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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.025 PER SHARE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NOT APPLICABLE
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(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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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.
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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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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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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:
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DATE COMPANY LINE OF BUSINESS
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<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
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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.
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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> 10
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> 11
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> 12
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> 13
"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> 14
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> 15
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> 16
<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> 17
<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> 18
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> 19
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.
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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.
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<PAGE> 21
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> 22
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> 23
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> 24
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.
23
<PAGE> 25
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
24
<PAGE> 26
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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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> 28
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> 29
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> 30
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> 31
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.
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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.
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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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
<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> 42
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> 43
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> 44
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
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<PAGE> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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.
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<PAGE> 70
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> 71
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
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<PAGE> 72
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> 73
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> 74
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>
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<PAGE> 75
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
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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> 77
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> 78
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> 79
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> 80
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
DIRECTORS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY DIRECTOR SINCE
- ---- --- --------------------- --------------
<S> <C> <C> <C>
Rupert O.H. Morley........................... 33 Chairman of the Board and 1999
Member of the Executive
Committee
Louis A. Lubrano............................. 65 Director and Member of the 1984
Audit and Compensation
Committees
J. Rex Fuqua................................. 49 Director and Member of the January 16, 1998 to
Executive, Audit and April 17, 1998;
Compensation Committees July 29, 1998 to
present
David P. Delaney, Jr......................... 46 Director and Member of the 1995
Executive Committee
Michael Dreyer............................... 47 Director and Member of the 1998
Audit and Compensation
Committees
</TABLE>
- ---------------
Mr. Morley has been a director of the Company since February 5, 1999, and
was appointed Chairman of the Board of the Company on March 24, 1999. Mr. Morley
is an Operations Director of Brierley Investments Limited, a New Zealand
investment holding company, an affiliate of BIL. Mr. Morley is also a director
of English, Welsh & Scottish Railways, a UK freight railway company, and a
director of Thistle Hotels plc, a listed UK hotel company. From September 1992
to July 1997, Mr. Morley held various executive positions at The Peninsular &
Oriental Steam Navigation Company, including serving as Managing Director of
Swan Hellenic, a UK cruise line subsidiary, from April 1995 to July 1997.
Pursuant to 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, Mr. Morley serves as one of BIL's designees to the Company's
Board of Directors.
Mr. Lubrano has been an investment banker with Herzog, Heine, Geduld, Inc.,
a member New York Stock Exchange firm, since December 1996. From March 1, 1991
to December 1996, Mr. Lubrano was a managing director of Stires & Company, Inc.,
an investment banking firm. From March 1990 to February 1991, Mr. Lubrano was a
director of the Nasdaq Forum. Prior to such time, Mr. Lubrano was a managing
director of Home Group Capital Markets, Inc., an investment banking firm. From
April 1986 to March 1989, he was President of Gabelli & Company, Inc., an
investment banking firm. He is also a director of Andersen Group, Inc., a
diversified manufacturing company.
Mr. Fuqua has been President and Chief Executive Officer of Realan Capital
Corporation, a privately-held investment corporation since 1985, and the
President and Chief Executive Officer of Fuqua Capital Corporation, a
privately-held investment management corporation, since 1987. Previously, he was
the Chairman of the Board of Directors of Fuqua Enterprises, Inc., a company
engaged in the manufacture and sale of medical products, which was acquired by
the Company on December 30, 1997. Mr. Fuqua also serves as a director of WebMD,
7 Aaron Rents, Inc., and FMB Bankshares, Inc.
Mr. Delaney has been the President and Chief Executive Officer of Lancer
Financial Group and its principal operating subsidiary, Lancer Insurance
Company, since 1985. Mr. Delaney founded the Lancer Financial Group, which
currently provides insurance coverage and specialized services to the United
States passenger transportation industry. In addition, Mr. Delaney has served as
the Chairman of the Long Island Chapter of the Young President's Organization,
and serves as the Chairperson of the Community Campaign
77
<PAGE> 81
at Mercy Medical Center and is a member of the Advisory Board of the Alliance of
American Insurers. From February 4, 1999 to March 24, 1999, Mr. Delaney served
as the Chairman of the Board of the Company.
Mr. Dreyer is a certified public accountant and has been the managing
partner of Dreyer, Edmonds & Associates, a regional accounting firm located in
Los Angeles, California since 1982. Prior to that time, Mr. Dreyer was an
employee of Price Waterhouse. Pursuant to the BIL Stockholder Agreement, Mr.
Dreyer serves as one of BIL's designees to the Company's Board of Directors. Mr.
Dreyer also serves as a director of American Shower Door Corporation.
Each of the persons listed is now serving as a director and was previously
elected by the Company's stockholders, except J. Rex Fuqua, Rupert Morley and
Michael Dreyer who were elected at meetings of the Board of Directors held on
July 29, 1998, February 5, 1999, and December 14, 1998, respectively. No
director is related to any other director or executive officer.
Each member of the Company's Board of Directors holds office for the term
for which he was elected and until his successor shall have been elected and
qualified, or until the earlier of his resignation, removal from office or
death. The Company's Board of Directors is composed of three classes consisting
of the following members: Class I Director with a term expiring in 2000 -- J.
