general and administrative expenses.
1997 compared to 1996. Selling, general and administrative expenses as a
percentage of operating revenues for the year ended December 31, 1997 increased
to 28%, as compared to 25% in the prior year. In the fourth quarter of 1997, a
provision for uncollectible accounts and notes receivable of $5,000,000 was
recorded to reflect increased credit risk due to the anticipated impact of
changes in state Medicare reimbursement and procurement policies for certain
product lines and the extended payment terms being taken by the Company's
customers. The changes in such reimbursement patterns resulted in an increased
number of days outstanding for receivables. In addition, the Company incurred a
charge of $838,000 in 1997 for stock compensation. Excluding the provision for
uncollectible accounts receivable and charge for stock compensation, selling,
general and administrative expenses as a percentage of operating revenues for
1997 would have been 26%. The increase in selling, general and administrative
expenses was primarily due to higher than anticipated integration costs
associated with the acquisitions completed in 1997. The delays associated with
the integration process also negatively impacted the Company's ability to
realize certain anticipated cost savings relating to the consolidation of
corporate offices, manufacturing and distribution facilities, the streamlining
of information and technology systems and the merging of sales forces and
product lines.
Interest Expense
1998 compared to 1997. Interest expense for the year ended December 31,
1998 increased to $12,652,000, as compared to $7,260,000 for the prior year. The
increase is primarily due to a full year of interest attributable to the
Company's sale on August 4, 1997 of its Senior Subordinated Notes, a higher cost
of borrowings under the Credit Facility, and an increased level of borrowings
under the Credit Facility.
1997 compared to 1996. Interest expense for the year ended December 31,
1997 increased to $7,260,000, as compared to $2,762,000 for the prior year. The
increase is primarily due to increased borrowings attributable to Graham-Field's
revenue growth, the expansion of the Graham-Field Express program, and the sale
of the Senior Subordinated Notes on August 4, 1997.
Merger and Restructuring Related Charges
1998 compared to 1997. Merger and restructuring related charges decreased
to record a benefit of $3,547,000 during 1998, as compared to a charge in 1997
of $22,544,000. The decrease is primarily due to the reevaluation of certain
merger and restructuring related charges originally recorded in 1997 that are no
longer needed as of the end of 1998. In 1998, the Company performed a
reevaluation of such accruals and considered
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<PAGE> 32
the actual costs incurred to complete the strategic restructuring initiatives
and the estimated future costs to complete the initiatives contemplated in the
1997 restructuring plan (the "Restructuring Plan") (see Note 3 to the
consolidated financial statements).
1997 compared to 1996. In connection with the acquisition of Fuqua on
December 30, 1997, the Company adopted the Restructuring Plan to implement
certain strategic restructuring initiatives and recorded restructuring charges
of $18,151,000 (the "Restructuring Charges") and indirect merger charges of
$4,393,000 (the "Merger Charges"). The Restructuring Plan was initiated to
create manufacturing, distribution and operating efficiencies and enhance the
Company's position as a low-cost supplier in the healthcare industry. These
steps included a broad range of efforts, including the consolidation of the
Company's Temco manufacturing operations in New Jersey into Fuqua's Lumex
manufacturing facility in New York and relocation of the Company's corporate
headquarters to the Lumex facility. In addition, the Company will be closing
several other distribution facilities and consolidating operations in an effort
to achieve additional cost savings.
The Restructuring Charges include exit costs of $15,301,000 related to the
elimination of duplicate manufacturing and distribution facilities, severance
costs of $650,000 for approximately 100 employees, and asset write-downs of
$2,200,000 relating to assets to be sold or abandoned. In addition, the Company
recorded a provision for inventory write-downs of $7,732,000 associated with the
elimination of certain non-strategic inventory and product lines that is
included in costs of revenue.
The Merger Charges were related to the Fuqua acquisition and Medapex
combination and included the write-off of certain unamortized catalog costs with
no future value, certain insurance policies, payment of bonuses related to the
acquisitions, and various transaction costs. The Company also incurred
$3,300,000 of expenses in 1997 related to the write-off of purchased in-process
research and development costs of Fuqua.
During the fourth quarter of 1996, Graham-Field recorded charges of
$15,146,000 related to the acquisition of Everest & Jennings. The charges
included $12,500,000 associated with the write-off of purchased in-process
research and development costs and $2,646,000 of merger expenses related to
severance payments, the write-off of certain unamortized catalog and software
costs with no future value, the accrual of costs to vacate certain of
Graham-Field's facilities, and the cost of certain insurance policies.
Net Loss or Income
1998 compared to 1997. Loss before income taxes for the year ended
December 31, 1998 was $32,585,000, which includes $20,584,000 of unusual items
(the "1998 Unusual Items"), as compared to a loss before income taxes of
$37,009,000 in 1997, which includes Restructuring Charges, Merger Charges and
other charges in the aggregate amount of $39,414,000.
The 1998 Unusual Items include a provision for uncollectible accounts and
notes receivable of $11,047,000, a provision of $3,000,000 related to the P.T.
Dharma Loan Agreement, separation charges of $2,548,000, a charge of $2,389,000
related to the inventory write-down for certain obsolete and excess inventory,
charges of $2,320,000 related to other asset write-offs and accrual adjustments,
charges for impairment of excess of cost over net assets acquired of $1,873,000,
a charge of $954,000 for stock compensation, and the reversal of merger and
restructuring related accruals no longer needed of $3,547,000. Excluding the
unusual items and restructuring, merger and other charges recorded in 1998 and
1997, the loss before income taxes was $12,001,000 in 1998, as compared to
income before income taxes of $2,405,000 in 1997. This decrease in income before
income taxes was primarily due to a decrease in cost of revenues as a percentage
of operating revenues offset by an increase in selling, general and
administrative expenses as a percentage of operating revenues, an increase in
amortization expense and an increase in interest expense.
Net loss for the year ended December 31, 1998 was $48,992,000, as compared
to $26,417,000 for the prior year. An income tax expense of $16,407,000 was
recorded in 1998 compared to an income tax benefit of $10,592,000 in 1997. At
December 31, 1998, the Company had aggregate federal net operating loss
carryforwards of approximately $52,000,000 for income tax purposes, which expire
during the period 2010 through 2018. Approximately $24,164,000 of the net
operating loss carryforwards were acquired primarily in
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<PAGE> 33
connection with the Everest & Jennings acquisition and are limited to use in any
particular year. For financial reporting purposes, due to prior year losses of
Everest & Jennings, and SRLY limitations, a full valuation allowance of
approximately $12,598,000 was recorded in purchase accounting against the
Everest & Jennings net operating losses and deferred tax assets. Subsequent
realization of any Everest & Jennings tax benefits will be recorded as a
reduction of the excess of cost over net assets acquired.
As a result of the continuation operating losses in 1998, the Company
increased its deferred tax valuation allowance by $22,996,000, which results in
a full valuation allowance against all net deferred tax assets at December 31,
1998.
1997 compared to 1996. Loss before income taxes for the year ended
December 31, 1997 was $37,009,000, as compared to a loss before income taxes and
extraordinary item of $11,482,000 for the prior year. The loss before income
taxes for 1997 includes Restructuring Charges of $18,151,000, Merger Charges of
$4,393,000, a provision for inventory write-downs of $7,732,000, a provision for
uncollectible accounts and notes receivable of $5,000,000, a charge of
$3,300,000 related to the write-off of purchased in-process research and
development costs of Fuqua and charges for stock compensation of $838,000. The
loss before income taxes and extraordinary item for 1996 includes certain
charges of $15,146,000 relating to the acquisition of Everest & Jennings.
Excluding the restructuring, merger and other charges and the write-off of
purchased in-process research and development costs in 1996 and 1997, income
before income taxes decreased from $3,664,000 in 1996 to $2,405,000 in 1997,
primarily due to an increase in interest expense, amortization and selling,
general and administrative expenses as a percent of operating revenues.
Net loss for the year ended December 31, 1997 was $26,417,000, as compared
to $13,574,000 for the prior year. Graham-Field recorded an income tax benefit
of $10,592,000 for the year ended December 31, 1997, as compared to income tax
expense of $1,356,000 for the prior year. As of December 31, 1997, Graham-Field
had net deferred tax assets of $18,619,000, primarily comprised of future tax
deductions for restructuring and other accruals and reserves related to the
acquisition of Fuqua. A full valuation allowance has been recorded against
Everest & Jennings' net deferred tax assets. When realized, the tax benefit for
such items will be recorded as a reduction of the Everest & Jennings' goodwill.
A valuation allowance on the remaining deferred tax assets was not provided in
1997 because management believed that there would be sufficient earnings in the
carryforward period to utilize such deferred tax assets.
The net loss in 1996 includes an extraordinary item of $736,000 (net of tax
benefit of $383,000) related to the "make-whole" payment and write-off of
unamortized deferred financing costs associated with the early retirement of the
John Hancock Indebtedness.
Graham-Field's business has not been materially affected by inflation.
Liquidity and Capital Resources
Graham-Field had working capital of $76,376,000 at December 31, 1998, as
compared to $99,132,000 at December 31, 1997.
Cash used in operating activities for the year ended December 31, 1998 was
$20,937,000, as compared to cash used in operating activities of $39,377,000 in
the prior year. The principal reasons for the decrease in cash used in operating
activities during 1998 were an increase in operating cash flow before changes in
operating assets and liabilities and a decrease in the changes in operating
assets and liabilities. During 1998, the Company had a lower investment in
accounts receivable relative to the investment in 1997 and a decrease in
inventory levels (compared to an increase in inventory levels during 1997) which
were partially offset by reductions in accounts payable and accrued expenses due
principally to 1998 payments on prior year restructuring and merger accruals. In
1998, the Company utilized approximately $4,367,000 in cash related to the
Restructuring and Merger Charges recorded in 1997.
On December 30, 1997, Graham-Field acquired Fuqua and assumed $62,076,000
of Fuqua indebtedness (the "Fuqua Indebtedness") under Fuqua's revolving credit
facility with SunTrust Bank. On January 28, 1998, Graham-Field sold the Leather
Operations of Fuqua for $60,167,400 in cash, 5,000 shares of Series A Preferred
Stock of the buying entity with a stated value of $4,250,000 (which has been
valued at $1,539,000), and the assumption of debt of $2,341,250. The cash
proceeds from the sale of the Fuqua leather operations
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<PAGE> 34
were used to repay the indebtedness incurred under the Credit Facility, which
was used to retire the Fuqua Indebtedness.
The Credit Facility provides for borrowings of up to $50 million (after
giving effect to the 1999 Amendment), including letters of credit and bankers
acceptances arranged by IBJ, as agent. Under the terms of the Credit Facility,
borrowings bear interest at IBJ's prime rate (7.75% at December 31, 1998) plus
one percent.
As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was
not in compliance with certain financial covenants and other terms and
provisions contained in the Credit Facility. The 1999 Amendment provides for,
among other things, the waiver of these 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 Amendment
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. After giving effect to the 1999 Amendment, which
includes the reduction and/or elimination of certain availability and borrowing
base reserves, the Company's availability to borrow funds under the Credit
Facility remains relatively unchanged. As part of the 1999 Amendment, the
Company is required to pay a waiver fee (the "Waiver Fee") in the amount of
$400,000 on or before June 30, 1999, unless the Company either presents an
acceptable business plan to the banks on or before June 30, 1999, or repays in
full all outstanding obligations under the Credit Facility on or before June 30,
1999. Notwithstanding the foregoing, in the event the Company is in receipt on
or before June 30, 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 ninety (90) days from June 30, 1999. The Credit Facility
is secured by substantially all of the assets of the Company and the pledge of
the capital stock of certain of the Company's subsidiaries.
At December 31, 1998, the Company had working capital of approximately
$76.4 million and unused availability under the Credit Facility of approximately
$15.7 million. As of June 1, 1999, after giving effect to the 1999 Amendment
(see Note 6 to the Consolidated Financial Statements), the Company had unused
availability of approximately $7.2 million. The Company has incurred significant
losses in each of the three years in the period ended December 31, 1998 and in
the first quarter of 1999. These losses have arisen as a result of a significant
amount of merger, restructuring and other expenses related to acquisitions
completed in 1996 and 1997, 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
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
and other advisory fees in the first quarter of 1999, all of which management
believes to be substantially non-recurring. 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 (see Note 15 to the Consolidated Financial Statements).
In response to the losses incurred in 1997, 1998 and the first quarter of
1999, management has commenced a program to reduce operating expenses, improve
gross margins and reduce the investment in working capital during the remainder
of 1999 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 3 to the Consolidated
Financial Statements; (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
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<PAGE> 35
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 currently expects
that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment. Management also believes that,
if necessary, it could sell certain assets to meet cash requirements, which
would require the consent of the lenders under the Credit Facility.
Management believes that such objectives are attainable, however, there can
be no assurance that the Company will be successful in its efforts to improve
its cash flow from operations or that it will be able to obtain such additional
borrowing availability on satisfactory terms in a timely manner to provide
sufficient cash for operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments 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.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Notes, the incurrence of additional debt,
liens, transactions with affiliates and certain consolidations, mergers and
acquisitions and sales of assets, and restrictions relating to capital
expenditures. In addition, Graham-Field is prohibited from declaring or paying
any dividend or making any distribution on any shares of common stock or
preferred stock of Graham-Field (other than dividends or distributions payable
in its stock, or split-ups or reclassifications of its stock) or applying any of
its funds, property or assets to the purchase, redemption or other retirement of
any such shares, or of any options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay
cash dividends in any fiscal year in an amount not to exceed the greater of (i)
the amount of dividends due BIL under the terms of the Graham-Field Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends. The Credit Facility contains
certain financial covenants, including a net cash flow covenant and leverage
ratio, as well as the requirement that Graham-Field reduce outstanding
borrowings with the net cash proceeds of certain asset sales.
On August 4, 1997, Graham-Field issued the Senior Subordinated Notes under
Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). On
February 9, 1998, Graham-Field completed its exchange offer to exchange the
outstanding Senior Subordinated Notes for an equal amount of the new Senior
Subordinated Notes, which have been registered under the Securities Act. The new
Senior Subordinated Notes are identical in all material respects to the
previously outstanding Senior 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.
30
<PAGE> 36
The net proceeds from the offering of the Senior Subordinated Notes were
used to repay $60.3 million of indebtedness under the Credit Facility and $5
million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes, including the funding for acquisitions, the opening
of additional Graham-Field Express facilities and strategic alliances.
Under the terms of the Indenture, the Senior Subordinated Notes are not
redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the
Senior Subordinated Notes are redeemable, in whole or in part, at the option of
Graham-Field, at certain redemption prices plus accrued and unpaid interest to
the date of redemption. In addition, prior to August 15, 2000, Graham-Field may,
at its option, redeem up to 25% of the aggregate principal amount of Senior
Subordinated Notes originally issued with the net proceeds from one or more
public offerings of common stock at a redemption price of 109.75% of the
principal amount, plus accrued and unpaid interest to the date of redemption;
provided that at least 75% of the aggregate principal amount of Senior
Subordinated Notes originally issued remain outstanding after giving effect to
any such redemption.
The Indenture contains customary covenants including, but not limited to,
covenants relating to limitations on the incurrence of additional indebtedness,
the creation of liens, restricted payments, the sales of assets, mergers and
consolidations, payment restrictions affecting subsidiaries and transactions
with affiliates. In addition, in the event of a change of control of
Graham-Field as defined in the Indenture, each holder of the Senior Subordinated
Notes will have the right to require Graham-Field to repurchase such holder's
Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Graham-Field will be required in certain circumstances
to make an offer to purchase Senior Subordinated Notes at a purchase price equal
to 100% of the principal amount thereof plus accrued and unpaid interest to the
date of purchase, with the net cash proceeds of certain asset sales. The Credit
Facility, however, prohibits Graham-Field from purchasing the Senior
Subordinated Notes without the consent of the lenders thereunder.
In addition, the Indenture prohibits the Company from declaring or paying
any dividend or making any distribution or restricted payment as defined in the
Indenture (collectively, the "Restricted Payments") (other than dividends or
distributions payable in capital stock of the Company), unless, at the time of
such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.
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 "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.
31
<PAGE> 37
Year 2000
The following disclosure is intended to be a "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The Company 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 compliance 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 for
distribution and manufacturing functions, which the Company believes are Y2K
compliant based upon representations from the supplier of such application
packages. Management believes, subject to completion of its review of the Y2K
compliance of its critical business partners (as discussed below) and completion
of product testing, that the current warehouse automation systems should be Y2K
compliant. With respect to each of these application environments, the Company
is relying on the Y2K compliance representations of suppliers and other third
parties whose activities may impact the Company's business operations. The
Company will be conducting Y2K compliance testing of these 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 have been
upgraded, and order entry is anticipated to be upgraded during the first half of
1999. The manufacturing system upgrade is in process, and one of the five
manufacturing sites has been completed. The remaining manufacturing sites are
currently in the remediation phase with all remediation and testing scheduled to
be completed by the end of the third quarter of 1999.
In the event that the Company's IT and non-IT systems are not Y2K compliant
in time, the most reasonably likely worst case scenario is that such
non-compliance would result in a material adverse effect on the Company's
business, financial position, and results of operations in future periods. The
Company intends to create a contingency plan during 1999 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.
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 compliance
status. Although the Company anticipates completing its assessment of the Y2K
compliance of its business partners by the middle of 1999, the Company will be
relying primarily on the representations of these external parties regarding
their readiness for Y2K compliance. The inability of the Company's high-priority
business partners to be Y2K compliant 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 compliance 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 is
attempting to identify its at-risk products (which include date data
processing), prioritize these products, and identify and address pertinent Y2K
concerns. The Company is assessing the Y2K compliance representations made by
suppliers, and anticipates completing its assessment by the third quarter of
1999. Since the Company's Y2K plan is dependent in part upon these suppliers and
other key third parties being Y2K compliant, 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 compliance.
32
<PAGE> 38
A Y2K program manager has been assigned to coordinate the computer system
upgrades and the Company's Y2K compliance 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 compliant. 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 due to 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 compliance in this area. While
the total costs to become Y2K compliant in the non-IT system area are not known
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
As of December 31, 1998, 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, which bear interest at IBJ's prime rate, as adjusted from time
to time, plus one percent.
33
<PAGE> 39
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d)
LIST OF FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1998
GRAHAM-FIELD HEALTH PRODUCTS, INC.
BAY SHORE, NEW YORK
<PAGE> 40
FORM 10 - K -- ITEM 8, ITEM 14(a)(1) AND (2)(c) AND (d)
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Graham-Field Health
Products, Inc. and subsidiaries are included in Item 8:
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets -- December 31, 1998 and 1997... F-3
Consolidated Statements of Operations -- Years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1998, 1997 and 1996.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements -- December 31,
1998...................................................... F-9
The following consolidated financial statement schedule of
Graham-Field Health Products, Inc. and subsidiaries is included
in Item 14(d):
Schedule II -- Valuation and qualifying accounts............
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Graham-Field Health Products, Inc.
We have audited the accompanying consolidated balance sheets of
Graham-Field Health Products, Inc. and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Graham-Field Health Products, Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 1, the Company has incurred significant
losses in each of the three fiscal years in the period ended December 31, 1998.
In addition, as more fully described in Note 15, the Company has been named as a
defendant in at least fifteen putative class action lawsuits that have been
consolidated into an amended complaint. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Notes 1 and 15. The
consolidated financial statements and financial statement schedule do not
include any adjustments 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.
/s/ ERNST & YOUNG LLP
Melville, New York
June 3, 1999
F-2
<PAGE> 42
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
------------- ----------------
AS RESTATED, SEE
NOTE 16
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,290,000 $ 4,430,000
Accounts receivable, less allowance for doubtful accounts
of $20,107,000 and $14,368,000, respectively........... 90,969,000 87,212,000
Inventories............................................... 63,121,000 74,029,000
Notes receivable and other current assets, less allowance
for doubtful notes of $5,373,000 in 1998............... 9,252,000 7,317,000
Recoverable and prepaid income taxes...................... 1,441,000 4,422,000
Deferred tax assets....................................... -- 10,695,000
Asset held for sale....................................... -- 61,706,000
------------- ------------
TOTAL CURRENT ASSETS.............................. 168,073,000 249,811,000
Property, plant and equipment, net.......................... 40,188,000 35,890,000
Excess of cost over net assets acquired, net of accumulated
amortization of $20,664,000 and $11,441,000,
respectively.............................................. 207,554,000 230,063,000
Deferred tax assets......................................... -- 7,924,000
Other assets................................................ 13,044,000 13,649,000
------------- ------------
TOTAL ASSETS...................................... $ 428,859,000 $537,337,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit facility........................................... $ 27,606,000 $ 65,883,000
Current maturities of long-term debt...................... 1,235,000 2,619,000
Accounts payable.......................................... 28,915,000 33,758,000
Accrued expenses.......................................... 33,941,000 48,419,000
------------- ------------
TOTAL CURRENT LIABILITIES......................... 91,697,000 150,679,000
Long-term debt and Senior Subordinated Notes................ 106,715,000 107,733,000
Other long-term liabilities................................. 10,580,000 13,816,000
------------- ------------
TOTAL LIABILITIES................................. 208,992,000 272,228,000
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.01 per share:
authorized shares 300,000, none issued.................... -- --
Series B preferred stock, par value $.01 per share:
authorized shares 6,100, issued and outstanding 6,100..... 28,200,000 28,200,000
Series C preferred stock, par value $.01 per share:
authorized shares 1,000, issued and outstanding 1,000..... 3,400,000 3,400,000
Common stock, par value $.025 per share:
authorized shares 60,000,000, issued and outstanding
31,311,104 and 30,574,982, respectively................... 783,000 764,000
Additional paid-in capital.................................. 286,503,000 280,179,000
Accumulated deficit......................................... (97,587,000) (47,530,000)
Accumulated other comprehensive income (loss)............... (1,432,000) 96,000
------------- ------------
TOTAL STOCKHOLDERS' EQUITY........................ 219,867,000 265,109,000
Commitments and contingencies............................... -- --
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 428,859,000 $537,337,000
============= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 43
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
AS RESTATED, AS RESTATED,
SEE NOTE 16 SEE NOTE 16
<S> <C> <C> <C>
Net revenues:
Medical equipment and supplies................. $378,840,000 $261,672,000 $142,711,000
Interest and other income...................... 2,026,000 1,162,000 559,000
------------ ------------ ------------
380,866,000 262,834,000 143,270,000
------------ ------------ ------------
Costs and expenses:
Cost of revenues............................... 265,360,000 193,127,000 100,998,000
Selling, general and administrative............ 138,986,000 73,612,000 35,846,000
Interest expense............................... 12,652,000 7,260,000 2,762,000
Purchased in-process research and development
costs....................................... -- 3,300,000 12,500,000
Merger and restructuring related charges....... (3,547,000) 22,544,000 2,646,000
------------ ------------ ------------
413,451,000 299,843,000 154,752,000
------------ ------------ ------------
Loss before income taxes and extraordinary
item........................................... (32,585,000) (37,009,000) (11,482,000)
Income taxes (benefit)........................... 16,407,000 (10,592,000) 1,356,000
------------ ------------ ------------
Loss before extraordinary item................... (48,992,000) (26,417,000) (12,838,000)
Extraordinary loss on early retirement of debt
(net of tax benefit of $383,000)............... -- -- (736,000)
------------ ------------ ------------
Net loss......................................... (48,992,000) (26,417,000) (13,574,000)
Preferred stock dividends........................ 1,065,000 1,065,000 --
------------ ------------ ------------
Net loss attributable to common stockholders..... $(50,057,000) $(27,482,000) $(13,574,000)
============ ============ ============
Net loss per common share -- basic and diluted:
Loss before extraordinary item................... $ (1.61) $ (1.33) $ (.82)
Extraordinary loss on early retirement of debt... -- -- (.05)
------------ ------------ ------------
Net loss......................................... $ (1.61) $ (1.33) $ (.87)
============ ============ ============
Weighted average number of common shares
outstanding.................................... 31,111,000 20,600,000 15,557,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 44
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B SERIES C COMMON STOCK ADDITIONAL
PREFERRED PREFERRED --------------------- PAID-IN ACCUMULATED
TOTAL STOCK STOCK SHARES AMOUNT CAPITAL DEFICIT
------------ ----------- ---------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 (see
Note 16).................... $ 60,882,000 15,065,286 $377,000 $ 66,891,000 $ (6,386,000)
Net loss (as restated, see
Note 16).................. (13,574,000) -- -- -- (13,574,000)
Other comprehensive income
(loss):
Translation adjustment...... (12,000) -- -- -- --
------------
Total comprehensive loss.... (13,586,000)
Issuance of common stock on
exercise of stock
options................... 550,000 153,255 4,000 711,000 --
Issuance of stock in
connection with
acquisitions.............. 65,809,000 $28,200,000 $3,400,000 4,477,720 112,000 34,097,000 --
Tax benefit from exercise of
stock options............. 38,000 -- -- -- -- 38,000 --
Retirement of Treasury
Stock..................... -- -- -- (45,517) (1,000) (164,000) --
Dividend accrued on
Preferred Stock........... (88,000) -- -- -- -- -- (88,000)
Notes receivable from
officers for sale of
shares.................... (155,000) -- -- -- -- -- --
------------ ----------- ---------- ---------- -------- ------------ -------------
BALANCE, DECEMBER 31, 1996
(as restated, see Note
16)....................... 113,450,000 28,200,000 3,400,000 19,650,744 492,000 101,573,000 (20,048,000)
Net loss (as restated, see
Note 16).................. (26,417,000) -- -- -- -- -- (26,417,000)
Other comprehensive income
(loss):
Translation adjustment...... 108,000 -- -- -- -- -- --
------------
Total comprehensive loss.... (26,309,000)
Issuance of common stock on
exercise of stock
options................... 1,212,000 -- -- 527,975 13,000 2,816,000 --
Compensation component of
employee stock options.... 838,000 -- -- -- -- 838,000 --
Issuance of stock in
connection with
acquisitions.............. 175,944,000 -- -- 10,490,133 262,000 175,682,000 --
Issuance of common stock for
accrued dividends......... 364,000 -- -- 41,000 1,000 363,000 --
Tax benefit from exercise of
stock options............. 520,000 -- -- -- -- 520,000 --
Retirement of Treasury
Stock..................... -- -- -- (134,870) (4,000) (1,613,000) --
Dividend accrued on
Preferred Stock........... (1,065,000) -- -- -- -- -- (1,065,000)
<CAPTION>
ACCUMULATED
TREASURY STOCK OTHER
---------------------- COMPREHENSIVE NOTES RECEIVABLE
SHARES AMOUNT INCOME (LOSS) FROM SALE OF SHARES
-------- ----------- ------------- -------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 (see
Note 16)....................
Net loss (as restated, see
Note 16)..................
Other comprehensive income
(loss):
Translation adjustment...... $ (12,000)
Total comprehensive loss....
Issuance of common stock on
exercise of stock
options................... (45,517) $ (165,000) --
Issuance of stock in
connection with
acquisitions.............. -- -- --
Tax benefit from exercise of
stock options............. -- -- --
Retirement of Treasury
Stock..................... 45,517 165,000 --
Dividend accrued on
Preferred Stock........... -- -- --
Notes receivable from
officers for sale of
shares.................... -- -- -- $(155,000)
-------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1996
(as restated, see Note
16)....................... -- -- (12,000) (155,000)
Net loss (as restated, see
Note 16).................. -- -- -- --
Other comprehensive income
(loss):
Translation adjustment...... -- -- 108,000 --
Total comprehensive loss....
Issuance of common stock on
exercise of stock
options................... (134,870) (1,617,000) -- --
Compensation component of
employee stock options.... -- -- -- --
Issuance of stock in
connection with
acquisitions.............. -- -- -- --
Issuance of common stock for
accrued dividends......... -- -- -- --
Tax benefit from exercise of
stock options............. -- -- -- --
Retirement of Treasury
Stock..................... 134,870 1,617,000 -- --
Dividend accrued on
Preferred Stock........... -- -- -- --
</TABLE>
F-5
<PAGE> 45
<TABLE>
<CAPTION>
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
SERIES B SERIES C COMMON STOCK ADDITIONAL
PREFERRED PREFERRED --------------------- PAID-IN ACCUMULATED
TOTAL STOCK STOCK AMOUNT CAPITAL DEFICIT
------------ ----------- ---------- SHARES -------- ------------ -------------
----------
<S> <C> <C> <C> <C> <C> <C> <C>
Notes receivable from
officers.................. 155,000 -- -- -- -- -- --
BALANCE, DECEMBER 31, 1997
(as restated, see Note
16)....................... 265,109,000 28,200,000 3,400,000 30,574,982 764,000 280,179,000 (47,530,000)
Net loss.................... (48,992,000) -- -- -- -- -- (48,992,000)
Other comprehensive income
(loss):
Translation adjustment...... (544,000) -- -- -- -- -- --
Minimum pension liability... (984,000) -- -- -- -- -- --
------------
Total comprehensive loss.... (50,520,000)
Issuance of common stock on
exercise of stock
options................... 4,689,000 -- -- 645,353 16,000 5,276,000 --
Compensation component of
employee stock options.... 954,000 -- -- -- -- 954,000 --
Issuance of common stock for
accrued dividends......... 700,000 -- -- 129,654 4,000 696,000 --
Retirement of Treasury
Stock..................... -- -- -- (38,885) (1,000) (602,000) --
Dividend accrued on
Preferred Stock........... (1,065,000) -- -- -- -- -- (1,065,000)
------------ ----------- ---------- ---------- -------- ------------ -------------
BALANCE, DECEMBER 31, 1998.... $219,867,000 $28,200,000 $3,400,000 31,311,104 $783,000 $286,503,000 $ (97,587,000)
============ =========== ========== ========== ======== ============ =============
<CAPTION>
GRAHAM-FIELD HEALTH PRODUCTS,
CONSOLIDATED STATEMENTS OF STO
ACCUMULATED
TREASURY STOCK OTHER
---------------------- COMPREHENSIVE NOTES RECEIVABLE
AMOUNT INCOME (LOSS) FROM SALE OF SHARES
SHARES ----------- ------------- -------------------
--------
<S> <C> <C> <C> <C>
Notes receivable from
officers.................. -- -- -- 155,000
BALANCE, DECEMBER 31, 1997
(as restated, see Note
16)....................... -- -- 96,000 --
Net loss.................... -- -- -- --
Other comprehensive income
(loss):
Translation adjustment...... -- -- (544,000) --
Minimum pension liability... -- -- (984,000) --
Total comprehensive loss....
Issuance of common stock on
exercise of stock
options................... (38,885) (603,000) -- --
Compensation component of
employee stock options.... -- -- -- --
Issuance of common stock for
accrued dividends......... -- -- -- --
Retirement of Treasury
Stock..................... 38,885 603,000 -- --
Dividend accrued on
Preferred Stock........... -- -- -- --
-------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1998.... -- $ -- $(1,432,000) $ --
======== =========== =========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 46
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
AS RESTATED, AS RESTATED,
SEE NOTE 16 SEE NOTE 16
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $(48,992,000) $ (26,417,000) $(13,574,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................. 14,413,000 6,493,000 3,559,000
Deferred income taxes......................... 16,610,000 (14,134,000) 577,000
Provisions for losses on accounts
receivable................................. 11,904,000 6,292,000 1,176,000
Provision for losses on notes receivable...... 4,500,000
Gain on sale of product line.................. -- -- (360,000)
Gain on sale of marketable securities......... -- (41,000) --
Loss on disposal of property, plant and
equipment.................................. 197,000 121,000 --
Purchased in-process research and development
cost....................................... -- 3,300,000 12,500,000
Non-cash amounts included in merger and
restructuring related charges.............. (3,547,000) 20,018,000 1,051,000
Non-cash compensation component of employee
stock options.............................. 954,000 838,000 --
Non-cash amounts included in extraordinary
loss....................................... -- -- 476,000
Non-cash separation charges................... 2,387,000 -- --
Non-cash asset impairment..................... 1,873,000 -- --
Other......................................... 1,592,000 -- --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable........................ (14,073,000) (27,528,000) (10,957,000)
Inventories................................ 10,942,000 (5,585,000) (3,951,000)
Other current assets and recoverable and
prepaid income taxes..................... 1,363,000 (3,382,000) (1,362,000)
Accounts and acceptances payable and
accrued expenses......................... (21,060,000) 648,000 14,206,000
------------ ------------- ------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES.................................... (20,937,000) (39,377,000) 3,341,000
Proceeds from sale of marketable securities..... -- 104,198,000 --
Proceeds from sale of asset held for sale....... 60,167,000 -- --
Purchase of marketable securities............... -- (104,157,000) --
Purchase of property, plant and equipment....... (10,768,000) (6,555,000) (1,085,000)
Acquisitions, net of cash acquired.............. (555,000) (10,093,000) (4,371,000)
Decrease in excess of cost over net assets
acquired...................................... 6,144,000 -- --
Proceeds from the sale of property, plant, and
equipment..................................... 17,000 240,000 --
Proceeds from sale of product line.............. -- -- 500,000
Proceeds from sale of assets under leveraged
lease......................................... -- -- 487,000
Notes receivable from officers.................. -- -- (155,000)
Net decrease (increase) in other assets......... 480,000 (4,321,000) (41,000)
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................... $ 55,485,000 $ (20,688,000) $ (4,665,000)
</TABLE>
F-7
<PAGE> 47
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
AS RESTATED, AS RESTATED,
SEE NOTE 16 SEE NOTE 16
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of Senior Subordinated
Notes......................................... $ -- $ 100,000,000 $ --
Net (payments) borrowing under credit
facility...................................... (38,277,000) 51,898,000 11,885,000
Proceeds from long-term debt.................... 54,000 1,253,000 4,000,000
Principal payments on long-term debt............ (2,086,000) (66,177,000) (24,151,000)
Payments on acceptances payable, net............ -- (19,800,000) --
Proceeds on exercise of stock options........... 4,621,000 1,212,000 550,000
Payment of preferred stock dividends............ -- (435,000) --
Proceeds from issuance of preferred stock in
connection with an acquisition................ -- -- 10,000,000
Payments of note issue costs.................... -- (4,642,000) --
------------ ------------- ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.................................... (35,688,000) 63,309,000 2,284,000
------------ ------------- ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................... (1,140,000) 3,244,000 960,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR.......................................... 4,430,000 1,186,000 226,000
------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 3,290,000 $ 4,430,000 $ 1,186,000
============ ============= ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid................................. $ 12,811,000 $ 3,130,000 $ 2,975,000
============ ============= ============
Income taxes paid (net of refunds)............ $ (7,627,000) $ 4,094,000 $ 187,000
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 48
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Graham-Field Health Products, Inc.
("Graham-Field" or the "Company") is a manufacturer and distributor of
healthcare products targeting the home healthcare, medical/surgical,
rehabilitation and long-term care markets in North America, Europe, Central and
South America, and Asia. The Company markets and distributes a broad range of
products under its own brand names and under suppliers' names throughout the
world. The Company maintains manufacturing and distribution facilities
throughout North America. The Company's products are marketed principally to
hospital, nursing home, physician, home healthcare and rehabilitation dealers,
healthcare product wholesalers and retailers, including drug stores, catalog
companies, pharmacies, home-shopping related businesses, and certain
governmental agencies.
The Company operates in one reportable segment -- healthcare products. The
Company's principal products and product lines include wheelchairs and power
wheelchair seating systems, mobility products and bathroom safety products,
medical beds and patient room furnishings, blood pressure and diagnostic
products, adult incontinence products, specialty seating products, wound care
and urologicals, ostomy products, diabetic products, obstetrical supplies,
nutritional supplements, therapeutic support systems and respiratory equipment
and supplies. By offering a wide range of products from a single source, the
Company enables its customers to reduce purchasing costs, including transaction,
freight and inventory expenses.
The following is a summary of the Company's revenues from its principal
product lines or products:
<TABLE>
<CAPTION>
% OF TOTAL REVENUE
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Wheelchairs and related positioning products................ 22% 33% 7%
Ambulatory and patient aids................................. 12% 8% 5%
Incontinence products....................................... 6% 7% 8%
Sphygmomanometers........................................... 3% 3% 5%
Wound care and ostomy products.............................. 4% 4% 6%
</TABLE>
No other product line or product accounted for more than 5% of annual
revenues for each year.
The Company's business operations are primarily conducted in North America.
The following is a summary of revenues attributable to customers located in the
United States and foreign countries:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
United States............................ $350,497,000 $237,227,000 $135,947,000
Foreign.................................. 28,343,000 24,445,000 6,764,000
------------ ------------ ------------
$378,840,000 $261,672,000 $142,711,000
============ ============ ============
</TABLE>
At December 31, 1998, 1997 and 1996, the Company had long-lived assets
(property, plant and equipment and excess of cost over net assets acquired)
located in foreign countries (Mexico and Canada) of approximately $5.0 million,
$6.5 million and $2.3 million, respectively. The balance of the Company's long-
lived assets are located in the United States.
Liquidity, Financial Results and Basis of Presentation: At December 31,
1998, the Company had working capital of approximately $76.4 million and unused
availability of approximately $15.7 million under its Senior Secured Revolving
Credit Facility, as amended (the "Credit Facility"), with IBJ Whitehall Business
Credit Corp. (formerly known as IBJ Schroder Business Credit Corp.), as agent
(IBJ). As of June 1, 1999, after giving effect to the 1999 Amendment (see Note
6), the Company had unused availability of approximately $7.2 million. The
Company has incurred significant losses in each of the three years in the
F-9
<PAGE> 49
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period ended December 31, 1998 and in the first quarter of 1999. These losses
have arisen as a result of a significant amount of merger, restructuring and
other expenses related to acquisitions completed in 1996 and 1997, 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 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 and other advisory fees in the first quarter
of 1999, all of which management believes to be substantially non-recurring.
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 (see Note 15).
As further described in Note 6, the Company was not in compliance with
certain financial covenants, and other terms and provisions contained in the
Credit Facility at June 30, 1998, December 31, 1998 and March 31, 1999. On April
22, 1999 (and as subsequently amended as of May 21 and June 3, 1999), the
Company entered into an amendment to the Credit Facility, which provided for,
among other things, a waiver of these 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 consistent with the Company's business plan for the remainder of
1999, and an extension of the term of the Credit Facility from December 10, 1999
to May 31, 2000.
In response to the losses incurred in 1997, 1998 and the first quarter of
1999, management has commenced a program to reduce operating expenses, improve
gross margins and reduce the investment in working capital during the remainder
of 1999 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 3; (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 currently expects
that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment. Management also believes that,
if necessary, it could sell certain assets to meet cash requirements which would
require the consent of the lenders under the Credit Facility.
Management believes that such objectives are attainable, however, there can
be no assurance that the Company will be successful in its efforts to improve
its cash flow from operations or that it will be able to obtain such additional
borrowing availability on satisfactory terms in a timely manner to provide
sufficient cash for operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments 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.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries, each of which is wholly-owned.
All material intercompany accounts and transactions have been eliminated in
consolidation.