Rex Fuqua; Class II Directors with a term expiring in 2001 -- David P. Delaney,
Jr. and Michael Dreyer; Class III Directors with a term expiring in
2002 -- Rupert O.H. Morley and Louis A. Lubrano.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of May 3, 1999 with
respect to the executive officers of the Company:
<TABLE>
<CAPTION>
POSITION(S) WITH YEAR BECAME
NAME AGE COMPANY EXECUTIVE OFFICER
- ---- --- ---------------- -----------------
<S> <C> <C> <C>
Donald D. Cantwell........................... 47 Vice President of Information 1997
Systems
Harvey P. Diamond............................ 45 Senior Vice President of 1998
Corporate
Sales
Richard S. Kolodny........................... 40 Senior Vice President, General 1993
Counsel, and Secretary
John G. McGregor............................. 53 Chief Executive Officer and 1999
President
J. Soren Reynertson.......................... 32 Senior Vice President and 1999
Chief Financial Officer
</TABLE>
Mr. Cantwell has been the Vice President of Information Systems of the
Company since May 1996, and became an executive officer of the Company on
January 1, 1997. From 1995 to 1996, Mr. Cantwell was the Chief Information
Officer of Dial-A-Mattress, Inc. Prior to such time, Mr. Cantwell held various
management positions with Grumman Corporation for over ten years.
Mr. Diamond is currently the Senior Vice President of Corporate Sales, and
has held various executive sales and marketing positions with the Company since
November 1998. From April 1995 to November 1998, Mr. Diamond was involved in
various business ventures unrelated to the Company. During the period January
1995 through April 1995, Mr. Diamond was the President, Chief Operating Officer,
and member of the Board of Directors of the Company. Mr. Diamond was the founder
and President of Diamond Medical Equipment Corp., a manufacturer of patient
aids, importer of blood pressure equipment and distributor of a broad line of
home healthcare products including adult incontinence and nutritional support
products, which was acquired by the Company in May 1992.
Mr. Kolodny is currently the Senior Vice President, General Counsel and
Secretary of the Company, and has been the Vice President, General Counsel and
Secretary since August 1993. From 1990 to 1993, Mr. Kolodny was associated with
the New York law firm of Carro, Spanbock, Kaster & Cuiffo. Prior to such time,
Mr. Kolodny was associated with the New York law firm of Shea & Gould.
78
<PAGE> 82
Mr. McGregor was appointed President and Chief Executive Officer of the
Company on March 24, 1999. Mr. McGregor is, and has been since 1991, a principal
of Jay Alix & Associates ("JA&A"), a firm specializing in financial
reorganizations, cash management, operational consolidations and other
strategies for underperforming companies. From January 1997 to March 1999, Mr.
McGregor served as President and Chief Executive Officer of Cotton Ginny
Limited, a Canadian retailer of casual wear, and prior to such time, Mr.
McGregor served for a period of three months as the interim Chief Executive of
Philip Services Corporation, a North American integrated provider of industrials
and metals services.
Mr. Reynertson was appointed Senior Vice President and Chief Financial
Officer of the Company on March 24, 1999. Mr. Reynertson is, and has been since
January 1996, a senior associate of JA&A. From October 1998 to February 1999,
Mr. Reynertson served as interim Chief Financial Officer of Cotton Ginny
Limited, a Canadian retailer of casual wear. From August 1994 to December 1995,
Mr. Reynertson was associated with Price Waterhouse's Dispute Analysis and
Corporate Recovery Group.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of the Common Stock of the Company to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the exchange on which the Common Stock is listed for trading.
Officers, directors and more than ten percent stockholders are required by
regulations promulgated under the Exchange Act to furnish the Company with
copies of all Section 16(a) reports filed.
Based solely on the Company's review of copies of the Section 16(a) reports
filed for the year ended December 31, 1998, and written representations from
certain reporting persons that no Forms 5 were required for such persons for the
year ended December 31, 1998, the Company believes that all reporting
requirements applicable to its officers, directors, and more than ten percent
stockholders were complied with for the year ended December 31, 1998, except for
(i) a Form 4 filing on behalf of BIL dated as of June 2, 1998, which reported
open market purchases of 11,800 shares and 5,000 shares of Common Stock on June
2, 1997 and June 3, 1997, respectively, and (ii) a Form 4 filing on behalf of
Rodney F. Price, a former BIL designee to the Company's Board of Directors and
former Chief Executive Officer of the Company, to reflect Mr. Price's indirect
ownership of the shares of Common Stock purchased in the open market by BIL on
June 2, 1997 and June 3, 1997.
79
<PAGE> 83
ITEM 11. EXECUTIVE COMPENSATION:
The following summary compensation table sets forth certain information
concerning the compensation of the Company's named executive officers (the
"Named Executive Officers") within the meaning of Item 402(a)(3) of Regulation
S-K for each of the three years during the period ended December 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------------------------- RESTRICTED OPTIONS TO
OTHER ANNUAL STOCK PURCHASE ALL OTHER
SALARY BONUS COMPENSATION(1) AWARDS SHARES(2) COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------- ---- -------- --------- --------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rodney F. Price(3)............... 1998 -- -- -- -- 10,000(4) --
Chairman of the Board and Chief 1997 -- -- -- -- 10,000(4) --
Executive Officer 1996 -- -- -- -- -- --
Paul Bellamy(5).................. 1998 206,731 -- -- -- 475,000(6) --
President and Chief Financial 1997 -- -- -- -- -- --
Officer 1996 -- -- -- -- -- --
Irwin Selinger(7)................ 1998 550,000 -- -- -- 250,000(9) 1,879,252(10)
Former Chairman of the Board, 1997 446,156 1,000,000 -- -- 139,944(9) 33,790(11)
President and Chief Executive 1996 250,000 100,000 180,000(8) -- 245,517(9) 31,098(11)
Officer
Peter Winocur.................... 1998 233,846 -- -- -- 210,000 --
Executive Vice President of
Sales 1997 200,000 177,089(12) 27,089(13) -- 18,500 --
and Marketing 1996 150,000 75,000 -- -- 110,000 --
Ralph Liguori(14)................ 1998 223,846 -- -- -- 203,797 --
Executive Vice President of 1997 200,000 107,089(12) 27,089(13) -- 16,000 --
Operations 1996 175,000 50,000 -- -- 35,000 --
Jeffrey Schwartz(15)............. 1998 203,846 15,000 -- -- 10,000 --
President of GF Express 1997 177,885 100,000 -- -- 10,000 --
1996 91,731 75,000 -- -- 35,000 --
Richard S. Kolodny............... 1998 203,365 -- -- -- 213,750 --
Vice President, General Counsel 1997 175,000 152,089(12) 27,089(13) -- 17,767 --
and Secretary 1996 150,000 75,000 -- -- 35,000 --
</TABLE>
- ---------------
(1) Except as set forth in notes (8) and (13) below, the aggregate amount of
Other Annual Compensation for each of the Named Executive Officers did not
equal or exceed the lesser of either $50,000 or 10% of the total of such
individual's base salary and bonus, as reported herein and is not reflected
in the table.
(2) Stock options are granted under the terms and provisions of the Company's
Incentive Program. For a description of the stock options, see "Executive
Compensation -- Option Grants in Last Fiscal Year."
(3) Mr. Price served as Chairman of the Board from July 25, 1998 to February 4,
1999, and as Chief Executive Officer of the Company from July 29, 1998 to
February 4, 1999. As Chairman of the Board and Chief Executive Officer, Mr.
Price did not receive any cash compensation. During his tenure as Chairman
of the Board and Chief Executive Officer, Mr. Price was reimbursed for
travel, lodging and meal expenses.
(4) Under the terms of the Company's Incentive Program, Mr. Price's directors'
options expire on February 4, 2001.
(5) Mr. Bellamy served in various executive officer capacities with the Company
from March 2, 1998 through December 31, 1998, including Vice President,
Chief Financial Officer, President, and a director
80
<PAGE> 84
of the Company. From February 5, 1999 through March 24, 1999, Mr. Bellamy
served as President, Chief Executive Officer and a director of the Company.
(6) Under the terms of Mr. Bellamy's stock option agreements, Mr. Bellamy's
stock options expire ninety (90) days following his resignation on March
24, 1999.
(7) Mr. Selinger resigned as Chief Executive Officer, President and a director
of the Company on July 29, 1998, and entered into a Separation Agreement
(the "Separation Agreement") with the Company. The terms of the Separation
Agreement provide that Mr. Selinger will continue to receive his base
salary of $550,000 per year through July 31, 1999. For a description of the
terms and provisions of the Separation Agreement, see "Employment,
Termination and Change in Control Arrangements and Other Arrangements."
(8) On November 27, 1996, the Company forgave indebtedness in the amount of
$180,000 (inclusive of accrued interest), under a secured loan provided to
Mr. Selinger on April 1, 1996. The loan was used by Mr. Selinger to
purchase 50,000 shares of Common Stock in the open market.
(9) Under the terms of Mr. Selinger's stock option agreements, Mr. Selinger's
stock options expired ninety (90) days following his resignation on July
29, 1998.
(10) The amount includes the forgiveness on July 29, 1998 of net indebtedness in
the amount of $1,841,098 (inclusive of accrued interest and certain other
expenses) under a loan (the "Selinger Loan") made by the Company to Mr.
Selinger on December 3, 1997 in the original principal amount of
$2,500,000. The outstanding principal amount of $2,200,000 and accrued
interest under the Selinger Loan was forgiven under the terms and
provisions of the Separation Agreement, in partial consideration of Mr.
Selinger's agreement to repay $500,000 to the Company on June 30, 1999, and
a three (3) year non-competition covenant. For a description of the terms
and provisions of the Separation Agreement, see "Employment, Termination
and Change in Control Arrangements and Other Arrangements." In addition,
such amount includes $38,154 relating to the projected actuarial benefit to
Mr. Selinger for the year ended December 31, 1998 with respect to the
Company's payment of certain premiums on a life insurance policy owned by a
trust for the benefit of Mr. Selinger's children on a split-dollar basis.
(11) In June 1992, the Company entered into a split-dollar life insurance
arrangement for the benefit of Mr. Selinger. During the fiscal years ended
December 31, 1998, 1997 and 1996, the Company paid the premiums on the life
insurance policy owned by a trust for the benefit of Mr. Selinger's
children on a split-dollar basis. With respect to the payment of such
premiums by the Company, the benefit to Mr. Selinger for the years ended
December 31, 1998, 1997 and 1996, projected on an actuarial basis was
$38,154, $33,790 and $31,098, respectively, which is included in the table
above. Under the terms of the Separation Agreement, the Company is required
to continue to make such premium payments in accordance with the terms of
Mr. Selinger's divorce judgment.
(12) Includes the forgiveness of indebtedness in the amount of $27,089
(inclusive of accrued interest) under secured loans (the "Secured Loans")
provided to Mr. Winocur, Mr. Kolodny and Mr. Liguori on February 26, 1996.
The Secured Loans were used by each of Mr. Winocur, Mr. Kolodny and Mr.
Liguori to purchase 6,000 shares of Common Stock on the open market in
1996.
(13) Each of Mr. Winocur, Mr. Kolodny and Mr. Liguori were reimbursed for all
applicable Federal, state and local income taxes relating to the
forgiveness of indebtedness under the Secured Loans.
(14) On April 29, 1999, the Company provided Mr. Liguori with three (3) months
prior written notice of termination of employment in accordance with the
terms of his employment agreement.
(15) On May 14, 1996, Mr. Schwartz joined the Company as the Vice President of
GF Express. Mr. Schwartz became an executive officer of the Company in June
1997.