Restatement: In March 1999, the Company reported that an investigation
conducted by the Company's Audit Committee, with the assistance of outside
counsel, had found certain accounting errors and irregularities with respect to
the Company's financial results. Based on the results of the investigation, the
Company has restated its previously issued Consolidated Financial Statements for
1996 and 1997. The Company has also
F-10
<PAGE> 50
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restated the financial results for the first, second and third quarters of 1998
to correct for certain accounting errors. The 1998 adjustments are unrelated to
the investigation conducted by the Company's Audit Committee, which was
announced in March 1999. (See Notes 16 and 17.)
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market. Cost
is determined principally on the standard cost method for manufactured goods and
on the average cost method for other inventories, each of which approximates
actual cost on the first-in, first-out method.
Property, Plant and Equipment: Property, plant and equipment is recorded
at cost, less accumulated depreciation and amortization. Depreciation and
amortization is computed on the straight-line method over the lesser of the
estimated useful lives of the related assets or, where appropriate, the lease
term.
Long-Lived Assets: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This standard establishes the accounting for the impairment of long-lived
assets, certain identifiable intangibles and the excess of cost over net assets
acquired, related to those assets to be held and used in operations, whereby
impairment losses are required to be recorded when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets and certain identifiable intangibles that
are expected to be disposed of. The adoption of SFAS No. 121 did not have a
material effect on the results of operations or financial condition of the
Company.
Excess of cost over net assets acquired is amortized on a straight-line
basis over 30 to 40 years. The carrying value of such costs are reviewed by
management as to whether the facts and circumstances indicate that an impairment
may have occurred. If this review indicates that such costs or a portion thereof
will not be recoverable, as determined based on the undiscounted cash flows of
the entities acquired, over the remaining amortization period, the carrying
value of these costs will be measured by comparing the fair value of the group
of assets acquired to the carrying value. If fair values are unavailable, the
carrying value will be measured by comparing the carrying values to the
discounted cash flows. Based upon present operations and strategic plans,
management believes that no impairment of the excess of cost over net assets
acquired has occurred other than as described in Note 2.
Revenue Recognition Policy: The Company recognizes revenue when products
are shipped with appropriate provisions for uncollectible accounts and credits
for returns.
Income Taxes: The Company and its subsidiaries file a consolidated Federal
income tax return. The Company uses the liability method in accounting for
income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes".
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Earnings Per Common Share Information: 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")
in the aggregate amount
F-11
<PAGE> 51
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $1,065,000 in 1998 and 1997. Conversion of the preferred stock and common
equivalent shares was not assumed since the result would have been antidilutive.
Employee Stock Options: SFAS No. 123, "Accounting for Stock-Based
Compensation," defines a fair value method of accounting for the issuance of
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Pursuant to SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose in the
financial statement footnotes, pro forma net (loss) income and per share amounts
as if the new method of accounting was applied for all grants made beginning
with 1995. The Company has elected to continue to account for stock issued to
employees in accordance with APB No. 25.
The Company has a stock option program which is more fully described in
Note 11. Under the Company's stock option program, options are granted with an
exercise price equal to the market price of the underlying common stock of the
Company on the date of grant.
Concentration of Credit Risk: The Company is a manufacturer and
distributor of healthcare products targeting the home healthcare,
medical/surgical, rehabilitation and long-term care markets in North America,
Europe, Central and South America, and Asia. The Company's products are marketed
principally to hospital, nursing home, physician, home healthcare and
rehabilitation dealers, healthcare product wholesalers and retailers, including
drug stores, catalog companies, pharmacies, home shopping related businesses,
and certain governmental agencies. Third party reimbursement through private or
governmental insurance programs and managed care programs have increasingly
impacted the Company's customers, which affects a portion of the Company's
business. The Company performs periodic credit evaluations of its customers'
financial condition and in certain instances requires collateral. Receivables
generally are due within 30 to 120 days, except for notes receivable which have
a stated term. In the fourth quarter of 1997, a provision for uncollectible
accounts and notes receivable of $5 million (which provision is included in
selling, general and administrative expenses) was recorded to reflect increased
credit risk due to the anticipated impact of changes in state medicare
reimbursement and procurement policies for certain product lines and the
extended payment terms being taken by the Company's customers. The changes in
such reimbursement patterns resulted in an increased number of days outstanding
for receivables. In 1998, the Company continued to experience deterioration in
its days outstanding for receivables. In the fourth quarter of 1998, the Company
recorded an additional provision of $11 million for accounts and notes
receivable (which provision is included in selling, general and administrative
expenses) to reflect anticipated losses from one customer in financial
difficulty and several other customer accounts placed in collection.
Concentration of Sources of Supply: The business of Everest & Jennings
International Ltd. ("Everest & Jennings"), a wholly-owned subsidiary of the
Company, is heavily dependent on its maintenance of a key supply contract.
Everest & Jennings obtains the majority of its commodity wheelchairs and
wheelchair components pursuant to an exclusive supply agreement (the "Wheelchair
Supply Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"), an Indonesian
manufacturer. The term of this agreement extends until June 30, 2000, and on
each June 30 thereafter automatically renews for an additional year unless
Everest & Jennings elects not to extend the agreement or Everest & Jennings
fails to order at least 50% of the contractually specified minimums and P.T.
Dharma elects to terminate the agreement or either party terminates the
agreement as a result of a material breach of the agreement after notice and the
expiration of the applicable cure period. If the Wheelchair Supply Agreement is
terminated, there can be no assurance that Everest & Jennings will be able to
enter into a suitable wheelchair supply agreement with another manufacturer. The
failure by Everest & Jennings to secure an alternate source of supply would
result in a material adverse effect on Graham-Field's business and financial
condition. In February 1998, the Company advanced $3.5 million to P.T. Dharma
(the "P.T. Dharma Advance") in consideration of the grant of a six
F-12
<PAGE> 52
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
month option to purchase the wheelchair assets of P.T. Dharma for a price to be
determined. In March 1999, the P.T. Dharma Advance was converted into a three
year loan arrangement (the "P.T. Dharma Loan Agreement"). Under the terms of the
P.T. Dharma Loan Agreement, P.T. Dharma is required to repay the P.T. Dharma
Advance to Graham-Field over a period of three years, with interest at
Graham-Field's borrowing rate, as adjusted from time to time, in monthly
installments ranging from $50,000 to $100,000 per month. The P.T. Dharma Loan
Agreement is secured by the shares of the capital stock of P.T. Dharma and
guaranteed by the principal stockholders of P.T. Dharma. In the fourth quarter
of 1998, the Company recorded a $3,000,000 provision (included in selling,
general and administrative expenses) against the advance as a result of adverse
political conditions in Indonesia and a deterioration in the financial condition
of P.T. Dharma.
Foreign Currency Translation: The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars in accordance with the
provisions of SFAS No. 52, "Foreign Currency Translation." The assets and
liabilities of subsidiaries, other than the Company's Mexican subsidiary, are
translated at year-end exchange rates. Revenues and expenses are translated at
the average exchange rate for each year. The resulting translation adjustments
for each year are recorded as a separate component of stockholders' equity. For
1997 and 1998, Mexico is considered a highly inflationary economy and,
accordingly, inventories and property plant and equipment for the Company's
Mexican subsidiary are translated at historical rates, while other assets and
liabilities are translated at year-end rates. All foreign currency transaction
gains and losses are included in the determination of income and are not
significant.
Research and Development: Research and development costs are expensed as
incurred. The amount of such costs for 1998 and 1997 was $1,003,000 and
$392,000, respectively. Research and development costs for 1996 were not
material. See Note 2 for a discussion of purchased in-process research and
development expensed in connection with certain acquisitions.
New Accounting Pronouncements: 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 expensed
as incurred until certain capitalization criteria are met. The Company will
adopt SOP 98-1 prospectively beginning January 1, 1999. Based on the Company's
current information systems plans, which include completing its Year 2000
remediation program and completing the upgrade of its order entry and
manufacturing system, adoption of this statement is not expected to 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. 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.
2. ACQUISITIONS OF BUSINESSES
On December 30, 1997, the Company acquired Fuqua Enterprises, Inc.
(currently, Lumex/Basic American Holdings, Inc.) ("Fuqua") pursuant to an
Agreement and Plan of Merger (the "Fuqua Merger Agreement"), dated as of
September 5, 1997 and amended as of September 29, 1997, by and among Fuqua, GFHP
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Company ("Sub"), and the Company. Under the terms of the Fuqua Merger Agreement,
Sub was merged with and into Fuqua with Fuqua continuing as the surviving
corporation wholly-owned by the Company (the "Fuqua Merger"). In the Fuqua
Merger, each share of Fuqua's common stock, par value $2.50 per share (the
"Fuqua Common Stock"), other than shares of Fuqua Common Stock canceled pursuant
to the Fuqua Merger Agreement, was converted into the right to receive 2.1
shares of common stock, par value $.025 per share, of the Company (the
F-13
<PAGE> 53
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Company Common Stock"). There were 4,482,709 shares of Fuqua Common Stock
outstanding on December 30, 1997, which converted into 9,413,689 shares of the
Company Common Stock.
In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options as adjusted for the exchange ratio of
2.1 is approximately 885,150 shares of the Company Common Stock. For purposes of
calculating the purchase price, the Company Common Stock was valued at $16.69
per share, which represents the average closing market price of the Company
Common Stock for the period three business days immediately prior to and three
business days immediately after the announcement on September 8, 1997 of the
execution of the Fuqua Merger Agreement.
The acquisition of Fuqua has been accounted for under the purchase method
of accounting and, accordingly, the operating results of Fuqua have been
included in the Company's consolidated financial statements from the date of
acquisition. Fuqua contributed approximately $2,100,000 of revenue for the year
ended December 31, 1997. The Company allocated $3,300,000 of the purchase price
to purchased in-process research and development projects which have not reached
technological feasibility and have no probable alternative future uses and
accordingly, expensed such purchased in-process and research and development
projects in 1997. At the December 31, 1997 acquisition date, the Company
recorded a preliminary estimate of the excess of the aggregate purchase price
over the estimated fair market value of the net assets acquired of approximately
$134.9 million, and during 1998 reduced such amount by $13.7 million following
the receipt of all information necessary to complete the purchase price
allocation. The excess of cost over the estimated fair value of net assets
acquired is being amortized on a straight line basis over 30 years.
In connection with the Fuqua Merger, the Company acquired the leather
operations of Fuqua ("Leather Operations"). It was the Company's intention to
dispose of this Leather Operations as soon as reasonably practicable following
the consummation of the Fuqua Merger. Accordingly, the net assets of the Leather
Operations have been reflected as "Assets held for sale" in the accompanying
consolidated balance sheet as of December 31, 1997. The net asset value of the
Leather Operations includes the value of the proceeds that were realized from
the sale of the Leather Operations. The Company did not record any earnings or
losses for the Leather Operations for the period December 30, 1997 to January
27, 1998 (date of disposal).
On January 27, 1998, Fuqua, a wholly-owned subsidiary of the Company,
disposed of the Leather Operations (the "Leather Sale Transaction") through the
sale of all of the capital stock of Irving Tanning Company ("ITC"), Hancock
Ellsworth Tanners, Inc., Kroy Tanning Company, Incorporated and Seagrave Leather
Corporation (collectively, the "Leather Companies"), to the management of ITC
pursuant to a (i) Stock Purchase Agreement dated as of January 27, 1998, by and
among IT Acquisition Corporation ("ITAC"), the Company and Fuqua, and (ii) Stock
Purchase Agreement dated as of January 27, 1998, by and among HEKS Corporation,
the Company and Fuqua. The aggregate selling price for the Leather Companies
consisted of (i) $60,167,400 in cash, (ii) an aggregate of 5,000 shares of
Series A Preferred Stock of ITAC with a stated value of $4,250,000 (which has
been valued at $1,539,000), and (iii) the assumption of debt of $2,341,250. In
addition, as the holder of the ITAC Preferred Stock, the Company is entitled to
appoint one director to the Board of Directors of ITAC.
On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medical Supplies of America, Inc., a Florida
corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement") dated August 28, 1997, by and among the
Company, S.E. (Gene) Davis and Vicki Ray (collectively the "Medapex Selling
Stockholders"). In accordance with the terms of the Reorganization Agreement,
Medapex became a wholly-owned subsidiary of the Company and the Medapex Selling
Stockholders received in the aggregate 960,000 shares of Company
F-14
<PAGE> 54
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock in exchange for all of the issued and outstanding shares of the
capital stock of Medapex. Pursuant to a Real Estate Sales Agreement dated as of
August 28, 1997 (the "Real Estate Sales Agreement"), by and between the Company
and BBD&M, a Georgia Limited Partnership and an affiliate of Medapex, the
Company acquired Medapex's principal corporate headquarters and distribution
facility in Atlanta, Georgia for a purchase price consisting of (i) $622,335
payable (x) by the issuance of 23,156 shares of the Company Common Stock and (y)
in cash in the amount of $311,167, and (ii) the assumption of debt in the amount
of $477,664. Each of the Medapex Selling Stockholders entered into a two-year
employment agreement and non-competition agreement with the Company. The Medapex
transaction was accounted for as a pooling of interests and the Company's
historical financial statements have been restated to reflect this transaction.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Net revenues:
Graham-Field........................................ $108,713,000 $126,873,000
Medapex............................................. 10,006,000 16,397,000
------------ ------------
Combined............................................ $118,719,000 $143,270,000
============ ============
Extraordinary loss, net:
Graham-Field........................................ $ -- $ (736,000)
Medapex............................................. -- --
------------ ------------
Combined............................................ $ -- $ (736,000)
============ ============
Net income (loss):
Graham-Field........................................ $ 1,474,000 $(13,916,000)
Medapex............................................. 196,000 342,000
------------ ------------
Combined............................................ $ 1,670,000 $(13,574,000)
============ ============
</TABLE>
On August 17, 1997, the Company acquired substantially all of the assets
and certain liabilities of Medi-Source, Inc. ("Medi-Source"), a privately-owned
distributor of medical supplies, for $4,500,000 in cash. The Company also
entered into a five year non-competition agreement with the previous owner in
the aggregate amount of $301,000 payable over the five year period. The
acquisition was accounted for as a purchase, and accordingly, assets and
liabilities were recorded at fair value at the date of acquisition and the
results of operations are included subsequent to that date. The excess of the
purchase price over net assets acquired was approximately $3.7 million.
On June 25, 1997, the Company acquired all of the capital stock of LaBac
Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction
pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among
the Company, LaBac Acquisition Corp., a wholly-owned subsidiary of the Company,
LaBac, Gregory A. Peek and Michael L. Peek (collectively, the "LaBac Selling
Stockholders"). In connection with the acquisition, LaBac became a wholly-owned
subsidiary of the Company, and the LaBac Selling Stockholders received in the
aggregate 772,557 shares of Company Common Stock valued at $11.77 per share in
exchange for all of the issued and outstanding shares of the capital stock of
LaBac. The Company also entered into a three year consulting agreement with the
LaBac Selling Stockholders and an entity controlled by the LaBac Selling
Stockholders, and non-competition agreements with each of the LaBac Selling
Stockholders. The acquisition was accounted for as a purchase and accordingly,
assets and liabilities were recorded at fair value at the date of acquisition
and the results of operations are included subsequent to that date. The excess
of cost over net assets acquired amounted to approximately $7.3 million.
F-15
<PAGE> 55
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the
Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for a purchase price of $1.51 million representing the
net book value of Kuschall. The purchase price was paid by the issuance of
116,154 shares of Company Common Stock valued at $13.00 per share, of which
23,230 shares were delivered into escrow. The acquisition was accounted for as a
purchase and accordingly, assets and liabilities were recorded at fair value at
the date of acquisition and the results of operations are included subsequent to
that date.
On February 28, 1997, Everest & Jennings Canadian Limited ("Everest &
Jennings Canada"), a wholly-owned subsidiary of the Company, acquired
substantially all of the assets and certain liabilities of Motion 2000 Inc. and
its wholly-owned subsidiary, Motion 2000 Quebec Inc., for a purchase price equal
to Cdn. $2.9 million (Canadian Dollars) (approximately $2.15 million). The
purchase price was paid by the issuance of 187,733 shares of the Company Common
Stock valued at $11.437 per share. The acquisition was accounted for as a
purchase and accordingly, assets and liabilities were recorded at fair value at
the date of acquisition and the results of operations are included subsequent to
that date. The excess of cost over the net assets acquired amounted to
approximately $2.5 million. In the fourth quarter of 1998, the Company recorded
a charge of $1,873,000 to reflect an impairment in this asset as a result of the
loss of exclusive rights to the principal product line of Motion 2000, Inc.
(which charge is included in selling, general and administrative expenses).
On November 27, 1996, the Company acquired Everest & Jennings pursuant to
the terms and provisions of the Amended and Restated Agreement and Plan of
Merger dated as of September 3, 1996 and amended as of October 1, 1996 (the
"Everest & Jennings Merger Agreement"), by and among the Company, Everest &
Jennings, Everest & Jennings Acquisition Corp., a wholly-owned subsidiary of the
Company ("E&J Sub"), and BIL (Far East Holdings) Limited, a Hong Kong
corporation and the majority stockholder of Everest & Jennings ("BIL"). Under
the terms of the Everest & Jennings Merger Agreement, E&J Sub was merged with
and into Everest & Jennings with Everest & Jennings continuing as the surviving
corporation wholly-owned by the Company (the "Everest & Jennings Merger").
In the Everest & Jennings Merger, each share of Everest & Jennings' common
stock, par value $.10 per share (the "Everest & Jennings Common Stock"), other
than shares of Everest & Jennings Common Stock cancelled pursuant to the Everest
& Jennings Merger Agreement, was converted into the right to receive .35 shares
of the Company Common Stock. The Company Common Stock was valued at $7.64 per
share, which represents the average closing market price of the Company Common
Stock for the period three business days immediately prior to and three business
days immediately after the announcement of the execution of the Everest &
Jennings Merger Agreement. There were 7,207,689 shares of Everest & Jennings
Common Stock outstanding on November 27, 1996, which converted into 2,522,691
shares of the Company Common Stock.
In addition, in connection with, and at the effective time of the Everest &
Jennings Merger:
(i) BIL was issued 1,922,242 shares of the Company Common Stock in
consideration of the repayment of indebtedness owing by Everest &
Jennings in the amount of $24,989,151 to Hong Kong and Shanghai
Banking Corporation Limited, which indebtedness (the "HSBC
Indebtedness") was guaranteed by BIL. The proceeds of such stock
purchase were contributed by the Company to Everest & Jennings
immediately following the Everest & Jennings Merger and used to
discharge the HSBC Indebtedness. The Company Common Stock was valued
at $7.64 per share, which represents the average closing market price
of the Company Common Stock for the period three business days
immediately prior to and three business days immediately after the
announcement of the execution of the Everest & Jennings Merger
Agreement.
(ii) The Company issued $61 million stated value of the Series B Preferred
Stock to BIL in exchange for certain indebtedness of Everest &
Jennings owing to BIL and shares of Everest & Jennings preferred
stock owned by BIL. The Series B Preferred Stock is entitled to a
dividend of 1.5% per
F-16
<PAGE> 56
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annum payable quarterly, votes on an as-converted basis as a single
class with the Company Common Stock and the Series C Preferred Stock,
is not subject to redemption and is convertible into shares of the
Company Common Stock (x) at the option of the holder thereof, at a
conversion price of $20 per share (or, in the case of certain
dividend payment defaults, at a conversion price of $15.50 per
share), (y) at the option of the Company, at a conversion price equal
to current trading prices (subject to a minimum conversion price of
$15.50 and a maximum conversion price of $20 per share) and (z)
automatically on the fifth anniversary of the date of issuance at a
conversion price of $15.50 per share. Such conversion prices are
subject to customary antidilution adjustments. Based on an
independent valuation, the fair value ascribed to the Series B
Preferred Stock was $28,200,000.