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<PAGE> 85
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain summary information concerning the
number of stock options granted and the potential realizable value of the stock
options granted to the Company's Named Executive Officers during the fiscal year
ended December 31, 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM(2)
GRANTED IN EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME 1998(1) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rodney F. Price.................... 10,000 .7% 16.3125 (3) $ 45,068 $ 99,589
Chairman of the Board and Chief
Executive Officer
Paul Bellamy....................... 200,000 13.4% 7.6875(4) $ 424,783 $ 938,659
President and Chief Financial 275,000 18.4% 2.875 (5) 218,435 482,684
Officer
Irwin Selinger..................... 250,000 16.8% 17.00 (6) $1,174,197 $2,594,668
Former Chairman of the Board and
Chief Executive Officer
Peter Winocur...................... 10,000(7) .7% 15.50 01/28/03 $ 42,824 $ 94,629
Executive Vice President of 100,000 6.7% 7.6875(4) 02/02/03 212,391 469,330
Sales & Marketing 100,000 6.7% 2.875 09/15/03 79,431 175,522
Ralph Liguori...................... 3,797(7) .3% 15.50 (8) $ 16,260 $ 35,931
Executive Vice President of 100,000 6.7% 7.6875(4) 02/02/03 212,391 469,330
Operations 100,000 6.7% 2.875 09/15/03 79,431 175,522
Jeffrey Schwartz................... 10,000 .7% 7.6875 04/17/03 $ 21,239 $ 46,933
President of GF Express
Richard S. Kolodny................. 13,750(7) .9% 15.50 01/28/03 $ 58,883 $ 130,115
Vice President, General Counsel 100,000 6.7% 7.6875(4) 02/02/03 212,391 469,330
and Secretary 100,000 6.7% 2.875 09/15/03 79,431 175,522
</TABLE>
- ---------------
(1) During the fiscal year ended December 31, 1998, stock options were granted
under the Company's Incentive Program at an exercise price equal to the fair
market value of the Common Stock on the date of grant. The stock options,
other than directors' options, have a term of five years, subject to earlier
termination in the event of termination of employment for cause. The stock
options are non-transferable, other than by will or the laws of descent and
distribution, and vest and are exercisable at the rate of 50% per year
(other than directors' options, which are exercisable at the rate of 1/3 per
year), subject to certain exceptions including a change of control of the
Company and the death of an optionee. The stock options may be exercised by
payment of cash, shares of Common Stock or other consideration. The
Company's Incentive Program is administered by the Compensation Committee of
the Board of Directors.
(2) Represents gain that would be realized assuming the stock options were held
for the entire five-year period and the stock price increased at compounded
rates of 5% and 10%, respectively, from the exercise prices set forth in the
table. These amounts represent assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will be dependent on overall market
conditions and on the future performance of the Company. There can be no
assurance that the amounts reflected in the table will be achieved.
(3) This amount represents the grant of directors' options to purchase 10,000
shares of Common Stock issued pursuant to the Company's Incentive Program.
Under the terms of the Company's Incentive Program, Mr. Price's directors'
options expire on February 4, 2001. For a description of the terms and
provisions of directors' options, see "Compensation of Directors."
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<PAGE> 86
(4) Such stock options were repriced in 1998. For a description of the repricing
of the stock options, see "Stock Option Repricing Table."
(5) Under the terms of Mr. Bellamy's stock options agreements, Mr. Bellamy's
stock options expire ninety (90) days following his resignation on March 24,
1999.
(6) Under the terms of Mr. Selinger's stock option agreements, Mr. Selinger's
stock options expired ninety (90) days following his resignation on July 29,
1998.
(7) Represents restored stock options granted at the time of an exercise of a
stock option through a stock swap (payment of the exercise price by
surrender of previously owned shares of Common Stock). The restored stock
option was granted for the number of shares tendered to pay the exercise
price of the related option.
(8) Under the terms of Mr. Liguori's restored stock option agreement, Mr.
Liguori's restored stock option expires ninety (90) days following his
effective date of termination of employment of July 29, 1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides certain summary information concerning stock
option exercises during the fiscal year ended December 31, 1998 by the Company's
Named Executive Officers and the value of unexercised stock options held by the
Company's Named Executive Officers as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN THE MONEY"
OPTIONS AT FISCAL OPTIONS AT FISCAL
NUMBER OF VALUE YEAR END(3) YEAR END(4)
SHARES ACQUIRED REALIZED --------------------------- ---------------------------
NAME UPON EXERCISE ($)(1)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney F. Price................ -0- -0- 10,000 -0- -0- -0-
Former Chairman of the Board
and Chief Executive Officer
Paul Bellamy................... -0- -0- -0- 475,000 -0- $137,500
Former President and Chief
Executive Officer
Irwin Selinger................. -0- -0- -0- -0- -0- -0-
Former Chairman of the Board
and Chief Executive Officer
Peter Winocur.................. 30,406 $316,291 121,844 206,250 -0- $ 50,000
Executive Vice President of
Sales and Marketing
Ralph Liguori.................. 8,881 $ 78,800 43,131 205,000 -0- $ 50,000
Executive Vice President of
Operations
Jeffrey Schwartz............... -0- -0- 32,000 15,000 -0- -0-
President of GF Express
Richard S. Kolodny............. 44,000 $468,875 51,267 206,250 -0- $ 50,000
Vice President, General
Counsel and Secretary
</TABLE>
- ---------------
(1) Values were calculated by multiplying the closing market price of the Common
Stock as reported on the New York Stock Exchange, Inc. on the date of
exercise, by the respective number of shares and subtracting the exercise
price per share.
(2) The shares of Common Stock received upon exercise of the stock options were
not disposed of by the Named Executive Officers.