(iii) BIL was issued $10 million stated value of the Series C Preferred
Stock, the proceeds of which are available to the Company for
general corporate purposes. The Series C Preferred Stock is entitled
to a dividend of 1.5% per annum payable quarterly, votes on an
as-converted basis as a single class with the Company Common Stock
and the Series B Preferred Stock, is subject to redemption as a
whole at the option of the Company on the fifth anniversary of the
date of issuance at stated value and, if not so redeemed, will be
convertible into shares of the Company Common Stock automatically on
the fifth anniversary of the date of issuance at a conversion price
of $20 per share, subject to customary antidilution adjustments. The
fair value ascribed to the Series C Preferred Stock was $3,400,000.
(iv) Certain indebtedness in the amount of $4 million owing by the Company
to BIL was exchanged for an equal amount of unsecured subordinated
indebtedness of the Company maturing on April 1, 2001 and bearing
interest at the effective rate of 7.7% per annum (the "BIL Note").
Effective as of May 12, 1999, BIL 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 non-voting Series D Preferred Stock (the "Series D
Preferred Stock), par value .01 per share, with an aggregate stated
value equal to $4,072,000, representing the aggregate of the unpaid
principal amount and accrued interest on the BIL Note (See Note 18).
The acquisition of Everest & Jennings has been accounted for under the
purchase method of accounting and, accordingly, the operating results of Everest
& Jennings have been included in the Company's consolidated financial statements
from the date of acquisition. The Company allocated $12,500,000 of the purchase
price to purchased in-process research and development projects which have not
reached technological feasibility and have no probable alternative future uses
and accordingly, the Company expensed the purchased in-process and research
development projects at the date of acquisition. As a result of the acquisition,
the Company incurred $2,646,000 of merger related expenses, principally for
severance payments, the write-off of certain unamortized catalog and software
costs with no future value, the accrual of costs to vacate certain of the
Company's facilities, and certain insurance policies. At December 31, 1996, the
Company recorded a preliminary estimate of the excess of the aggregate purchase
price over the fair market value of the net deficiency acquired of $59.0
million, and during 1997 reduced such amount by $4.8 million following the
receipt of all information necessary to complete the purchase price allocation.
The excess of aggregate purchase price over the fair market value of the net
deficiency acquired is being amortized on a straight line basis over 30 years.
From the date of acquisition, Everest & Jennings contributed approximately
$3,634,000 of revenue for the year ended December 31, 1996.
On September 4, 1996, the Company acquired substantially all of the assets
of V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of
medical products in Puerto Rico, for a purchase price consisting of $1,704,000
in cash, and the issuance of 32,787 shares of the Company Common Stock valued at
$7.625 per share representing the closing market price of the Company Common
Stock on the last trading day immediately prior to the closing. In addition, the
Company assumed certain liabilities of V.C. Medical in the amount of $297,000.
The shares of the Company Common Stock were delivered into escrow, and have been
F-17
<PAGE> 57
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
held in escrow, subject to the resolution of a claim for indemnification
asserted by the Company. The acquisition was accounted for as a purchase and
accordingly, assets and liabilities were recorded at fair value at the date of
acquisition and the results of operations are included subsequent to that date.
The excess of cost over the net assets acquired amounted to approximately
$988,000.
The following summary presents unaudited pro forma consolidated results of
operations for the years ended December 31, 1997 and 1996 as if the acquisitions
described above occurred at the beginning of 1996. This information gives effect
to the adjustment of interest expense, income tax provisions, and to the assumed
amortization of fair value adjustments, including the excess of cost over net
assets acquired. Both the 1997 and 1996 pro forma information includes the
write-off of certain purchased in-process research and development costs of
$3,300,000 in 1997 and $15,800,000 in 1996 and merger and restructuring related
charges of $35,276,000 in 1997 and $37,922,000 in 1996 associated with the
strategic restructuring initiatives. The pro forma net loss per common share has
been calculated by assuming the payment of a dividend of 1.5% on both the Series
B Preferred Stock and Series C Preferred Stock in the aggregate amount of
$1,065,000 for each of the years ended December 31, 1997 and 1996. Conversion of
the preferred stock was not assumed since the result would have been
antidilutive.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net revenues............................................ $373,879,000 $330,387,000
============ ============
Loss before extraordinary item.......................... $(36,154,000) $(59,734,000)
============ ============
Net loss................................................ $(36,154,000) $(60,470,000)
============ ============
Common per share data -- basic and diluted:
Loss before extraordinary item.......................... $ (1.22) $ (2.02)
============ ============
Net loss per common share -- basic and diluted.......... $ (1.22) $ (2.04)
============ ============
Weighted average number of common shares outstanding.... 30,525,000 30,105,000
============ ============
</TABLE>
On March 4, 1996, the Company sold its Gentle Expressions(R) breast pump
product line for $1,000,000 of which $500,000 was paid in cash with the balance
paid by the delivery of a secured subordinated promissory note in the aggregate
principal amount of $500,000, payable over 48 months with interest at the prime
rate plus one percent. The Company recorded a gain of $360,000 in 1996, which is
included in other revenue in the accompanying condensed consolidated statements
of operations. As of March 31, 1999, the Company had received approximately
$200,000 of payments under the note, and has commenced an action to recover the
remaining balance of the note and interest thereon. As of December 31, 1998, the
Company has recorded a reserve of $160,000 against this note.
3. 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
(the "Restructuring Charges") and $4,393,000 of indirect merger charges (the
"Merger Charges"). In addition, the Company recorded a provision for inventory
write-downs of $7,732,000 in 1997 associated with the elimination of certain
non-strategic inventory and product lines (which costs are included in costs of
revenue). The Restructuring Plan was initiated to create manufacturing,
distribution and operating efficiencies and enhance the Company's position as a
low-cost supplier in the healthcare industry. The Restructuring Plan included 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, the relocation of the Company's corporate headquarters to the Lumex
facility and the closure and/or consolidation of certain other distribution
facilities and operations.
F-18
<PAGE> 58
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Restructuring Charges included exit costs of $15,301,000 related to the
elimination of duplicate manufacturing and distribution facilities, severance
costs of $650,000 for approximately 100 employees and asset write-downs of
$2,200,000 relating to assets to be sold or abandoned.
The Merger Charges related to the Fuqua acquisition and Medapex combination
with respect to the write-off of certain unamortized catalog costs with no
future value, certain insurance policies, payment of bonuses related to the
acquisitions, and various transaction costs. The Company also incurred
$3,300,000 of expenses in 1997 related to the write-off of purchased in-process
research and development costs of Fuqua.
As of March 31, 1999, the Company had completed the majority of the
initiatives contemplated in the Restructuring Plan, including the consolidation
of the Temco operations into the Lumex manufacturing facility, the relocation of
the corporate headquarters to the Lumex facility and the closure of certain
distribution centers. The Company expects to complete the closure of the other
distribution center contemplated in the Restructuring Plan by June 30, 1999.
The Company has performed a reevaluation of the required restructuring
accrual after considering the actual costs incurred to complete the initiatives
carried out to date and the estimated future costs to complete the remaining
initiatives contemplated in the Restructuring Plan. In this connection, the
Company identified certain restructuring accruals that are no longer required
and, accordingly, the Consolidated Statement of Operations includes a benefit of
$3,123,000 recorded in the fourth quarter of 1998 to reduce the Restructuring
Plan accruals.
In connection with the Company's product rationalization program initiated
in the fourth quarter of 1998 and the closure of certain distribution facilities
in connection with the Company's restructuring initiatives, the Company recorded
additional provisions for inventory of $2,389,000 (which provision is included
in cost of revenues).
The following summarizes the activity in the restructuring accrual for the
years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
MERGER AND
RESTRUCTURING WRITE OFFS ACCRUAL NET ACCRUAL
CHARGES AND CASH BALANCE CASH REDUCTION BALANCE
RECORDED IN PAYMENTS IN DECEMBER 31, PAYMENTS IN RECORDED DECEMBER 31,
1997 1997 1997 1998 IN 1998 1998
------------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Facility exit costs...... $17,501,000 $(1,294,000) $16,207,000 $(1,799,000) $(2,510,000) $11,898,000
Severance................ 650,000 -- 650,000 (323,000) (183,000) 144,000
Merger related........... $ 4,393,000 (1,598,000) 2,795,000 (2,245,000) (430,000) 120,000
----------- ----------- ----------- ----------- ----------- -----------
$22,544,000 $(2,892,000) $19,652,000 $(4,367,000) $(3,123,000) $12,162,000
=========== =========== =========== =========== =========== ===========
</TABLE>
During the fourth quarter of 1996, the Company recorded charges of
$15,146,000 related to the acquisition of Everest & Jennings. The charges
included $12,500,000 related to the write-off of purchased in-process research
and development costs and $2,646,000 for other merger related charges (see Note
2).
In 1998, the Company identified certain Everest & Jennings merger related
accruals which had been charged to operations in 1996 that are no longer
required as of the end of 1998 and, accordingly, the Consolidated Statement of
Operations includes a benefit of $424,000 recorded in the fourth quarter of 1998
to reduce such accrual.
F-19
<PAGE> 59
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Raw materials............................................. $10,739,000 $16,553,000
Work-in-process........................................... 5,412,000 6,735,000
Finished goods............................................ 46,970,000 50,741,000
----------- -----------
$63,121,000 $74,029,000
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings..................................... $18,366,000 $16,766,000
Equipment.............................................. 33,909,000 27,796,000
Furniture and fixtures................................. 3,219,000 2,301,000
Leasehold improvements................................. 3,865,000 3,170,000
Construction in progress............................... 1,923,000 1,693,000
----------- -----------
61,282,000 51,726,000
Accumulated depreciation and amortization.............. (21,094,000) (15,836,000)
----------- -----------
$40,188,000 $35,890,000
=========== ===========
</TABLE>
The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $5,297,000, $2,395,000 (excluding
amounts recorded in the Restructuring Charge), and $1,778,000, for the years
ended December 31, 1998, 1997 and 1996, respectively.
6. NOTES AND ACCEPTANCES PAYABLE
The Company is a party to a senior secured revolving credit facility, as
amended (the "Credit Facility"), which provides for borrowings of up to $50
million (after giving effect to the 1999 Amendment (as defined below)),
including letters of credit and bankers' acceptances, arranged by IBJ Whitehall
Business Credit Corp. ("IBJ"), as agent. Under the terms of the Credit Facility,
borrowings bear interest at IBJ's prime rate (7.75% at December 31, 1998), plus
one percent.
As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was
not in compliance with certain financial covenants, and other terms and
provisions contained in the Credit Facility. On April 22, 1999, the Company
entered into an amendment, which was subsequently amended as of May 21 and June
3, 1999 (the "1999 Amendment"), which provided for, among other things, the
waiver of these 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 Amendment 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. After giving effect to the 1999 Amendment, which includes the
reduction and/or elimination of certain availability and borrowing base
reserves, the Company's availability to borrow funds under the Credit Facility
remains relatively unchanged. As part of the 1999 Amendment, the Company is
required to pay a waiver fee (the "Waiver Fee") in the amount of $400,000 on or
before June 30, 1999, unless the Company either presents an acceptable business
plan to the banks on or before June 30, 1999, or repays in full all outstanding
obligations under the Credit Facility on or before June 30, 1999.
Notwithstanding the foregoing, in the event the Company is in receipt on or
before June 30, 1999 of a commitment letter, letter of intent or agreement to
F-20
<PAGE> 60
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 ninety (90) days from June 30, 1999. The Credit Facility
is secured by substantially all of the assets of the Company and the pledge of
the capital stock of certain of the Company's subsidiaries.
As of June 1, 1999, after giving effect to the 1999 Amendment, the Company
had availability to borrow up to approximately $32.1 million under the Credit
Facility, of which approximately $24.9 million was utilized.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Notes, the incurrence of additional debt,
liens, transactions with affiliates and certain consolidations, mergers and
acquisitions and sales of assets, and restrictions relating to capital
expenditures. In addition, Graham-Field is prohibited from declaring or paying
any dividend or making any distribution on any shares of common stock or
preferred stock of Graham-Field (other than dividends or distributions payable
in its stock, or split-ups or reclassifications of its stock) or applying any of
its funds, property or assets to the purchase, redemption or other retirement of
any such shares, or of any options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay
cash dividends in any fiscal year in an amount not to exceed the greater of (i)
the amount of dividends due BIL under the terms of the Graham-Field Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends. The Credit Facility contains
certain financial covenants, including a net cash flow covenant and leverage
ratio, as well as the requirement that Graham-Field reduce outstanding
borrowings with the net cash proceeds of certain asset sales.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the prepayment of principal on
subordinated debt, including the Company's 9.75% Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes"), the incurrence of additional debt,
liens, transactions with affiliates, and certain consolidations, mergers and
acquisitions, and sales of assets, dividends and other distributions (other than
the payment of dividends to BIL in accordance with the terms of the Series B and
Series C Preferred Stock). In addition, the Credit Facility contains certain
financial covenants, including a net cash flow covenant and leverage ratio, and
requires specified levels of earnings before interest and taxes, as well as the
requirement that the Company reduce outstanding borrowings with the net cash
proceeds of certain asset sales.
At December 31, 1998, the Company had aggregate direct borrowings under the
Credit Facility of $27,606,000. The weighted average interest rate on borrowings
in 1998 was 8.9%. Open letters of credit at December 31, 1998 were $1,347,000
relating to trade credit and $1,558,000 for other requirements.
At December 31, 1997, the Company had aggregate direct borrowings under the
Credit Facility of $65,883,000. On January 27, 1998, the Company used the
proceeds from the sale of the Leather Operations of $60,167,000 to repay
outstanding borrowings under the Credit Facility. The weighted average interest
rate on borrowings in 1997 was 8.5%. Open letters of credit at December 31, 1997
were $2,261,000 relating to trade credit and $1,759,000 for other requirements.
F-21
<PAGE> 61
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---------- ------------
<S> <C> <C>
BIL Note(a)................................................. $4,000,000 $4,000,000
Notes payable to International Business Machines Corp.
("IBM")(b)................................................ 35,000 490,000
Capital lease obligations(c)................................ 290,000 759,000
Term loan(d)................................................ 1,416,000 1,535,000
Other(e).................................................... 2,209,000 3,568,000
---------- ----------
7,950,000 10,352,000
Less current maturities................................ 1,235,000 2,619,000
---------- ----------
$6,715,000 $7,733,000
========== ==========
</TABLE>
- ---------------
(a) On July 18, 1996, an affiliate of BIL provided the Company with a loan in
the amount of $4,000,000, at an effective interest rate of 8.8%. The loan
was used to fund the acquisition of V.C. Medical and for general corporate
purposes. In connection with the acquisition of Everest & Jennings, the
indebtedness owing by the Company to BIL was exchanged for the BIL Note.
Under the terms of the BIL Note, the principal amount matures on April 1,
2001 and bears interest at the effective rate of 7.7% per annum and the
Company has the right to reduce the principal amount of the BIL Note in the
event punitive damages are awarded against the Company or any of its
subsidiaries which relate to any existing product liability claims of
Everest & Jennings and/or its subsidiaries involving a death prior to
September 3, 1996. Effective as of May 12, 1999, BIL waived certain events
of default under the BIL Note and exchanged all of its right, title and
interest under the BIL Note, in consideration of the issuance of 2,036
shares of the Series D Preferred Stock (See Note 18).
(b) In connection with the development of the Company's St. Louis Distribution
Center, the Company entered into an agreement with IBM to provide the
computer hardware and software, and all necessary warehousing machinery and
equipment including installation thereof. This project was primarily
financed through IBM by the issuance of the Company's unsecured notes which
corresponded to various components of the project. The unsecured notes
mature through October 2000, with interest rates ranging from 7.68% to
11.53%.
(c) At December 31, 1998, the Company is obligated under certain lease
agreements for equipment which have been accounted for as capital leases.
Future minimum payments in the aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
- ---------------------- --------
<S> <C>
1999............................................... $153,000
2000............................................... 115,000
2001............................................... 66,000
2002............................................... 15,000
--------
Total.............................................. 349,000
Less amounts representing interest................. (59,000)
--------
Present value of future minimum lease payments..... $290,000
========
</TABLE>
(d) In connection with the Fuqua Merger, the Company assumed a term loan, which
is payable in monthly installments of $9,900, bearing interest at LIBOR +
.55% through January 2001, with a final payment due at that time.
(e) Other long-term debt consists primarily of a mortgage payable for the
Company's Canadian subsidiary in the amount of $490,000 due in monthly
installments of $20,400 through November 1999, with a final
F-22
<PAGE> 62
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment of approximately $265,000 due in November 1999, and bearing interest
at 1.25% above prime. As of December 31, 1998, the interest rate was 6.75%.
In connection with the acquisition of Medapex's principal corporate
headquarters, the Company assumed debt collateralized by the principal
headquarters and requiring the payment of interest at 72% of the current
prime rate. As of December 31, 1998, the outstanding balance was $428,000,
and the interest rate was 6.12%. In connection with the acquisitions of
LaBac and Medi-Source, the Company entered into non-competition agreements
with certain former shareholders of such companies. The non-competition
agreements have a remaining balance due of $919,000 as of December 31, 1998.
In addition, the Company assumed certain debt obligations of other acquired
companies.
The scheduled maturities of the long-term debt obligations, excluding the
present value of minimum payments on capital lease obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
- ---------------------- ----------
<S> <C>
1999.............................................. $1,123,000
2000.............................................. 438,000
2001.............................................. 5,484,000
2002.............................................. 239,000
2003.............................................. 202,000
Thereafter........................................ 174,000
----------
$7,660,000
==========
</TABLE>
8. SENIOR SUBORDINATED NOTES
On August 4, 1997, the Company issued its $100 million Senior Subordinated
Notes due 2007 under Rule 144A of the Securities Act of 1933, as amended (the
"Securities Act"). On February 9, 1998, the Company completed its exchange offer
to exchange the outstanding Senior Subordinated Notes for an equal amount of 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 the Company,
subordinated in right of payment to all existing and future senior debt of the
Company, including indebtedness under the Credit Facility arranged by IBJ
Whitehall, as agent. 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 the Company (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 the
Company's obligations under the Credit Facility.
The Company is a holding company with no assets or operations other than
its investments in its subsidiaries. The subsidiary guarantors are wholly-owned
subsidiaries of the Company and comprise all of the direct and indirect
subsidiaries of the Company. Accordingly, the Company has not presented separate
financial statements and other disclosures concerning each subsidiary guarantor
because management has determined that such information is not material to
investors.
The net proceeds from the offering of the Senior Subordinated Notes were
used to repay $60.3 million of indebtedness under the Credit Facility and $5
million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes, including the funding for acquisitions and the
opening of an additional Graham-Field Express facility.
Beginning on August 15, 2002, the Senior Subordinated Notes are redeemable,
in whole or in part, at the option of the Company, at certain redemption prices
plus accrued and unpaid interest to the date of redemption. In addition, prior
to August 15, 2000, the Company may, at its option, redeem up to 25% of the
F-23
<PAGE> 63
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate principal amount of Senior Subordinated Notes originally issued with
the net proceeds from one or more public offerings of Company Common Stock at a
redemption price of 109.75% of the principal amount, plus accrued and unpaid
interest to the date of redemption; provided that at least 75% of the aggregate
principal amount of Notes originally issued remain outstanding after giving
effect to any such redemption.
The indenture ("Indenture") governing the Senior Subordinated Notes
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 the Company as defined in
the Indenture, each holder of the Senior Subordinated Notes will have the right
to require the Company 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, the
Company 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 assets sales. The Credit Facility prohibits the
Company from purchasing the Senior Subordinated Notes without the consent of the
lenders.
In addition, the Indenture prohibits the Company from declaring or paying
any dividend or making any distribution or restricted payment as defined in the
Indenture (collectively, the "Restricted Payments") (other than dividends or
distributions payable in capital stock of the Company), unless, at the time of
such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.
9. SEPARATION CHARGES
On July 29, 1998, Irwin Selinger resigned as Chairman of the Board, Chief
Executive Officer and President of the Company, and entered into a Separation
Agreement (the "Separation Agreement") with the Company. The Separation
Agreement provides for (i) the continuation of Mr. Selinger's (a) base salary of
$550,000 through July 31, 1999, (b) healthcare and insurance benefits through
July 8, 2001, and (c) automobile lease payments and associated automobile
expenses through July 8, 2001, (ii) the forgiveness of the outstanding principal
amount of $2.2 million and accrued interest under a loan made to Mr. Selinger in
the original principal amount of $2.5 million in 1997, in consideration of Mr.
Selinger's repayment of $500,000 on June 30, 1999, (iii) a three year
non-competition agreement, (iv) the continuation of Mr. Selinger's split dollar
life insurance policy in accordance with the terms of Mr. Selinger's divorce
judgment, (v) a non-disparagement agreement, (vi) mutual releases, and (vii) the
continuation of the Company's indemnification provisions for Mr. Selinger. The
Company has recorded a charge of $2,548,000 in 1998, to reflect the financial
effects of the Separation Agreement (which charge is included in selling,
general and administrative expenses).
10. EXTRAORDINARY ITEM
In December 1996, the Company repaid $20,000,000 of indebtedness under the
John Hancock Note and Warrant Agreement with proceeds from the Credit Facility.
In connection with the early retirement of the
F-24
<PAGE> 64
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
John Hancock indebtedness, the Company incurred charges relating to the
"make-whole" payment and the write-off of all unamortized financing costs
associated with the John Hancock Note and Warrant Agreement. The charges
amounted to $736,000 (net of a tax benefit of $383,000), and are reported as an
extraordinary item in 1996 in the accompanying consolidated statements of
operations.
11. STOCKHOLDERS' EQUITY
Rights Agreement
On August 12, 1996, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of the Company Common Stock. The dividend was paid on September 17, 1996
(the "Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $.01 per
share, of the Company (the "Series A Preferred Stock") at a price of $35.00 per
one one-hundredth of a share of Series A Preferred Stock (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of September 3, 1996 (the "Rights Agreement")
between the Company and American Stock Transfer & Trust Company, as Rights Agent
(the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons have acquired (an
"Acquiring Person") beneficial ownership of 20% or more of the outstanding
shares of capital stock of the Company entitled generally to vote in the
election of directors ("Voting Shares") or (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors of the Company
prior to such time as any person or group of affiliated persons becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in a person or group becoming an Acquiring Person (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Company Common Stock certificates outstanding as of the
Record Date, by such certificate with a copy of the Summary of Rights which is
attached to the Rights Agreement (the "Summary of Rights"). Notwithstanding the
foregoing, BIL will not be an Acquiring Person by virtue of its ownership of any
Voting Shares acquired in connection with the Company's acquisition of Everest &
Jennings or in accordance with the Amended and Restated Stockholder Agreement
dated as of September 3, 1996, as amended (the "BIL Stockholder Agreement"), by
and between the Company and BIL (the "BIL Voting Shares"), but BIL will become
an Acquiring Person if it acquires any Voting Shares other than BIL Voting
Shares or shares distributed generally to the holders of any series or class of
capital stock of the Company. "BIL Voting Shares" is defined in the Rights
Agreement as (i) any Voting Shares owned by BIL which were acquired by BIL in
connection with the Company's acquisition of Everest & Jennings or in accordance
with the BIL Stockholder Agreement, and (ii) any shares of the Company Common
Stock issued by the Company to BIL upon conversion of or as a dividend on the
shares referred to in clause (i) above.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Company Common Stock. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Company Common Stock certificates
issued after the Record Date upon transfer or new issuance of the Company Common
Stock will contain a notation incorporating the Rights Agreement by reference.
Until the Distribution Date (or earlier redemption or expiration of the Rights),
the surrender for transfer of any certificates for the Company Common Stock
outstanding as of the Record Date, even without such notation or a copy of the
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Company Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Company Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
F-25
<PAGE> 65
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Rights are not exercisable until the Distribution Date. The Rights will
expire on September 3, 2006 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series A
Preferred Stock (ii) upon the grant to holders of Series A Preferred Stock of
certain rights or warrants to subscribe for or purchase Series A Preferred Stock
at a price, or a securities convertible into Series A Preferred Stock with a
conversion price, less than the then-current market price of Series A Preferred
Stock or (iii) upon the distribution to holders of Series A Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in shares of
Series A Preferred Stock) or of subscription rights or warrants (other than
those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Series A Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a stock split of the Company Common Stock
or a stock dividend on the Company Common Stock payable in shares of the Company
Common Stock, subdivisions, consolidations or combinations of the Company Common
Stock occurring, in any such case, prior to the Distribution Date.
Shares of Series A Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each share of Series A Preferred Stock will be entitled
to a minimum preferential quarterly dividend payment of $1 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of the Company Common Stock. In the event of liquidation of the Company, the
holders of the Series A Preferred Stock will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per share of the Company Common
Stock. Each share of Series A Preferred Stock will have 100 votes, voting
together with the Company Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of the Company Common Stock
are exchanged, each share of Series A Preferred Stock will be entitled to
receive 100 times the amount received per share of the Company Common Stock.
These rights are protected by customary antidilution provisions.
Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Series A Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of the Company Common Stock.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earnings
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current Purchase Price,
that number of shares of common stock of the acquiring company which at the time
of such transaction will have a market value of two times the Purchase Price.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, the Rights Agreement provides that proper provision
shall be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive (subject to adjustment) upon exercise that number of
shares of the Company Common Stock having a market value of two times the
Purchase Price. At any time after any person or group becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding shares of the Company Common Stock the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such person or
group, which will have become void), in whole or in part, at an exchange ratio
of one share of the Company Common Stock, or one one-hundredth of a share of
Series A
F-26
<PAGE> 66
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock (or of a share of a class or series of Company Preferred Stock
having equivalent rights, preferences and privileges), per Right (subject to
adjustment).
The Rights Agreement provides that none of the directors or officers of
Company shall be deemed to beneficially own any Voting Shares owned by any other
director or officer solely by virtue of such persons acting in their capacities
as such, including in connection with the formulation and publication of the
recommendation of the position of the Board of Directors of the Company, and
actions taken in furtherance thereof, with respect to an acquisition proposal
relating to Company or a tender or exchange offer for the Company Common Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of Series A Preferred Stock, which may, at the election of the
Company, be evidenced by depositary receipts) and in lieu thereof, any
adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to a person or group becoming an Acquiring Person, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (the "Redemption Price"). The redemption of
the Rights may be made effective at such time on such basis with such conditions
as the Board of Directors of the Company in its sole discretion may establish.
Immediately upon any redemption of the rights in accordance with this paragraph,
the right to exercise the Rights will terminate and the only right of the holder
of the Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to (a) lower certain thresholds described above to not less than the greater of
(i) any percentage greater than the largest percentage of the outstanding Voting
Shares then known to the Company to be beneficially owned by any person or group
of affiliated or associated persons and (ii) 10%, (b) fix a Final Expiration
Date later than September 3, 2006, (c) reduce the Redemption Price or (d)
increase the Purchase Price, except that from and after such time as any person
or group of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights (other
than the Acquiring Person and its affiliates and associates).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
As long as the Rights are attached to the Company Common Stock, the Company
will issue one Right with each new share of the Company Common Stock so that all
such shares will have Rights attached. The Board of Directors of the Company has
reserved 300,000 shares of Series A Preferred Stock for issuance upon exercise
of the Rights.
Stock Transactions
On December 30, 1997, the Company acquired Fuqua (see Note 2), in
consideration of the issuance of 9,413,689 shares of the Company Common Stock
(excluding shares of Company Common Stock to be issued in connection with Fuqua
stock options assumed by the Company).
On June 25, 1997, the Company acquired the capital stock of LaBac (see Note
2), in consideration of the issuance of 772,557 shares of the Company Common
Stock.
On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the
Company, acquired Kuschall (see Note 2), in consideration of the issuance of
116,154 shares of the Company Common Stock.
F-27
<PAGE> 67
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary
of the Company, acquired Motion 2000, Inc. and Motion 2000 Quebec, Inc. (see
Note 2), in consideration of the issuance of the 187,733 shares of the Company
Common Stock.
On November 27, 1996, in connection with the acquisition of Everest &
Jennings (see Note 2), the Company issued an aggregate of 4,444,933 shares of
the Company Common Stock, and $61 million stated value of Series B Preferred
Stock and $10 million stated value of Series C Preferred Stock to BIL. The
Series B Preferred Stock is entitled to a dividend of 1.5% per annum payable
quarterly (in cash or in shares of the Company's common stock at the option of
the Company), votes on an as-converted basis as a single class with the Company
Common Stock of the Company and the Series C Preferred Stock, is not subject to
redemption and is convertible into shares of the Company Common Stock (x) at the
option of the holder thereof, at a conversion price of $20 per share (or, in the
case of certain dividend payment defaults, at a conversion price of $15.50 per
share), (y) at the option of the Company, at a conversion price equal to current
trading prices (subject to a minimum conversion price of $15.50 and a maximum
conversion price of $20 per share) and (z) automatically on the fifth
anniversary of the date of issuance at a conversion price of $15.50 per share.
Such conversion prices are subject to customary antidilution adjustments.
The Series C Preferred Stock is entitled to a dividend of 1.5% per annum
payable quarterly (in cash or in shares of the Company's common stock at the
option of the Company), with shares of the Company's common stock, votes on an
as-converted basis as a single class with the Company Common Stock and the
Series B Preferred Stock, is subject to redemption as a whole at the option of
the Company on the fifth anniversary of the date of issuance at stated value
and, if not so redeemed, will be convertible into shares of the Company Common
Stock automatically on the fifth anniversary of the date of issuance at a
conversion price of $20 per share, subject to customary antidilution
adjustments.
On November 27, 1996, the Company amended its certificate of incorporation
to provide for, among other things, an increase in the number of authorized
shares of common stock from 40,000,000 to 60,000,000 shares.
On September 4, 1996, the Company acquired substantially all of the assets
of V.C. Medical, in consideration of $1,703,829 in cash and the issuance of
32,787 shares of the Company Common Stock.
In connection with the John Hancock Note and Warrant Agreement, the Company
issued warrants to John Hancock to purchase 345,336 shares of the Company Common
Stock at exercise prices ranging from $5.17 to $5.42. The warrants expire in
February 2000.
Stock Options
Under the Company's stock option program (the "Incentive Program"), the
Company is authorized to grant incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock grants and restored
options. Incentive stock options may be granted at not less than 100% of the
fair market value of the Company Common Stock at the date of grant. Stock
options outstanding under the Incentive Program generally vest and are
exercisable at a rate of 50% per annum. Incentive and non-qualified stock
options expire five years from the date of grant. Effective as of December 21,
1995, non-employee directors' were automatically granted directors' options to
purchase 10,000 shares of the Company Common Stock on January 2nd of each year
at an exercise price equal to the fair market value of the Company Common Stock
at the date of grant. Under the terms of the Incentive Program, directors'
options were granted on January 2, 1998 to each of the Company's non-employee
directors to purchase 10,000 shares of the Company Common Stock. In general,
directors' options are exercisable one-third each year for three years, and have
a term of ten years. Effective as of February 1998, the Incentive Program was
amended to eliminate the automatic grant feature for directors' options and
provide that directors' options shall be granted upon terms and conditions
approved by the Company's Stock Option and Compensation Committee. On January 2,
1999, the Company's Stock Option and Compensation Committee granted each of the
non-employee directors a directors' option to
F-28
<PAGE> 68
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase 25,000 shares of the Common Stock at an option price equal to the fair
market value of the Common Stock on the date of grant.
In 1996, the plan was amended to increase the maximum number of shares
available from 2,100,000 to 3,000,000. On December 30, 1997, the plan was
further amended to increase the maximum number of shares available from
3,000,000 to 4,500,000.
During 1998, 1997 and 1996, officers of the Company surrendered 38,885,
134,870 and 45,517 shares, respectively, of the Company Common Stock with a fair
market value of $603,000, $1,617,000 and $165,000, respectively, in satisfaction
of the exercise price of stock options to purchase 120,331, 306,669 and 50,000
shares, respectively, of the Company Common Stock. In connection with the
surrender of shares and exercise of stock options in 1998 and 1997, the Company
recorded (as a component of selling, general and administrative expenses) stock
compensation charges of $954,000 and $838,000, respectively, for shares held
less than six months prior to the date of surrender. The shares received in
satisfaction of the exercise price of stock options were recorded as treasury
stock and were retired on a quarterly basis as authorized by the Board of
Directors. Accordingly, all such shares have been restored as authorized and
unissued shares of the Company Common Stock.
In April 1998, the Company repriced 700,000 stock options with a weighted
average exercise price of $14.55 per share that were granted to certain of the
Company's senior executives during the first quarter of 1998 to new exercise
prices of $7.50 and $7.6875, which were the fair market values of the Company's
common stock at the date of the option repricing.
In accordance with SFAS No. 123, pro forma information regarding net loss
and loss per common share has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these stock options was estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 4.64% for 1998, 6.375%
for 1997 and 6.5% for 1996; no dividend yields on the Common Stock, weighted
average volatility factors of the expected market price of the Company's Common
Stock of .84, .46 and .41; and a weighted average expected life of the option of
approximately 3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options due to changes in subjective input assumptions which may materially
affect the fair value estimate, and because the Company's employee stock options
have characteristics significantly different from those of traded options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss attributable to common
stockholders........................... $(54,089,000) $(29,037,000) $(14,063,000)
============ ============ ============
Pro forma net loss per share -- basic and
diluted:............................... $ (1.74) $ (1.41) $ (.90)
============ ============ ============
</TABLE>
F-29
<PAGE> 69
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to options during the years ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -- beginning of
year............................. 2,474,082 $8.44 1,643,175 $5.77 912,645 $5.49
Options granted:
Incentive options................ 412,442 6.00 240,483 12.25 699,121 6.45
Directors' options............... 40,000 16.31 90,000 9.33 90,000 3.25
Non-qualified options............ 1,069,193 5.35 185,453 11.96 91,764 6.02
Options outside plan............. 110,000 3.46 -- -- -- --
Fuqua stock options................ -- -- 885,150 9.69 -- --
Options exercised.................. (645,353) 8.12 (527,975) 5.36 (103,255) 3.83
Options cancelled and expired...... (459,144) 8.45 (42,204) 8.38 (47,100) 4.87
---------- ---------- ----------
Options outstanding -- end of
year............................. 3,001,220 $7.03 2,474,082 $8.44 1,643,175 $5.77
========== ========== ==========
Options exercisable at end of
year............................. 1,203,343 $8.25 1,594,142 $7.91 582,244 $5.45
========== ========== ==========
Weighted average fair value of
options granted during the
year............................. $ 2.63 $ 4.22 $ 2.10
========== ========== ==========
</TABLE>
In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options, has been adjusted for the exchange
ratio of 2.1, in accordance with the terms of the Fuqua Merger Agreement.
F-30
<PAGE> 70
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for stock options outstanding and for options exercisable
as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF OPTIONS RANGE OF
OPTIONS EXERCISABLE EXERCISE PRICES
- --------- ----------- ---------------
<S> <C> <C>
685,000 10,000 $ 2.00 - $ 2.99
280,766 115,766 3.00 - 3.99
26,050 26,050 4.00 - 4.99
15,500 15,500 5.00 - 5.99
32,500 22,500 6.00 - 6.99
1,005,251 299,001 7.00 - 7.99
150,974 92,371 8.00 - 8.99
471,350 471,350 9.00 - 9.99
15,000 7,500 10.00 - 10.99
55,677 42,838 11.00 - 11.99
137,500 68,750 12.00 - 12.99
10,000 3,333 13.00 - 13.99
19,500 9,750 14.00 - 14.99
56,152 8,634 15.00 - 15.99
40,000 10,000 16.00 - 16.99
- --------- ---------
3,001,220 1,203,343
========= =========
</TABLE>
The weighted average remaining contractual life of the above-described
stock options is approximately 4.5 years.
Shares of common stock reserved for future issuance as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Stock options............................................. 3,555,565
Warrants issued to John Hancock........................... 345,336
Series B Preferred Stock.................................. 3,935,483
Series C Preferred Stock.................................. 500,000
---------
8,336,384
=========
</TABLE>
The exercise of non-qualified stock options and disqualifying dispositions
of incentive stock options resulted in Federal and state income tax benefits to
the Company equal to the difference between the market price at the date of
exercise or sale of stock and the exercise price of the option. Accordingly,
during 1997 and 1996, approximately $520,000, and $38,000, respectively, was
credited to additional paid-in capital. No such tax benefits were credited to
additional paid-in capital during 1998 as the Company has not realized such tax
benefits due to continuing net operating losses.
F-31
<PAGE> 71
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
Current:
Federal................................... $(1,005,000) $ -- $ --
State and local........................... 153,000 -- --
Foreign................................... 236,000 1,073,000 9,000
----------- ------------ ----------
(616,000) 1,073,000 9,000
Deferred.................................... 17,023,000 (11,665,000) 1,347,000
----------- ------------ ----------
$16,407,000 $(10,592,000) $1,356,000
=========== ============ ==========
</TABLE>
Pre-tax (loss) income consists of the amounts earned in the United States
versus Foreign locations as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
United States............................ $(29,605,000) $(38,995,000) $(11,537,000)
Foreign.................................. (2,980,000) 1,986,000 55,000
------------ ------------ ------------
Total.................................... $(32,585,000) $(37,009,000) $(11,482,000)
============ ============ ============
</TABLE>
The following is a reconciliation of income tax computed at the Federal
statutory rate to the provision for taxes:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit)
computed at
statutory rate...... $(11,079,000) (34%) $(12,583,000) (34%) $(3,904,000) (34%)
Expenses not
deductible for
income tax purposes:
Amortization of excess
of cost over net
assets acquired..... 2,825,000 9% 950,000 2% 276,000 2%
In-process R&D
costs............... -- -- 1,122,000 3% 4,352,000 38%
Other................. 1,514,000 4% 369,000 1% 77,000 1%
Write-off of merger
and restructuring
charges............. -- -- 1,835,000 5% -- --
State tax expense
(benefit), net of
Federal benefit..... (903,000) (3%) (1,885,000) (5%) 155,000 1%
Foreign............... 1,054,000 3% -- -- -- --
Valuation allowance on
deferred tax
assets.............. 22,996,000 71% (400,000) (1%) 400,000 4%
------------ --- ------------ --- ----------- ---
$ 16,407,000 50% $(10,592,000) (29%) $ 1,356,000 12%
============ === ============ === =========== ===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-32
<PAGE> 72
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards............... $20,597,000 $11,934,000
Tax credits.................................... 857,000 562,000
Accounts receivable allowances................. 10,171,000 4,412,000
Inventory related.............................. 5,809,000 5,387,000
Deferred rent.................................. 78,000 349,000
Merger and restructuring related charges....... 4,986,000 8,061,000
Other reserves and accrued items............... 3,445,000 3,942,000
----------- -----------
45,943,000 34,647,000
Valuation allowance for deferred assets........ (35,114,000) (12,118,000)
----------- -----------
Total deferred tax assets.............. 10,829,000 22,529,000
----------- -----------
Deferred Tax Liabilities:
Tax in excess of book depreciation............. 5,106,000 2,148,000
Prepaid expenses............................... 4,322,000 940,000
Amortization of intangibles.................... 1,745,000 822,000
----------- -----------
Total deferred tax liabilities......... 11,173,000 3,910,000
----------- -----------
Net deferred tax
assets/(liabilities)................. $ (344,000) $18,619,000
=========== ===========
</TABLE>
At December 31, 1998, the Company had aggregate federal net operating loss
carryforwards of approximately $52,000,000 for income tax purposes, which expire
between 2010 and 2018. Approximately $24,164,000 of the net operating loss
carryforwards were acquired primarily in connection with the Everest & Jennings
acquisition and are limited to use in any particular year. At December 31, 1998,
the Company also had alternative minimum tax credits of $857,000 that have no
expiration date.