(3) Represents the aggregate number of stock options held as of December 31,
1998.
(4) Values were calculated by multiplying the closing market price of the Common
Stock as reported on the New York Stock Exchange, Inc. on December 31, 1998
by the respective number of shares and subtracting the exercise price per
share, without any adjustment for any termination or vesting contingencies.
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<PAGE> 87
STOCK OPTION REPRICING TABLE
The following table sets forth certain summary information concerning the
repricing of stock options held by any of the Company's Named Officers during
the past ten (10) years. See "Report of Compensation Committee -- Stock Option
Repricing."
<TABLE>
<CAPTION>
MARKET EXERCISE PRICE
NUMBER OF PRICE AT TIME LENGTH OF ORIGINAL
SECURITIES OF STOCK OF REPRICING NEW OPTION TERM
UNDERLYING OPTIONS/ AT TIME OF OR EXERCISE REMAINING AT DATE
SARS REPRICED OR REPRICING OR AMENDMENT PRICE OF REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) ($) AMENDMENT
- ---- ------- ------------------- ------------ -------------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Paul Bellamy(1).......... 4/01/98 200,000 $ 7.50 $17.93 $ 7.50 4 years, 11 months
Former President 4/17/98 200,000 $7.6875 $ 7.50 $7.6875 4 years, 11 months
and Chief Executive
Officer
Peter Winocur............ 4/17/98 100,000 $7.6875 $17.00 $7.6875 4 years, 10 months
Executive Vice
President of Sales and
Marketing
Ralph Liguori............ 4/17/98 100,000 $7.6875 $17.00 $7.6875 4 years, 10 months
Executive Vice
President of Operations
Richard S. Kolodny....... 4/17/98 100,000 $7.6875 $17.00 $7.6875 4 years, 10 months
Vice President, General
Counsel
</TABLE>
- ---------------
(1) On March 2, 1998, Mr. Bellamy was granted a stock option to purchase 200,000
shares of common stock, which was repriced on April 1, 1998 and on April 17,
1998. Mr. Bellamy resigned as President, Chief Executive Officer and a
director of the Company on March 24, 1999. Under the terms of Mr. Bellamy's
stock options agreements, Mr. Bellamy's stock options expire ninety (90)
days following his resignation on March 24, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no compensation committee interlocks between the Company and
other entities involving any of the executive officers of the Company who serve
as executive officers of such other entities.
COMPENSATION OF DIRECTORS
The directors' cash compensation program provides for the payment of
directors' fees to outside directors of $1,000 for the attendance at each Board
meeting and $500 for each Committee meeting, provided each Committee meeting is
held on a date other than a Board meeting. In addition, no directors' fees are
provided for telephonic Board or Committee meetings which are less than two (2)
hours in duration.
Under the Company's Incentive Program, directors' options are granted
automatically as of January 2nd of each year that the Incentive Program is in
effect to each director who was neither an employee nor officer of the Company
or any of its subsidiaries (a "Qualifying Director"). Each director's option
entitles the Qualifying Director to whom it is granted to purchase 10,000 shares
of the Common Stock at an option price equal to the fair market value of the
Common Stock on the date of grant. Directors' options vest and are exercisable
at the rate of one-third (1/3) of each grant annually. Directors' options
terminate ten years from the date of grant or two years after a director's
termination, if other than for cause, in which latter case, the directors'
options terminate immediately. Effective as of February 1998, the Company's
Incentive Program was amended to eliminate the automatic grant feature for
directors' options. As currently in effect, the Company's Incentive Program
provides that directors' options may be granted upon terms and conditions
approved by the Compensation Committee. On January 2, 1999, the Compensation
Committee granted to each of the Qualifying Directors a directors' option to
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.
From February 4, 1999 to March 24, 1999, Mr. Delaney served as Chairman of
the Board of the Company and was paid $12,500 for such services.
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<PAGE> 88
EMPLOYMENT, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS AND OTHER
ARRANGEMENTS
On July 29, 1998, Irwin Selinger resigned as Chief Executive Officer,
President and a director of the Company, and entered into the Separation
Agreement, which terminated Mr. Selinger's existing employment agreement and
"change in control" agreement. The Separation Agreement provides for, among
other things, (i) the continuation of Mr. Selinger's (a) base salary of $550,000
through July 31, 1999, (b) health care 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 the Selinger Loan in partial
consideration of Mr. Selinger's repayment of $500,000 on June 30, 1999, (iii) a
three (3) year non-competition covenant, (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.
On March 24, 1999, Paul Bellamy resigned as President, Chief Executive
Officer and a director of the Company. On March 2, 1998, Mr. Bellamy entered
into a three-year employment agreement with the Company providing for, among
other things, an initial base salary of $250,000 per year. Under the terms and
provisions of Mr. Bellamy's employment agreement, Mr. Bellamy is not entitled to
receive any severance benefits or other payments upon a voluntary termination of
employment. On September 15, 1998, Mr. Bellamy entered into an agreement with
the Company providing for the payment of certain benefits following the
occurrence of a "change in control" (as defined in such agreement), which
agreement is no longer in effect as a result of Mr. Bellamy's voluntary
termination of employment.