For financial reporting purposes, due to prior year losses of Everest &
Jennings, and SRLY limitations, a full valuation allowance was recorded in
purchase accounting in 1996 against the Everest & Jennings net operating losses
and deferred tax assets. Subsequent realization of any tax benefits for those
items will be recorded as a reduction of the excess of cost over net assets
acquired.
As a result of the continuation of operating losses in 1998, the Company
increased its deferred tax valuation allowance by $22,996,000 which results in a
full valuation allowance against all net deferred tax assets at December 31,
1998.
13. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
employees of Everest & Jennings and two non-contributory defined benefit pension
plans for the non-bargaining unit salaried employees ("Salaried Plan") and
employees subject to collective bargaining agreements ("Hourly Plan") at its
Smith & Davis subsidiary. Effective May 1, 1991, benefits accruing under the
Everest & Jennings pension plan were frozen. During 1991, Everest & Jennings
froze the Hourly Plan and purchased participating annuity contracts to provide
for accumulated and projected benefit obligations. In addition, Everest &
Jennings froze the Salaried Plan effective as of January 1, 1993.
Effective for the fiscal year ended December 31, 1998, the Company adopted
SFAS No. 132, "Employers Disclosure about Pensions and Other Post Retirement
Benefits." The new standard revises disclosure requirements for pensions
benefits, but does not change the measurement or recognition of those plans. The
F-33
<PAGE> 73
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
following tables, prepared in accordance with the new standard, reconcile the
changes in obligations, plan assets and funded status at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................... $18,404,000 $17,567,000
Interest cost............................................. 1,276,000 1,284,000
Actuarial losses.......................................... 1,571,000 1,243,000
Benefits paid............................................. (1,702,000) (1,690,000)
----------- -----------
Benefit obligation at end of year......................... $19,549,000 $18,404,000
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year............ $16,817,000 $14,746,000
Actual return on plan assets.............................. 1,667,000 2,534,000
Company contributions..................................... 702,000 1,226,000
Benefits paid............................................. (1,703,000) (1,689,000)
----------- -----------
Fair value of plan assets at end of year.................. $17,483,000 $16,817,000
=========== ===========
Funded status:
As of end of year......................................... $(2,066,000) $(1,587,000)
Unrecognized transition obligation........................ (50,000) (62,000)
Unrecognized net loss..................................... 1,507,000 125,000
----------- -----------
Accrued benefit cost...................................... $ (609,000) $(1,524,000)
=========== ===========
Amounts recognized in the Consolidated Balance Sheets
consist of:
Accrued benefit liability................................. $(1,593,000) $(1,806,000)
Accumulated comprehensive income.......................... 984,000 282,000
----------- -----------
Net amount recognized..................................... $ (609,000) $(1,524,000)
=========== ===========
The components of net periodic pension cost are as follows:
Interest cost............................................. $ 1,276,000 $ 1,284,000
Expected return on plan assets............................ (1,480,000) (1,428,000)
Net amortization.......................................... (10,000) 110,000
----------- -----------
Net periodic pension cost (income).......................... $ (214,000) $ (34,000)
=========== ===========
</TABLE>
The following assumptions were used to determine the projected benefit
obligations and plan assets:
<TABLE>
<CAPTION>
EVEREST &
JENNINGS SMITH & DAVIS
-------------- -------------------------------
SALARIED PLAN HOURLY PLAN
------------- ------------
1998 1997 1998 & 1997 1998 & 1997
---- ---- ------------- ------------
<S> <C> <C> <C> <C>
Weighted average discount rate.... 6.5% 7.0% 7.0% 7.0%
Expected long-term rate of return
on assets....................... 9.0% 9.0% 9.0% 9.0%
</TABLE>
As all participants are inactive and the plans are frozen, no compensation
increases were assumed.
Effective as of July 1, 1998, the Company sponsors one 401(k) Savings and
Investment Plan, pursuant to which the Company contributes 100% of the first 1%
of an employee's base salary up to a maximum of $1,000 per year. In 1997 and
1996, the Company had several subsidiary 401(k) plans, certain of which provided
for Company contributions. Amounts expensed for 1998, 1997 and 1996 were
immaterial.
F-34
<PAGE> 74
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of December 31, 1998 and 1997, for
which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amounts reported in the
accompanying balance sheets approximate fair value.
Credit facility and acceptances payable: The carrying amounts of the
Company's borrowings under its credit facility approximate their fair value.
Long-term debt and Senior Subordinated Notes: The fair value of the
Company's Senior Subordinated Notes and BIL Note are based on reported Senior
Subordinated Notes transaction values (which management believes differs from
the value at which such debt could be settled). The fair value of this debt was
approximately $67 million at December 31, 1998 as compared to a carrying value
of $104 million. At December 31, 1997, the carrying value of the Senior
Subordinated Notes and BIL Note approximates fair value.
The fair values of the Company's other long-term debt are estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements. At December 31, 1998 and
1997, the carrying amounts for this debt approximates fair value.
15. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is a party to a number of noncancellable lease agreements for
warehouse space, office space and machinery and equipment rental. As of December
31, 1998 the agreements extend for various periods ranging from 1 to 9 years and
certain leases contain renewal options. Certain leases provide for payment of
real estate taxes and include escalation clauses.
As of December 31, 1998, minimal annual rental payments under all
noncancellable operating leases (including leases related to exited facilities
for which the Company remains liable) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
- -----------------------
<S> <C>
1999................................................ $ 7,071,000
2000................................................ 6,195,000
2001................................................ 5,544,000
2002................................................ 4,637,000
2003................................................ 3,185,000
Thereafter.......................................... 8,758,000
-----------
$35,390,000
===========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996
approximated $5,435,000, $3,896,000, and $2,805,000, respectively.
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 on behalf of all
purchasers of common stock of the Company (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, and
F-35
<PAGE> 75
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
(see Note 16). While the accounting errors and irregularities are not presently
the basis for the pending class actions, counsel to the class plaintiff have
informed the Company's counsel that plaintiffs may seek to amend the
consolidated complaint to allege claims based on such items.
The Company intends to defend the lawsuit vigorously, but the Company is
not currently able to evaluate the likelihood of success in this case or the
range of potential loss. However, if the foregoing proceeding were determined
adversely to the Company, management believes that such a judgment could have a
material adverse effect on the Company's financial condition, results of
operations and/or cash flows. In addition, the staff of the SEC has advised the
Company that the SEC may conduct an investigation with respect to the
aforementioned accounting errors and irregularities.
On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug
Administration arrived at the Company's principal headquarters and one other
Company location and retrieved several documents pursuant to search warrants.
The Company has subsequently been advised by an Assistant United States Attorney
for the Southern District of Florida that the Company is a target of an ongoing
grand jury investigation involving alleged fraud by one or more of the Company's
suppliers relating to the unauthorized diversion of medical products intended
for sale outside of the United States into United States markets. The Company
has also been advised that similar search warrants were obtained with respect to
approximately 14 other participants in the distribution of medical products. The
Company is presently investigating these matters. The Company does not know when
the grand jury investigation will conclude or what action, if any, may be taken
by the government against the Company or any of its employees. 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, the 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
F-36
<PAGE> 76
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In January, April, July and October 1998, and in January 1999,
additional confirmatory samples were taken and analyzed. These analytic results
provide further support that the groundwater is not significantly contaminated.
The Lumex Division 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 Lumex Division will seek to
withdraw its groundwater work plan.
At December 31, 1998, the Company had reserves for remediation costs and
additional investigation costs which will be required. Reserves are established
when it is probable that a liability has been incurred and such costs can be
reasonably estimated. The 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.
In April 1996, Fuqua acquired the Lumex Division from Cybex International,
Inc. (formerly Lumex, Inc.) for a purchase price of $40.7 million, subject to a
final purchase price adjustment in the asset sale agreement. The final purchase
price adjustment was disputed and, pursuant to the asset sale agreement was
resolved through arbitration. On July 30, 1998, Fuqua received a payment of
$2,468,358 (inclusive of interest) from Cybex, of which $2,384,606 was recorded
as a reduction of the excess of cost over net assets acquired at September 30,
1998.
In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights as provided under the terms of the asset sale agreement.
In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit
against the seller and certain former officers stating claims for fraud, breach
of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees.
Defendants filed an answer and counterclaim on April 7, 1998, denying liability
and asserting fifteen defenses. On February 18, 1999, Cybex paid Fuqua $2.6
million in settlement of all of Fuqua's claims. As part of the settlement, Cybex
released Fuqua from all liability in connection with Cybex's counterclaim.
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 complaint
seeking damages of $25,000,000 alleges 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. Pursuant to
the defendant-employee's employment agreement, the defendant-employee is seeking
indemnification with respect to such claims. Discovery is proceeding in the
action. The Company considers the plaintiff's allegations to be without merit
and intends to defend this lawsuit vigorously.
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
F-37
<PAGE> 77
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
'Irwin Selinger, the former Chairman of the Board and Chief Executive Officer,
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 parties are presently in the process of
briefing the motion to dismiss.
In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a
company acquired by Graham-Field in June 1997, asserted certain claims 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.
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.
COLLECTIVE BARGAINING AGREEMENTS
The Company is a party to four (4) collective bargaining agreements
covering Graham-Field's facilities located in Bay Shore, New York; Earth City,
Missouri; Ontario, Canada; and Guadalajara, Mexico. The collective bargaining
agreements cover approximately 642 employees. The collective bargaining
agreements for Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and
Guadalajara, Mexico are scheduled to expire on October 19, 2001, September 13,
1999, July 24, 2003 and December 31, 1999, respectively.
Graham-Field has never experienced an interruption or curtailment of
operations due to labor controversy that had a material adverse effect on
Graham-Field's operations. Graham-Field considers its employee relations to be
satisfactory.
16. RESTATEMENT
In March 1999, the Company reported that an investigation conducted by the
Company's Audit Committee, with the assistance of outside counsel, had found
certain accounting errors and irregularities with respect to the Company's
previously reported financial results. Based on the results of the
investigation, the Company has restated its previously issued Consolidated
Financial Statements for 1996 and 1997. The following Consolidated Statements of
Operations and Balance Sheets compare the previously reported and restated
financial information.
The restatement adjustments in 1997, which had the effect of increasing the
loss before income taxes by $6.781 million, were to correct intercompany balance
differences of $4.9 million and certain costs which were incorrectly added to
the excess of cost over net assets acquired of $1.3 million, as well as other
adjustments related primarily to current period costs incorrectly charged to
restructuring and merger related accruals, and compensation expense in
connection with employee stock options and improperly recognized revenue
including revenue recognized in the incorrect period.
F-38
<PAGE> 78
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The restatement adjustments in 1996, which had the effect of increasing the
loss before income taxes by $2.527 million, were to correct for unrecorded
purchases and expenses of $1.4 million and receivable allowances of $570,000, as
well as other adjustments related primarily to sales revenue recognized in the
incorrect period, and inventory valuation adjustments.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
---------------------------- ----------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues.......................... $263,143,000 $262,834,000 $143,642,000 $143,270,000
Cost of revenues...................... 188,695,000 193,127,000 99,641,000 100,998,000
Selling, general and administrative... 70,646,000 73,612,000 34,578,000 35,846,000
Interest expense...................... 7,260,000 7,260,000 2,578,000 2,762,000
Purchased-in-process research and
development......................... 3,300,000 3,300,000 12,800,000 12,500,000
Merger and restructuring charges...... 23,470,000 22,544,000 3,000,000 2,646,000
------------ ------------ ------------ ------------
Loss before income taxes (benefit) and
extraordinary item.................. (30,228,000) (37,009,000) (8,955,000) (11,482,000)
Income taxes (benefit)................ (7,335,000) (10,592,000) 2,918,000 1,356,000
------------ ------------ ------------ ------------
Loss before extraordinary item........ (22,893,000) (26,417,000) (11,873,000) (12,838,000)
Extraordinary loss.................... -- -- (736,000) (736,000)
------------ ------------ ------------ ------------
Net loss.............................. (22,893,000) (26,417,000) (12,609,000) (13,574,000)
Preferred stock dividends............. 1,065,000 1,065,000 -- --
------------ ------------ ------------ ------------
Net loss attributable to common
shareholders........................ $(23,958,000) $(27,482,000) $(12,609,000) $(13,574,000)
============ ============ ============ ============
Net loss per common share-basic and
diluted:
Loss before extraordinary item...... $ (1.16) $ (1.33) $ (.76) $ (.82)
Extraordinary item.................. -- -- (.05) (.05)
------------ ------------ ------------ ------------
Net loss............................ $ (1.16) $ (1.33) $ (.81) $ (.87)
============ ============ ============ ============
</TABLE>
F-39
<PAGE> 79
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ----------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents.................. $ 4,430,000 $ 4,430,000 $ 1,241,000 1,186,000
Accounts receivable, net.............. 91,451,000 87,212,000 45,703,000 43,726,000
Inventories........................... 73,532,000 74,029,000 48,245,000 48,761,000
Other current assets.................. 8,103,000 7,317,000 3,023,000 2,936,000
Recoverable and prepaid
income taxes........................ 4,422,000 4,422,000 256,000 256,000
Deferred tax assets................... 10,695,000 10,695,000 -- --
Asset held for sale................... 61,706,000 61,706,000 -- --
------------ ------------ ------------ ------------
Total current assets........ 254,339,000 249,811,000 98,468,000 96,865,000
Property, plant and
equipment, net...................... 35,955,000 35,890,000 11,264,000 11,351,000
Excess of cost over net
assets acquired, net................ 240,071,000 230,063,000 91,412,000 88,690,000
Deferred tax assets................... 3,044,000 7,924,000 938,000 2,562,000
Other assets.......................... 13,709,000 13,649,000 5,112,000 4,818,000
------------ ------------ ------------ ------------
Total assets................ $547,118,000 $537,337,000 $207,194,000 $204,286,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Credit facility....................... $ 65,883,000 $ 65,883,000 $ 13,985,000 13,985,000
Current maturities of long-term
debt................................ 2,619,000 2,619,000 2,016,000 2,016,000
Accounts payable...................... 33,888,000 33,758,000 22,995,000 21,644,000
Acceptances payable................... -- -- 19,800,000 19,800,000
Accrued expenses...................... 54,331,000 48,419,000 25,608,000 25,104,000
------------ ------------ ------------ ------------
Total current liabilities... 156,721,000 150,679,000 84,404,000 82,549,000
Long-term debt and Senior
Subordinated Notes.................. 107,733,000 107,733,000 6,535,000 6,535,000
Other long-term liabilities........... 13,816,000 13,816,000 1,752,000 1,752,000
------------ ------------ ------------ ------------
Total liabilities........... 278,270,000 272,228,000 92,691,000 90,836,000
Preferred stock....................... 31,600,000 31,600,000 31,600,000 31,600,000
Common stock.......................... 764,000 764,000 492,000 492,000
Additional paid-in capital............ 279,341,000 280,179,000 101,573,000 101,573,000
Accumulated deficit................... (42,953,000) (47,530,000) (18,995,000) (20,048,000)
Other................................. 96,000 96,000 (167,000) (167,000)
------------ ------------ ------------ ------------
Total stockholders'
equity.................... 268,848,000 265,109,000 114,503,000 113,450,000
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity...... $547,118,000 $537,337,000 $207,194,000 $204,286,000
============ ============ ============ ============
</TABLE>
In addition, the January 1, 1996 accumulated deficit has been increased by
$88,000 to reflect the correction of an error related to sales revenue
recognized in the incorrect period.
17. QUARTERLY DATA (UNAUDITED)
Selected unaudited quarterly financial data for 1998 and 1997 is provided
below. Results for 1997 have been restated to correct for the findings from an
independent investigation conducted by the Audit Committee
F-40
<PAGE> 80
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Board of Directors into the accuracy of prior financial statements. See
Note 16 for a description of the restatement adjustments.
The Company also restated the financial results for the first, second and
third quarters of 1998 to correct for certain improperly recorded transactions.
The 1998 adjustments are unrelated to the investigation conducted by the
Company's Audit Committee, which was announced in March 1999. 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.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------- --------------------- --------------------- -----------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Net revenues:
Medical equipment and
supplies............. $97,727 $97,893 $ 96,936 $ 97,228 $ 93,831 $93,158 $ 90,561
Interest and other
income............... 415 415 520 520 685 685 406
------- ------- -------- -------- -------- ------- --------
98,142 98,308 97,456 97,748 94,516 93,843 90,967
Costs and expenses:
Cost of revenues........ 67,102 67,378 67,030 67,251 65,075 64,378 66,353
Selling, general and
administrative....... 28,210 29,046 30,239 30,535 32,505 31,765 47,640
Interest expense........ 2,743 2,768 3,015 3,039 3,387 3,412 3,433
Merger and restructuring
related charges...... -- -- -- -- -- -- (3,547)
------- ------- -------- -------- -------- ------- --------
98,055 99,192 100,284 100,825 100,967 99,555 113,879
------- ------- -------- -------- -------- ------- --------
Income (loss) before
income taxes
(benefit)............... 87 (884) (2,828) (3,077) (6,451) (5,712) (22,912)
Income taxes (benefit).... 800 800 (800) (800) (1,287) (1,287) 17,694
------- ------- -------- -------- -------- ------- --------
Net income (loss)......... $ (713) $(1,684) $ (2,028) $ (2,277) $ (5,164) $(4,425) $(40,606)
======= ======= ======== ======== ======== ======= ========
Net income (loss) per
common share:
Net income (loss)......... $ (713) $(1,684) $ (2,028) $ (2,277) $ (5,164) $(4,425) $(40,606)
Preferred stock
dividends............... 266 266 267 267 266 266 266
------- ------- -------- -------- -------- ------- --------
Net income (loss)
attributable to common
shareholders............ $ (979) $(1,950) $ (2,295) $ (2,544) $ (5,430) $(4,691) $(40,872)
======= ======= ======== ======== ======== ======= ========
Common shares
outstanding -- basic and
diluted................. 30,839 30,839 31,100 31,100 31,244 31,244 31,287
Basic and diluted loss per
share................... $ (.03) $ (.06) $ (.07) $ (.08) $ (.17) $ (.15) $ (1.31)
</TABLE>
- ---------------
a) No incremental shares related to conversion of the preferred stock and common
equivalent shares are included due to the loss in each quarter.
b) The first quarter 1998 selling, general and administrative expenses includes
stock compensation charges of $954.
c) The third quarter 1998 selling, general and administrative expenses includes
separation charges of $2,548.
F-41
<PAGE> 81
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d) The fourth quarter 1998 includes certain charges and credits as described
below:
<TABLE>
<S> <C>
Write-off of deferred tax asset............................. $18,310
Provision for uncollectible accounts and notes receivable... 11,047
Provision for P.T. Dharma advance........................... 3,000
Provision for inventory obsolescence........................ 2,389
Other miscellaneous charges and credits, net................ 2,320
Impairment of excess of cost over net assets acquired....... 1,873
Reversal of 1997 restructuring accrual...................... (3,547)
-------
$35,392
=======
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30
------------------------ ------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997:
Net revenues:
Medical equipment and
supplies................ $56,191 $56,016 $62,579 $62,307
Interest and other
income.................. 144 144 252 252
------- ------- ------- -------
56,335 56,160 62,831 62,559
Costs and expenses:
Cost of revenues.......... 38,438 39,234 42,503 44,224
Selling, general and
administrative.......... 13,193 14,954 14,765 15,507
Interest expense.......... 994 994 1,169 1,169
Purchased in-process
research & development
costs................... -- -- -- --
Merger and restructuring
related charges......... -- -- -- --
------- ------- ------- -------
52,625 55,182 58,437 60,900
------- ------- ------- -------
Income (loss) before income
taxes (benefit)........... 3,710 978 4,394 1,659
Income taxes (benefit)...... 1,527 407 1,681 560
------- ------- ------- -------
Net income (loss)........... $ 2,183 $ 571 $ 2,713 $ 1,099
======= ======= ======= =======
Net income (loss) per common
share:
Net income (loss)........... $ 2,183 $ 571 $ 2,713 $ 1,099
Preferred stock dividends... --(a) --(a) --(a) --(a)
------- ------- ------- -------
Net income (loss)
attributable to common
shareholders.............. $ 2,183 $ 571 $ 2,713 $ 1,099
------- ------- ------- -------
Common shares outstanding --
basic..................... 19,763 19,763 20,204 20,204
Convertible preferred
stock..................... 4,435 4,435 4,435 4,435
Incremental shares using
treasury stock method..... 966 966 849 849
------- ------- ------- -------
Common shares outstanding --
diluted................... 25,164 25,164 25,488 25,488
======= ======= ======= =======
Basic earnings per share.... $ .11 $ .03 $ .13 $ .05
Diluted earnings per
share..................... $ .09 $ .02 $ .11 $ .04
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30 DECEMBER 31
------------------------ ------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997:
Net revenues:
Medical equipment and
supplies................ $70,745 $69,919 $ 72,466 $ 73,430
Interest and other
income.................. 363 363 403 403
------- ------- -------- --------
71,108 70,282 72,869 73,833
Costs and expenses:
Cost of revenues.......... 47,159 50,064 60,595 59,605
Selling, general and
administrative.......... 16,018 18,186 26,670 24,965
Interest expense.......... 2,394 2,394 2,703 2,703
Purchased in-process
research & development
costs................... -- -- 3,300 3,300
Merger and restructuring
related charges......... -- -- 23,470 22,544
------- ------- -------- --------
65,571 70,644 116,738 113,117
------- ------- -------- --------
Income (loss) before income
taxes (benefit)........... 5,537 (362) (43,869) (39,284)
Income taxes (benefit)...... 2,187 (232) (12,730) (11,327)
------- ------- -------- --------
Net income (loss)........... $ 3,350 $ (130) $(31,139) $(27,957)
======= ======= ======== ========
Net income (loss) per common
share:
Net income (loss)........... $ 3,350 $ (130) $(31,139) $(27,957)
Preferred stock dividends... --(a) --(a) 266 266
------- ------- -------- --------
Net income (loss)
attributable to common
shareholders.............. $ 3,350 $ (130) $(31,405) $(28,223)
------- ------- -------- --------
Common shares outstanding --
basic..................... 21,078 21,078 21,296 21,296
Convertible preferred
stock..................... 4,435 4,435 --(b) --
Incremental shares using
treasury stock method..... 1,227 1,227 --(b) --
------- ------- -------- --------
Common shares outstanding --
diluted................... 26,740 26,740 21,296 21,296
======= ======= ======== ========
Basic earnings per share.... $ .16 $ (.01) $ (1.47) $ (1.33)
Diluted earnings per
share..................... $ .13 $ -- (1.47)(b) $ (1.33)(b)
</TABLE>
- ---------------
(a) Assumes conversion of the preferred stock and elimination of any dividends
in relation to such preferred stock.
(b) No incremental shares related to conversion of the preferred stock and
options are included due to the loss in the fourth quarter.
(c) The March 31 and June 30 quarters have been restated to reflect the Medapex
transaction recorded as a pooling of interests.
F-42
<PAGE> 82
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) The third quarter 1997 selling, general and administrative expenses includes
stock compensation charges of $838.
(e) The fourth quarter 1997 loss before income taxes includes certain charges
described below:
<TABLE>
<S> <C>
Merger and restructuring related charges................. $ 22,544
Provision for inventory obsolescence..................... 7,732
Provision for uncollectible accounts and notes
receivable............................................. 5,000
Write-off of purchased in-process research and
development............................................ 3,300
-------------
$ 38,576
=============
</TABLE>
18. SUBSEQUENT EVENTS
On March 24, 1999, the Board of Directors appointed a new President and
Chief Executive Officer and a new Chief Financial Officer who are employed with
Jay Alix & Associates ("JA&A"), a corporate turnaround and financial
restructuring consulting firm. In connection with such appointments, the Company
entered into an agreement with JA&A (the "Consulting Agreement") which provides
for billings on an hourly basis for services rendered. In addition, JA&A was
granted a stock option with a four year term to purchase 200,000 shares of the
Company Common Stock which vests and becomes exercisable seven months following
the termination of the consulting engagement (or upon the consummation of a sale
of the business, if earlier). The stock option contains an exercise price equal
to the lowest five day average closing price of the Company Common Stock for the
period beginning on March 24, 1999 and ending on the earlier to occur of (i)
consummation of a sale of the business, or (ii) June 22, 1999. The Consulting
Agreement also provides for a contingent success fee in the event of a sale of
all or a portion of the Company's business. The minimum amount payable to JA&A
under the Consulting Agreement, inclusive of any contingent success fee, is
$1,000,000.
Effective as of May 12, 1999, BIL waived certain events of default under
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 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.
F-43
<PAGE> 83
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL C
COL A COL B ADDITIONS COL D COL E
- ----- ----------- --------------------------------------- ---------------- -----------
1
BALANCE AT ADDITIONS 2 OTHER CHANGES -- BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO OTHER ADD (DEDUCT) -- END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS -- DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------------- -------------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1998........ $14,368,000 $11,904,000 $ -- $(6,165,000)(1)(5) $20,107,000
Year ended December 31, 1997........ 8,363,000 6,542,000 1,253,000(3) (1,790,000)(1) 14,368,000
Year ended December 31, 1996........ 1,811,000 1,176,000 5,627,000(2) (251,000)(1) 8,363,000
Allowance for doubtful notes:
Year ended December 31, 1998........ $ -- 4,500,000(4) -- 873,000(5) $ 5,373,000
Valuation allowance for net deferred
tax assets:
Year ended December 31, 1998........ $12,118,000 $22,996,000 $ -- $ -- $35,114,000
Year ended December 31, 1997........ 12,118,000 -- -- 12,118,000
Year ended December 31, 1996........ 55,000 12,063,000(2) -- 12,118,000
</TABLE>
- ---------------
(1) Net write-offs of accounts receivable.
(2) Represents an allocation of the purchase price of the Everest & Jennings and
V.C. Medical acquisitions.
(3) Represents accounts receivable allowances of Kuschall and Fuqua acquired
during 1997.
(4) Reserve set up for advance to PT Dharma and for trade notes receivable.
(5) Transfer of $873,000 reserve amount applicable to notes receivable from
allowance for doubtful accounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The response to this Item is submitted as a separate section of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:
None.
F-44
<PAGE> 84
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this Item is set forth under the caption
"Election of Directors" in the Company's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1999 Proxy Statement"), and is
incorporated herein by reference. Information concerning the executive officers
of the Company is set forth above under "Directors and Executive Officers of the
Registrant -- Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this Item is set forth under the caption
"Executive Compensation" in the 1999 Proxy Statement and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this Item is set forth under the captions
"Principal Stockholders of the Company" and "Security Ownership of Management"
in the 1999 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this Item is set forth under the caption
"Executive Compensation -- Certain Relationships and Related Transactions" in
the 1999 Proxy Statement and is incorporated herein by reference.
79
<PAGE> 85
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:
14(a). Documents filed as part of this Form 10-K:
1. Financial Statements. The following financial statements are included
in Part II, Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets -- December 31, 1998 and 1997... F-3
Consolidated Statements of Operations -- Years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1998, 1997 and 1996.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements -- December 31,
1998...................................................... F-9
</TABLE>
2. Financial Statement Schedules. The following consolidated financial
statement schedule for the company is included in Part II, Item 14(d):
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits filed under Item 601 of Regulation S-K. (Numbers assigned to
the following correlate to those used in such Item 601; asterisks indicate that
an Exhibit is incorporated by reference).
80
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
<C> <S> <C>
3.1 Graham-Field's Certificate of Incorporation, as amended,
incorporated by reference to Exhibit 3(1) to Graham-Field's
Registration Statement on Form S-1 (File No. 33-40442)...... *
3.2 Certificate of Amendment of Certificate of Incorporation of
Graham-Field dated as of November 27, 1996, incorporated by
reference as Exhibit 3(b) to Graham-Field's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (the
"1996 Form 10-K")........................................... *
3.3 Graham-Field's By-Laws, as amended, incorporated by
reference as an Exhibit to Graham-Field's Current Report on
Form 8-K dated as of July 14, 1995.......................... *
3.4 Amendment to Graham-Field's By-Laws, dated August 12, 1996,
incorporated by reference as Exhibit 3.4 to Graham-Field's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "1998 Form 10-K").................... *
3.5 Amendment to Graham-Field's By-Laws, dated December 1, 1997,
incorporated by reference as Exhibit 3.4 to Graham-Field's
S-4/A Registration Statement filed on December 19, 1997
(Registration No.: 333-42561) (the "1997 S-4 Registration
Statement")................................................. *
4.1 Certificate of Designations of Graham-Field's Series B
Cumulative Convertible Preferred Stock, incorporated by
reference to Annex D to Graham-Field's S-4 Registration
Statement filed on October 18, 1996 (Registration No.:
333-14423) (the "1996 S-4 Registration Statement").......... *
4.2 Certificate of Designations of Graham-Field's Series C
Cumulative Convertible Preferred Stock, incorporated by
reference to Annex E to the 1996 S-4 Registration
Statement................................................... *
4.3 Certificate of Designations of Series A Junior Participating
Preferred Stock, incorporated by reference to Exhibit 4(c)
to Graham-Field's Current Report on Form 8-K dated as of
September 3, 1996 (the "September 1996 Form 8-K")........... *
4.4 Rights Agreement dated as of September 3, 1996 between
Graham-Field and American Stock Transfer & Trust Company, as
Rights Agent, incorporated by reference to Exhibit 4(b) to
the September 1996 Form 8-K................................. *
4.5 Certificate of Designation of Graham-Field's Series D
Preferred Stock, incorporated by reference as Exhibit 4.5 to
the 1998 Form 10-K.......................................... *
10.1 Registration Rights Agreement, dated as of September 3,
1996, between Graham-Field and BIL (Far East Holdings)
Limited ("BIL"), incorporated by reference to Exhibit 4(g)
to the September 1996 Form 8-K.............................. *
10.2 Registration Rights Agreement dated as of June 25, 1997, by
and among Graham-Field, Gregory A. Peek, and Michael L.
Peek, incorporated by reference to Exhibit 4(a) to
Graham-Field's Current Report on Form 8-K dated as of June
1997 (the "June 1997 Form 8-K")............................. *
10.3 Registration Rights Agreement dated as of August 28, 1997,
by and among Graham-Field, S.E. (Gene) Davis, and Vicki Ray,
incorporated by reference to Exhibit 4(a) to Graham-Field's
Current Report on Form 8-K dated as of September 1997 (the
"September 1997 Form 8-K").................................. *
10.4 Registration Rights Agreement, dated as of September 5,
1997, by and between Graham-Field and the Fuqua
Stockholders, incorporated by reference to Annex D to the
1997 S-4 Registration Statement............................. *
10.5 Registration Rights Agreement, dated as of November 25,
1997, by and among Graham-Field, Minotto Partners, L.P. and
Gene J. Minotto, incorporated by reference to Annex E to the
1997 S-4 Registration Statement............................. *
</TABLE>
81
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
<C> <S> <C>
10.6 Amended and Restated Agreement and Plan of Merger dated as
of September 3, 1996, and amended as of October 1, 1996, by
and among Graham-Field, E&J Acquisition Corp., E&J and BIL,
incorporated by reference to Exhibit 2(a) to Graham-Field's
Current Report on Form 8-K dated as of December 12, 1996
(the "December 1996 Form 8-K").............................. *
10.7 Agreement and Plan of Merger dated as of June 25, 1997, by
and among Graham-Field, LaBac Acquisition Corp., a
wholly-owned subsidiary of Graham-Field, LaBac Systems,
Inc., Gregory A. Peek, and Michael L. Peek, incorporated by
reference to Exhibit 2(a) to the June 1997 Form 8-K......... *
10.8 Agreement and Plan of Reorganization dated as of August 28,
1997, by and among Graham-Field, S.E. (Gene) Davis, and
Vicki Ray, incorporated by reference to Exhibit 2(a) to the
September 1997 Form 8-K..................................... *
10.9 Agreement and Plan of Merger, dated as of September 5, 1997,
as amended as of September 29, 1997, by and among
Graham-Field, GFHP Acquisition Corp. and Fuqua Enterprises,
Inc., incorporated by reference to Exhibit 2.1 to the 1997
S-4 Registration Statement.................................. *
10.10 Stockholder Agreement, dated as of September 3, 1996, and
amended and restated as of September 19, 1996, among
Graham-Field, BIL and Irwin Selinger, incorporated by
reference to Exhibit 4(b) to the December 1996 Form 8-K..... *
10.11 Amendment No. 1, dated as of May 1, 1997, to the Amended and
Restated Stockholder Agreement, dated as of September 3,
1996, as amended on September 19, 1996, by and among
Graham-Field, BIL and Irwin Selinger, incorporated by
reference to Exhibit 4(a) to Graham-Field's Current Report
on Form 8-K dated as of May 14, 1997........................ *
10.12 Agreement, dated as of April 17, 1998, by and between
Graham-Field and the Fuqua Stockholders, incorporated by
reference to Exhibit 5 to Graham-Field's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.............. *
10.13 Promissory Note dated as of December 10, 1996 (the "BIL
Note"), in the principal amount of $4 million made by
Graham-Field and payable to BIL Securities (Offshore)
Limited, incorporated by reference to Exhibit 10(vv) to the
1996 Form 10-K.............................................. *
10.14 John Hancock Mutual Life Insurance Note and Warrant
Agreement dated as of March 12, 1992 is incorporated by
reference to Exhibit 10(ee) to Graham-Field's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992
(the "1992 Form 10-K")...................................... *
10.15 Amendment dated as of December 31, 1992, to the John Hancock
Mutual Life Insurance Note and Warrant Agreement,
incorporated by reference to Exhibit 10(ff) to the 1992 Form
10-K........................................................ *
10.16 Amendment dated as of June 30, 1993, to the John Hancock
Mutual Life Insurance Note and Warrant Agreement,
incorporated by reference as an Exhibit to Graham-Field's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.......................................... *
10.17 Amendment dated as of December 31, 1993, to the John Hancock
Mutual Life Insurance Note and Warrant Agreement,
incorporated by reference to Exhibit 10(dd) to Graham-
Field's Annual Report on Form 10-K for the year ended
December 31, 1993........................................... *
10.18 Amendment dated as of December 30, 1994, to the John Hancock
Mutual Life Insurance Note and Warrant Agreement,
incorporated by reference to Exhibit 10(ee) to Graham-
Field's Annual Report on Form 10-K for the year ended
December 31, 1994........................................... *
10.19 Indenture dated as of August 4, 1997, by and between
Graham-Field and American Stock Transfer & Trust Company as
trustee, incorporated by reference to Exhibit 4.1 to
Graham-Field's S-4 Registration Statement filed on January
8, 1997 (Registration No. 333-43189)........................ *
10.20 Voting Agreement, dated as of September 5, 1997, by and
between Graham-Field and Gene J. Minotto, incorporated by
reference to Annex C to the 1997 S-4 Registration
Statement................................................... *
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10.21 Supply Agreement, by and between Everest & Jennings, Inc.
and P.T. Dharma Polimetal, dated as of March 5, 1999,
incorporated by reference as Exhibit 10.21 to the 1998 Form
10-K........................................................ *
10.22 Supply Agreement dated as of April 3, 1997, between Maxwell
Products, Inc. and Graham-Field, incorporated by reference
to Exhibit 99 to Graham-Field's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.................... *
10.23 International Distributorship Agreement dated as of
September 30, 1997, by and between Graham-Field and Thuasne,
incorporated by reference to Exhibit 1 to Graham-Field's
Quarterly Report for the quarter ended September 30, 1997
(the "September 1997 Form 10-Q")............................ *
10.24 Letter Agreement to International Distributorship Agreement
dated as of January 26, 1999, by and between Graham-Field
and Thuasne, incorporated by reference as Exhibit 10.24 to
the 1998 Form 10-K.......................................... *
10.25 Asset Purchase Agreement dated as of September 4, 1996, by
and among Graham-Field, Graham-Field Express (Puerto Rico),
Inc., and V.C. Medical Distributors, Inc., incorporated by
reference to Exhibit 2(a) to the September 1996 Form 8-K.... *
10.26 Asset Purchase Agreement dated as of February 10, 1997, by
and among Graham-Field, Everest & Jennings Canadian Ltd.
("E&J Canada"), Motion 2000 Inc. ("Motion 2000"), and Motion
2000 Quebec Inc.("Motion Quebec"), incorporated by reference
to Exhibit 2(a) Graham-Field's Current Report on Form 8-K
dated as of March 12, 1997 (the "March 1997 Form 8-K")...... *
10.27 Asset Purchase Agreement dated as of August 21, 1997, by and
among Graham-Field, Graham-Field, Inc., Medi-Source, Inc.,
Peter Galambos and Irene Galambos, incorporated by reference
to Exhibit 2 to the September 1997 Form 10-Q................ *
10.28 Stock Purchase Agreement dated as of March 7, 1997, by and
among Graham-Field, Everest & Jennings, Inc., Michael H.