On June 12, 1998, Andrew A. Giordano resigned as President, Chief Operating
Officer and a director of the Company. On April 17, 1998, Mr. Giordano entered
into a three (3) year employment agreement with the Company providing for an
initial base salary of $350,000 per year, and an agreement with the Company
providing for the payment of certain benefits following the occurrence of a
"change in control" (as defined in such agreement). On April 23, 1998, the
Company loaned $400,000 to Mr. Giordano, which was subsequently repaid in full
with interest on July 31, 1998. In connection with Mr. Giordano's resignation,
Mr. Giordano entered into a four (4) year Consulting Agreement with the Company
on September 17, 1998 (the "Consulting Agreement") to consult with the Company
for no more than ten (10) calendar days per month. As part of the Consulting
Agreement, Mr. Giordano's existing employment agreement and "change in control"
agreement were terminated. The Consulting Agreement provides for, among other
things, (i) four (4) payments of $75,000 per year on each September 17, with the
final payment to be made on September 17, 2001, and (ii) the reimbursement of
reasonable business expenses relating to Mr. Giordano's consultancy with the
Company.
Effective as of March 15, 1996, Mr. Schwartz entered into a five (5) year
employment agreement with the Company. Under the terms of Mr. Schwartz's
employment agreement, Mr. Schwartz receives an annual base salary of $200,000
and participates in the Company's bonus program. The employment agreement
contains certain non-competition provisions, which are effective until the later
to occur of March 14, 2001 or the date of termination of employment, subject to
certain extension terms. Mr. Schwartz's employment agreement provides that the
Company may terminate the employment of Mr. Schwartz only for cause (as defined
in the employment agreement), death or extended illness or disability. On May
14, 1996, Mr. Schwartz entered into an agreement with the Company providing for
the payment of certain benefits if within two years following the occurrence of
a "change in control"(as defined in each such agreement), Mr. Schwartz is
terminated other than by reason of death, disability, retirement, or for cause,
or if Mr. Schwartz terminates his employment for good reason. Under the terms of
such agreement, Mr. Schwartz is entitled upon the occurrence of a triggering
event to receive his base salary and incentive compensation, if any, through the
date of termination, plus a lump sum severance payment equal to one times Mr.
Schwartz' base salary.
On April 17, 1998, Mr. Winocur, Mr. Kolodny, and Mr. Liguori entered into
three (3) year employment agreements with the Company. The employment agreements
provide for initial annual base salaries of $230,000, $200,000 and $220,000,
respectively. Under the terms of the employment agreements, each of the
85
<PAGE> 89
executives participates in the Company's bonus program. The terms of the
employment agreements provide that the Company may terminate the executive's
employment for "cause" (as defined in the employment agreements), death or
extended illness or disability without any severance obligation. The Company may
terminate an executive's employment without "cause" under the employment
agreements by providing not less than three (3) months prior written notice to
the executive, in which case the executive shall be entitled to receive (i) his
base salary and benefits through the effective date of termination, (ii) a lump
sum payment equal to the sum of the aggregate base salary that would have been
payable to the executive from the date of termination through the end of the
initial term of the employment agreement, and (iii) all benefits through the end
of the initial term of the employment agreement. On April 29, 1999, the Company
provided Mr. Liguori with three (3) months prior written notice of termination
of employment in accordance with the terms of his employment agreement. In
addition, Mr. Winocur is subject to a non-competition agreement with the
Company, which provides that Mr. Winocur may not compete with the Company for a
period of five (5) years following his termination of employment.
On September 15, 1998, the Company entered into agreements with Mr.
Winocur, Mr. Liguori and Mr. Kolodny providing for the payment of certain
benefits following the occurrence of a "change in control" (as defined in such
agreements). The terms of such agreements generally provide that if the (i)
executive's employment is terminated, other than for "cause" within thirteen
(13) months following the occurrence of a "change in control", or (ii) executive
terminates his employment for any reason during the thirty (30) day period
immediately following the first anniversary of a "change in control", the
executive shall be entitled to receive upon the date of termination of
employment a lump sum severance payment in cash (or at the executive's sole
exclusive option receive such amounts as salary continuation during the
applicable period), equal to (x) three (3) times the highest annual base salary
paid or payable to the executive during the thirty-six (36) month period
immediately preceding the month in which the "change in control" occurs, and (y)
the aggregate of the maximum bonuses, which could have been earned, vested or
otherwise paid under the Company's bonus program during the term of such bonus
program. The agreements provide that the Company shall continue to provide the
executive and/or his dependents with life, disability, accident and health
insurance benefits, and certain other benefits following the occurrence of a
"change in control". In addition, in the event the executive receives any
payments under such agreements or pursuant to any other plan which become
subject to excise taxes under the Internal Revenue Code of 1986, as amended (the
"Code"), the agreements provide that the Company is required to pay to the
executive a gross-up payment such that after the payment by the executive of all
taxes and any excise taxes imposed upon or attributable to the gross-up payment,
the executive retains an amount of the gross-up payment equal to the excise tax
imposed upon the payments received by the executive.
On May 17, 1999, the Company hired Robert Mealey as its Senior Vice
President of Operations. In connection with Mr. Mealey's employment with the
Company, the Company entered into an arrangement with Mr. Mealey, which provides
for an eighteen (18) month severance arrangement in the event Mr. Mealey's
employment is terminated following a sale of the Company and Mr. Mealey is not
offered employment with an acquiror upon substantially the same employment terms
as in effect immediately prior to the sale of the Company.
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total stockholder
return of the Common Stock of the Company for the last five years with the
cumulative total return of the Standard & Poor's 500 Stock Index ("S&P 500
Index") and the Standard & Poor's Medical Products and Supplies Index over the
same period assuming the investment of $100 on December 31, 1993 in the Common
Stock of the Company, the Standard & Poor's 500 Stock Index and the Standard &
Poor's Medical Products and Supplies Index ("S&P Health Care Index") (assuming
the reinvestment of all dividends).
86
<PAGE> 90
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG GRAHAM-FIELD HEALTH PRODUCTS, INC.,
THE STANDARD & POOR'S 500 STOCK INDEX
AND THE STANDARD & POOR'S MEDICAL PRODUCTS AND SUPPLIES INDEX
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
GRAHAM-FIELD S & P 500 S & P HEALTH CARE
HEALTH PRODUCTS, --------- (MEDICAL PRODUCTS
INC. & SUPPLIES)
---------------- -----------------
<S> <C> <C> <C>
Dec 93 100.00 100.00 100.00
Dec 94 79.00 101.00 119.00
Dec 95 71.00 139.00 200.00
Dec 96 182.00 171.00 230.00
Dec 97 351.00 229.00 287.00
Dec 98 71.00 294.00 413.00
</TABLE>
* ASSUMES $100 INVESTED ON DECEMBER 31, 1993 IN STOCK OR INDEX, INCLUDING
REINVESTMENT OF DIVIDENDS.
87
<PAGE> 91
REPORT OF COMPENSATION COMMITTEE
OVERALL POLICY
The Company's executive officer compensation program is administered to be
closely linked to corporate performance and the total return to stockholders
over the long-term. The overall objectives of the executive officer compensation
program are to attract and retain the best possible executive talent, to
motivate these executives to achieve the goals inherent in the Company's
business strategy, to link executive and stockholder interests through
participation in the Company's Incentive Program and finally to provide a
compensation package that recognizes individual contributions as well as overall
business results.
The key elements of the Company's executive officer compensation consist of
base salary, an annual bonus pursuant to the Company's bonus program, and the
grant of stock options under the Company's Incentive Program. The Compensation
Committee reviews and approves the compensation package for the executive
officers of the Company. In addition, while the elements of compensation
described below are considered separately, the Compensation Committee takes into
account the full compensation package afforded by the Company to the individual.
BASE SALARIES
Base salaries for executive officers (officers with principal
decision-making authority) are initially determined by the Compensation
Committee through a subjective evaluation of the responsibilities of the
position held and the experience of the individual. Annual salary adjustments
and increases are determined by evaluating the performance of the Company and of
each executive officer, and also take into account new responsibilities.
ANNUAL BONUS
Cash bonuses are granted on a discretionary basis primarily to reward
individual contribution, following years in which the Company achieved projected
earnings and revenue growth. Due to the performance of the Company in 1998, no
cash bonuses were awarded to the executive officers, other than a $15,000 bonus
paid to one executive officer.
STOCK OPTIONS
Under the Company's Incentive Program, which was approved by the Company's
stockholders, stock options exercisable for Common Stock are granted to the
Company's employees, including executive officers. The Compensation Committee
approves the grant of stock options awards.
Stock options are designed to align the interests of executives with those
of the stockholders. Stock options are granted with an exercise price equal to
the market price of the Common Stock on the date of grant and generally vest and
are exercisable at the rate of 50 percent per year. This approach is designed to
incentivize the creation of stockholder value over the long term since the full
benefit of a compensation package cannot be realized unless stock price
appreciation occurs over a number of years.
CHIEF EXECUTIVE OFFICER COMPENSATION
From January 1, 1998 to July 29, 1998, Irwin Selinger served as Chief
Executive Officer of the Company, and was paid a base salary at an annual rate
of $550,000. On February 2, 1998, Mr. Selinger was granted a stock option to
purchase 250,000 shares of the common stock of the Company, which expired ninety
(90) days following his resignation on July 29, 1998. On July 29, 1998, Mr.
Selinger entered into the Separation Agreement, which terminated Mr. Selinger's
existing employment agreement and "change in control" agreement. For a
description of the terms and provisions of the Separation Agreement, see
"Employment, Termination and Change in Control Arrangements and Other
Arrangements."
From July 29, 1998 to February 4, 1999, Rodney F. Price served as Chief
Executive Officer of the Company, as well as Chairman of the Board. Mr. Price
did not receive any compensation for his services as
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<PAGE> 92
Chief Executive Officer, but was reimbursed for travel, lodging and other
expenses. On January 2, 1998, Mr. Price was granted directors' options under the
Company's Incentive Program to purchase 10,000 shares of the common stock of the
Company, which expire two (2) years following his resignation on February 4,
1999.
STOCK OPTION REPRICING
On April 1, 1998, the Compensation Committee determined to lower the
exercise price of stock options granted to Mr. Bellamy on March 2, 1998. In
addition, on April 17, 1998, the Compensation Committee determined to reset the
exercise price of Mr. Bellamy's repriced stock options of April 1, 1998, and
reset the exercise price with respect to stock options granted on February 2,
1998 to Mr. Winocur, Mr. Liguori and Mr. Kolodny. In connection with the
repricing of the stock options, the Compensation Committee cancelled the
previously granted stock options and granted new stock options. The terms of the
new stock options are identical in all respects to the cancelled stock options
except for the exercise price. The purpose and intention of the repricing was to
maintain equity incentives for key employees and to foster loyalty and economic
motivation. The Compensation Committee believes that stock options which are
significantly out of the money provide no particular compensatory incentive to
employees regarding performance, and that the repricing of stock options may
cause executives to forego alternative employment opportunities.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to a company's chief executive
officer and the other four most highly compensated individuals who are executive
officers as of the end of the year. Although maintaining tax deductibility is
one consideration among many, the Committee reserves the right to determine from
time to time that compensation arrangements are in the best interest of the
Company and its stockholders despite the fact that such arrangements might not
qualify for tax deductibility. The Company's bonus program is designed so that
individual bonuses are not dependent solely on objective or numerical criteria,
which enables the Committee to apply its independent judgment to reflect
performance against qualitative strategic objectives.