Dempsey, and Naomi C. Dempsey, incorporated by reference to
Exhibit 2(a) to the March 1997 Form 8-K..................... *
10.29 Stock Purchase Agreement dated as of January 27, 1998, by
and among IT Acquisition Corporation, Graham-Field and
Lumex/Basic American Holdings, Inc, incorporated by
reference to Exhibit 2(a) to Graham-Field's Current Report
on Form 8-K dated as of February 2, 1998 (the "February 1998
Form 8-K").................................................. *
10.30 Stock Purchase Agreement dated as of January 27, 1998, by
and among HEK'S Corporation, Graham-Field and Fuqua,
incorporated by reference to Exhibit 2(b) to the February
1998 Form 8-K............................................... *
10.31 Real Estate Sales Agreement dated as of August 28, 1997, by
and between BBD&M, Ltd. and Graham-Field, incorporated by
reference to Exhibit 4(g) to the September 1997 Form 8-K.... *
10.32 The Incentive Program, as amended, incorporated by reference
to Graham-Field's Registration Statements on Form S-8 (File
Nos.:33-37179, 33-38656, 33-48860, 033-60679, 333-16993, and
333-43493).................................................. *
10.33 Revolving Credit and Security Agreement dated as of December
10, 1996 (the "Revolving Credit Agreement"), by and among
IBJ Whitehall Business Credit Corporation (formerly known as
IBJ Schroder Bank & Trust Company) (as lender and as agent),
Graham-Field, Graham-Field, Inc., Graham-Field Express,
Inc., Graham-Field Temco, Inc., Graham-Field Distribution,
Inc., Graham-Field Bandage, Inc., Graham-Field Express
(Puerto Rico), Inc., and Everest & Jennings, Inc.,
incorporated by reference to Exhibit 10 to the December 1996
Form 8-K.................................................... *
</TABLE>
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10.34 Amendment No. 1, dated as of June 25, 1997, to the Revolving
Credit and Security Agreement dated as of December 10, 1996
(the "Revolving Credit Agreement"), by and among IBJ
Whitehall Business Credit Corporation, Graham-Field,
Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field
Temco, Inc., Graham-Field Distribution, Inc., Graham-Field
Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and
Everest & Jennings, Inc., incorporated by reference to
Exhibit 10(a) to Graham-Field's Current Report on Form 8-K
dated as of July 17, 1997 (the "July 1997 Form 8-K")........ *
10.35 Amendment No. 2, dated as of July 9, 1997, to the Revolving
Credit Agreement, by and among IBJ Whitehall Business Credit
Corporation, Graham-Field, Graham-Field, Inc., Graham-Field
Express, Inc., Graham-Field Temco, Inc., Graham-Field
Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field
Express (Puerto Rico), Inc., and Everest & Jennings, Inc.,
incorporated by reference to Exhibit 10(b) to the July 1997
Form 8-K.................................................... *
10.36 Amendment No. 3, dated as of July 9, 1997, to the Revolving
Credit Agreement, by and among IBJ Whitehall Business Credit
Corporation, Graham-Field, Graham-Field, Inc., Graham-Field
Express, Inc., Graham-Field Temco, Inc., Graham-Field
Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field
Express (Puerto Rico), Inc., and Everest & Jennings, Inc.,
incorporated by reference to Exhibit 10(c) to the July 1997
Form 8-K.................................................... *
10.37 Letter Amendment, dated as of September 18, 1997, to the
Revolving Credit Agreement, by and among IBJ Whitehall
Business Credit Corporation, Graham-Field, Graham-Field,
Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc.,
Graham-Field Distribution, Inc., Graham-Field Bandage, Inc.,
Graham-Field Express (Puerto Rico), Inc., and Everest &
Jennings, Inc., incorporated by reference as Exhibit 10.67
to the 1997 S-4 Registration Statement...................... *
10.38 Amendment No. 4 and Joinder Agreement, dated as of December
30, 1997, to the Revolving Credit Agreement, by and among
IBJ Whitehall Business Credit Corporation, Graham-Field,
Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field
Temco, Inc., Graham-Field Distribution, Inc., Graham-Field
Bandage, Inc., Graham-Field Express (Puerto Rico), Inc.,
Everest & Jennings, Inc., LaBac Systems, Inc., Medical
Supplies of American, Inc., Health Care Wholesalers, Inc., H
C Wholesalers, Inc., Critical Care Associates, Inc.,
Lumex/Basic American Holdings, Inc., Basic American Medical
Products, Inc., Lumex Medical Products, Inc., Prism
Enterprises, Inc., Basic American Sales and Distribution
Co., Inc., PrisTech, Inc., Lumex Sales and Distribution Co.,
Inc., MUL Acquisition Corp. II, incorporated by reference to
Exhibit 10.11 to Graham-Field's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "1997
10-K")...................................................... *
10.39 Amendment No. 5, dated as of April 13, 1998, to the
Revolving Credit Agreement by and among IBJ Whitehall
Business Credit Corporation, Graham-Field, Graham-Field,
Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc.,
Graham-Field Distribution, Inc., Graham-Field Bandage, Inc.,
Graham-Field Express (Puerto Rico), Inc., Everest &
Jennings, Inc., LaBac Systems, Inc., Medical Supplies of
American, Inc., Health Care Wholesalers, Inc., H C
Wholesalers, Inc., Critical Care Associates, Inc.,
Lumex/Basic American Holdings, Inc., Basic American Medical
Products, Inc., Lumex Medical Products, Inc., Prism
Enterprises, Inc., Basic American Sales and Distribution
Co., Inc., Pristech, Inc., Lumex Sales and Distribution Co.,
Inc., MUL Acquisition Corp. II, incorporated by reference to
Exhibit 10.12 to the 1997 Form 10-K......................... *
</TABLE>
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10.40 Waiver and Amendment No. 6 to Revolving Credit and Security
Agreement dated as of August 12, 1998, by and among IBJ
Whitehall Business Credit Corporation, Graham-Field,
Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field
Temco, Inc., Graham-Field Distribution, Inc., Graham-Field
Bandage, Inc., Graham-Field Express (Puerto Rico), Inc.,
Everest & Jennings, Inc., LaBac Systems, Inc., Medical
Supplies of America, Inc., Health Care Wholesalers, Inc., H
C Wholesalers, Inc., Critical Care Associates, Inc.,
Lumex/Basic American Holdings, Inc., Basic American Medical
Products, Inc., Lumex Medical Products, Inc., Prism,
Enterprises, Inc., Basic American Sales and Distribution
Co., Inc., PrisTech, Inc., Lumex Sales & Distribution Co.,
Inc., and MUL Acquisition Corp. Ltd., incorporated by
reference to Exhibit No. 10 to Graham-Field's Quarterly
Report for the fiscal quarter ended June 30, 1998........... *
10.41 Pledge Agreement, dated September 15, 1998, made by and
among IBJ Whitehall Business Credit Corporation,
Graham-Field, Graham-Field, Inc., Everest & Jennings, Inc.,
Medical Supplies of America, Inc., Lumex/Basic American
Holdings, Inc., Basic American Medical Products, Inc., Lumex
Medical Products, Inc., Prism Enterprises, Inc., and Everest
& Jennings International Ltd., incorporated by reference as
Exhibit 10.41 to the 1998 Form 10-K......................... *
10.42 Amendment No. 7 to Revolving Credit and Security Agreement
dated as of April 22, 1999, by and among IBJ Whitehall
Business Credit Corporation and Graham-Field, Graham-Field,
Inc., Graham-Field Temco, Inc., Graham-Field Distribution,
Inc., Graham-Field Bandage, Inc., Graham-Field Express
(Puerto Rico), Inc., Everest & Jennings, Inc., LaBac
Systems, Inc., Medical Supplies of America, Inc., Health
Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care
Associates, Inc., Lumex/Basic American Holdings, Inc., Basic
American Medical Products, Inc., Lumex Medical Products,
Inc., Prism Enterprises, Inc., Basic American Sales and
Distribution Co., Inc., Pristech, Inc., Lumex Sales and
Distribution Co., Inc., and MUL Acquisition Corp. II,
incorporated by reference as Exhibit 10.42 to the 1998 Form
10-K........................................................ *
10.43 Letter Amendments dated as of May 21, 1999 and June 3, 1999,
to the Revolving Credit and Security Agreement, by and among
IBJ Whitehall Business Credit Corporation and Graham-Field,
Graham-Field, Inc., Graham-Field Temco, Inc., Graham-Field
Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field
Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac
Systems, Inc., Medical Supplies of America, Inc., Health
Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care
Associates, Inc., Lumex/Basic American Holdings, Inc., Basic
American Medical Products, Inc., Lumex Medical Products,
Inc., Prism Enterprises, Inc., Basic American Sales and
Distribution Co., Inc., Pristech, Inc., Lumex Sales and
Distribution Co., Inc., and MUL Acquisition Corp. II,
incorporated by reference as Exhibit 10.43 to the 1998 Form
10-K........................................................ *
10.44 Separation Agreement dated as of July 29, 1998, by and
between Irwin Selinger and Graham-Field, incorporated by
reference to Exhibit 10 to Graham-Field's Current Report on
Form 8-K dated July 29, 1998................................ *
10.45 Consultant Agreement dated as of March 7, 1997, by and
between Graham-Field and Michael H. Dempsey, incorporated by
reference to Exhibit 10(b) to the March 1997 Form 8-K....... *
10.46 Consulting Agreement dated as of June 25, 1997, by and among
Graham-Field, Gregory A. Peek, and Michael L. Peek,
incorporated by reference to Exhibit 4(b) to the June 1997
Form 8-K.................................................... *
10.47 Consulting Agreement dated as of September 17, 1998, by and
between Andrew A. Giordano and Graham-Field, incorporated by
reference to Exhibit 10(a) to Graham-Field's quarterly
report for the quarter ended September 30, 1998 (the
"September 1998 Form 10-Q")................................. *
</TABLE>
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10.48 Golden Parachute Agreement, dated as of July 21, 1989, by
and between Graham-Field and Beatrice Scherer, incorporated
by reference to Exhibit 10.54 to the 1997 Form 10-K......... *
10.49 Employment Agreement, dated as of March 15, 1996, by and
between Jeffco Express Medical Supply, Inc. and Jeff
Schwartz, incorporated by reference to Exhibit 10.47 to the
1997 Form 10-K.............................................. *
10.50 Golden Parachute Agreement, dated as of May 14, 1996, by and
between Graham-Field and Jeff Schwartz, incorporated by
reference to Exhibit 10.51 to the 1997 Form 10-K............ *
10.51 Employment Agreement dated as of February 28, 1997, by and
between Graham-Field and Marco Ferrara, incorporated by
reference to Exhibit 10(b) to the March 1997 Form 8-K....... *
10.52 Non-Competition Agreement dated as of June 25, 1997, by and
among Graham-Field and Gregory A. Peek, incorporated by
reference to Exhibit 4(c) to the June 1997 Form 8-K......... *
10.53 Non-Competition Agreement dated as of June 25, 1997, by and
among Graham-Field and Michael L. Peek, incorporated by
reference to Exhibit 4(d) to the June 1997 Form 8-K......... *
10.54 Employment Agreement dated as of August 28, 1997, by and
between Graham-Field and S.E. (Gene) Davis, incorporated by
reference to Exhibit 4(b) to the September 1997 Form 8-K.... *
10.55 Non-Competition Agreement dated as of August 28, 1997, by
and between Graham-Field and S.E. (Gene) Davis, incorporated
by reference to Exhibit 4(d) to the September 1997 Form
8-K......................................................... *
10.56 Employment Agreement dated as of August 28, 1997, by and
between Graham-Field and Vicki Ray, incorporated by
reference to Exhibit 4(c) to the September 1997 Form 8-K.... *
10.57 Non-Competition Agreement dated as of August 28, 1997, by
and between Graham-Field and Vicki Ray, incorporated by
reference to Exhibit 4(e) to the September 1997 Form 8-K.... *
10.58 Noncompetition Agreement, dated as of September 5, 1997, by
and among Graham-Field, GFHP Acquisition Corp., J.B. Fuqua
and J. Rex Fuqua, incorporated by reference to Annex F to
the 1997 S-4 Registration Statement......................... *
10.59 Employment Agreement, dated as of March 2, 1998, by and
between Graham-Field and Paul Bellamy, incorporated by
reference to Exhibit 10.46 to the 1997 Form 10-K............ *
10.60 Amendment No. 1 to Employment Agreement dated as of
September 15, 1998, by and between Paul Bellamy and
Graham-Field, incorporated by reference to Exhibit 10(i) to
the September 1998 Form 10-Q................................ *
10.61 Agreement dated as of September 15, 1998, by and between
Paul Bellamy and Graham-Field, incorporated by reference to
Exhibit 10(b) to the September 1998 Form 10-Q............... *
10.62 Employment Agreement dated as of April 17, 1998, by and
between Graham-Field and Richard S. Kolodny, incorporated by
reference to Exhibit 2 to Graham-Field's Quarterly Report
for the quarter ended March 31, 1998 (the "March 1998 Form
10-Q")...................................................... *
10.63 Amendment No. 1 to Employment Agreement dated as of
September 15, 1998, by and between Richard S. Kolodny and
Graham-Field, incorporated by reference to Exhibit 10(j) to
the September 1998 Form 10-Q................................ *
10.64 Agreement dated as of September 15, 1998, by and between
Richard S. Kolodny and Graham-Field, incorporated by
reference to Exhibit 10(c) to the September 1998 Form
10-Q........................................................ *
10.65 Employment Agreement dated as of April 17, 1998, by and
between Graham-Field and Ralph Liguori, incorporated by
reference to Exhibit 3 to the March 1998 Form 10-Q.......... *
10.66 Amendment No. 1 to Employment Agreement dated as of
September 15, 1998, by and between Ralph Liguori and
Graham-Field, incorporated by reference to Exhibit 10(k) to
the September 1998 Form 10-Q................................ *
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10.67 Agreement dated as of September 15, 1998, by and between
Ralph Liguori and Graham-Field, incorporated by reference to
Exhibit 10(d) to the September 1998 Form 10-Q............... *
10.68 Employment Agreement dated as of April 17, 1998, by and
between Graham-Field and Peter Winocur, incorporated by
reference to Exhibit 4 to the March 1998 Form 10-Q.......... *
10.69 Amendment No. 1 to Employment Agreement dated as of
September 15, 1998, by and between Peter Winocur and
Graham-Field, incorporated by reference to Exhibit 10(l) to
the September 1998 Form 10-Q................................ *
10.70 Agreement dated as of September 15, 1998, by and between
Peter Winocur and Graham-Field, incorporated by reference to
Exhibit 10(e) to the September 1998 Form 10-Q............... *
10.71 Employment Agreement dated November 2, 1998, by and between
Harvey P. Diamond and Graham-Field, incorporated by
reference to Exhibit 10(f) to the September 1998 Form
10-Q........................................................ *
10.72 Non-Competition Agreement dated as of November 2, 1998, by
and between Harvey P. Diamond and Graham-Field, incorporated
by reference to Exhibit 10(h) to the September 1998 Form
10-Q........................................................ *
10.73 Agreement dated as of November 2, 1998, by and between
Harvey P. Diamond and Graham-Field, incorporated by
reference to Exhibit 10(g) to the September 1998 Form
10-Q........................................................ *
10.74 Agreement dated as of March 24, 1999, by and between Jay
Alix & Associates and Graham-Field incorporated by reference
as Exhibit 10.74 to the 1998 Form 10-K...................... *
10.75 Letter Agreement dated as of May 12, 1999, by and between
BIL Securities (Offshore) Limited and Graham-Field
incorporated by reference as Exhibit 10.75 to the 1998 Form
10-K........................................................ *
10.76 Letter Agreement dated as of May 12, 1999, by and among BIL
Securities (Offshore) Limited, BIL (Far East Holdings)
Limited, and Graham-Field incorporated by reference as
Exhibit 10.76 to the 1998 Form 10-K......................... *
21. Subsidiaries of the Company:
Graham-Field, Inc.
(a New York corporation)
Graham-Field Temco, Inc.
(a New Jersey corporation)
AquaTherm Corp.
(a New Jersey corporation)
</TABLE>
<TABLE>
<C> <S> <C>
Graham-Field Distribution, Inc.
(a Missouri corporation)
Graham-Field Bandage, Inc.
(a Rhode Island corporation)
Graham-Field European Distribution
Corporation Limited
(an Ireland corporation)
Graham-Field Express (Puerto Rico), Inc.
(a Delaware corporation)
Graham-Field Express (Dallas), Inc.
(a Delaware corporation)
Zens Data Systems, Inc.
(a Delaware corporation)
</TABLE>
- ---------------
* Incorporated by reference.
87
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<TABLE>
<C> <S> <C>
Graham-Field Sales Corp.
(a Delaware corporation)
Everest & Jennings International Ltd.
(a Delaware corporation)
Everest & Jennings, Inc.
(a California corporation)
Smith & Davis Manufacturing Company
(a Missouri corporation)
Everest & Jennings de Mexico S.A. de C.V.
(a Mexico corporation)
Everest & Jennings Canadian Limited
(a Canadian corporation)
Rabson Medical Sales, Ltd.
(a New York corporation)
Kuschall of America, Inc.
(a California corporation)
LaBac Systems, Inc.
(a Colorado corporation)
Medical Supplies of America, Inc.
(a Georgia corporation)
Health Care Wholesalers, Inc.
(a Georgia corporation)
H C Wholesalers, Inc.
(a Georgia corporation)
Critical Care Associates, Inc.
(a Georgia corporation)
Lumex/Basic American Holdings, Inc.
(a Delaware corporation)
Basic American Medical Products, Inc.
(a Georgia corporation)
Basic American Sales and Distribution Co., Inc.
(a Delaware corporation)
Lumex Medical Products, Inc.
(a Delaware corporation)
Lumex Sales and Distribution Co., Inc.
(a Delaware corporation)
MUL Acquisition Corp. II
(a Delaware corporation)
Prism Enterprises, Inc.
(a Delaware corporation)
PrisTech, Inc.
(a Delaware corporation)
P.T. Dharma Medipro (49% equity interest)
(an Indonesia corporation)
Kerma Medical Products, Inc. (25% equity interest)
(a Virginia corporation)
23. Consent of Independent Auditors.............................
</TABLE>
14(b). Reports on Form 8-K
Not Applicable.
88
<PAGE> 94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
By: /s/ JOHN G. MCGREGOR
------------------------------------
John G. McGregor, President and
Chief Executive Officer
(Principal Executive Officer)
Date: June 3, 1999
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN G. MCGREGOR President and Chief Executive Officer June 3, 1999
- ------------------------------------------------ (Principal Executive Officer)
John G. McGregor
/s/ J. SOREN REYNERTSON Senior Vice President, Chief June 3, 1999
- ------------------------------------------------ Financial
J. Soren Reynertson and Accounting Officer (Principal
Financial and Accounting Officer)
/s/ RUPERT O.H. MORLEY Chairman of the Board and Director June 3, 1999
- ------------------------------------------------
Rupert O.H. Morley
/s/ DAVID P. DELANEY, JR. Director June 3, 1999
- ------------------------------------------------
David P. Delaney, Jr.
/s/ J. REX FUQUA Director June 3, 1999
- ------------------------------------------------
J. Rex Fuqua
/s/ LOUIS A. LUBRANO Director June 3, 1999
- ------------------------------------------------
Louis A. Lubrano
/s/ MICHAEL DREYER Director June 3, 1999
- ------------------------------------------------
Michael Dreyer
</TABLE>
89
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GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CORPORATE INFORMATION
BOARD OF DIRECTORS
Rupert O.H. Morley(1)
Chairman of the Board
of Graham-Field and
Operations Director
Brierley Investments Limited
Michael S. Dreyer(2)(3)
Managing Partner
Dreyer, Edmonds & Associates
J. Rex Fuqua(1)(2)(3)
President and Chief Executive Officer
Fuqua Capital Corporation
Louis A. Lubrano(2)(3)
Investment Banker
Herzog, Heine, Geduld, Inc.
Dr. Kenneth R. Jennings
Vice Chairman
Jay Alix & Associates
(1) Executive Committee
(2) Compensation Committee
(3) Audit Committee
CORPORATE OFFICERS
John G. McGregor
Chief Executive Officer and President
Robert J. Gluck
Senior Vice President, Chief Financial Officer
Richard S. Kolodny
Senior Vice President, General Counsel, and Secretary
Robert J. Mealey
Senior Vice President, Operations
PRINCIPAL OPERATING OFFICERS
Peter Winocur
President, Labtron
Jeffrey Schwartz
Vice President, Sales
Cherie L. Antoniazzi
Vice President, Human Resources
Donald D. Cantwell
Vice President, Chief Information Officer
Edward J. Link
Vice President, Corporate Marketing
Gene J. Minotto
President, Basic American
Andrew E. Halls
President, Everest & Jennings
Merle M. Smith
President, Prism
AUDITORS
Ernst & Young, LLP
Melville, New York
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street -- 46th Floor
New York, New York 10005
<PAGE> 96
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