Compensation Committee
J. Rex Fuqua
Louis A. Lubrano
Michael Dreyer
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<PAGE> 93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") and Series C Cumulative Convertible Preferred Stock
(the "Series C Preferred Stock") with respect to each person who, to the
knowledge of the management of the Company, owns beneficially more than five
percent of each class of stock as of May 6, 1999. Beneficial ownership has been
determined for purposes of the following table in accordance with Rule 13d-3 of
the Exchange Act under which a person is deemed to be the beneficial owner of
securities if he or she has or shares voting power or investment power in
respect of such securities or has the right to acquire beneficial ownership
within 60 days.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF COMMON SERIES B PREFERRED SERIES C PREFERRED
STOCK BENEFICIALLY STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED(1) OWNED(1)(2) OWNED(1)(3)
------------------- ------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ------------------------------------ --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
BIL(4)................................... 4,388,353 14% 6,100 100% 1,000 100%
c/o Brierley Investments Ltd.
4th Floor, Stratton House
Stratton Street
London W1X 5FE
United Kingdom
J.B. Fuqua(5)............................ 2,372,190 7.6% -0- -0- -0- -0-
c/o Fuqua Capital, Inc.
1201 West Peachtree Street, N.E
Atlanta, Georgia 30309
J. Rex Fuqua(6).......................... 1,595,563 5.1% -0- -0- -0- -0-
c/o Fuqua Capital, Inc.
1201 West Peachtree Street, N.E
Atlanta, Georgia 30309
Dimensional Fund Advisors(7)............. 1,781,926 5.68% -0- -0- -0- -0-
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
</TABLE>
- ---------------
(1) All shares are beneficially owned and the sole voting and investment power
is held by the person or entities named, except as otherwise specified
herein.
(2) The Series B Preferred Stock is beneficially owned by BIL and convertible
into shares of Common Stock (i) at the option of BIL, at a conversion price
of $20 per share (or, in the case of certain dividend payment defaults, at a
conversion price of $15.50 per share), (ii) 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 (iii) automatically on November 27, 2001 at a conversion price of $15.50
per share. The conversion prices are subject to customary antidilution
adjustments. The shares of the Series B Preferred Stock are entitled to
3,935,483 votes, and vote as a single class with the Common Stock and the
Series C Preferred Stock.
(3) The Series C Preferred Stock is beneficially owned by BIL and subject to
redemption as a whole at the option of the Company on the fifth anniversary
of the date of issuance at a stated value plus accrued and unpaid dividends
and, if not redeemed will be convertible into shares of Common Stock
automatically at a conversion price of $20 per share, subject to customary
antidilution adjustments. The shares of the Series C Preferred Stock are
entitled to 500,000 votes, and vote as a single class with the Common Stock
and the Series B Preferred Stock.
90
<PAGE> 94
(4) Does not include 6,100 shares of the Series B Preferred Stock and 1,000
shares of the Series C Preferred Stock owned by BIL (see Notes (2) and (3)
above). The shares of Common Stock, Series B Preferred Stock and Series C
Preferred Stock beneficially owned by BIL represent in the aggregate 25% of
the voting power of the Company's outstanding capital stock as of May 6,
1999. Pursuant to the BIL Stockholder Agreement, BIL has agreed to vote its
shares of Common Stock, Series B Preferred Stock, and Series C Preferred
Stock in accordance with the direction of the Company's Board of Directors
for any nominees recommended by the Board of Directors and on all proposals
presented by any other stockholder of the Company. Effective as of May 12,
1999, BIL exchanged a $4 million note (the "BIL Note") owing by the Company
to BIL for 2,036 shares of non-voting Series D Preferred Stock (the "Series
D Preferred Stock"). The amount set forth in the table does not include the
shares of Series D Preferred Stock.
(5) According to information contained in a Joint Schedule 13D filing dated as
of August 10, 1998 (the "Fuqua 13D Filing"), the shares of Common Stock
beneficially owned by J.B. Fuqua include 675,538 shares held by two trusts
for the benefit of the grandchildren of J.B. Fuqua, of which Mr. Fuqua is
the trustee, and 146,365 shares held by The J.B. Fuqua Foundation, Inc. (the
"Fuqua Foundation"), of which Mr. Fuqua is a director and officer. Mr. Fuqua
shares voting and investment power with J. Rex Fuqua with respect to shares
held by the Fuqua Foundation. J.B. Fuqua also shares voting and investment
power with J. Rex Fuqua with respect to 768,600 shares held by Fuqua
Holdings I, L.P. (the "Fuqua Partnership") as a result of J.B. Fuqua's
status as an officer and director of Fuqua Holdings, Inc. ("Holdings"), the
general partner of the Fuqua Partnership.
(6) According to information contained in the Fuqua 13D Filing, J. Rex Fuqua
shares voting and investment power with J.B. Fuqua with respect to 768,600
shares held by the Fuqua Partnership as a result of J. Rex Fuqua's status as
an officer and director of Holdings, the general partner of the Fuqua
Partnership. In addition, J. Rex Fuqua shares voting and investment power
with J.B. Fuqua with respect to 146,365 shares held by the Fuqua Foundation,
of which J. Rex Fuqua is a director and officer.
(7) According to information contained in a Schedule 13G filing dated as of
February 11, 1999 by Dimensional Fund Advisors Inc. ("Dimensional"),
Dimensional, an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940, furnishes investment advise to four
investment companies registered under the Investment Company Act of 1940,
and serves as investment manager to certain other investment vehicles,
including commingled group trusts. (These investment companies and
investment vehicles are referred to hereinafter as the "Portfolios"). In its
role as investment advisor and investment manager, Dimensional possesses
both voting and investment power over the shares of Common Stock owned by
the Portfolios, and disclaims beneficial ownership of such shares.
91
<PAGE> 95
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, Series B Preferred Stock and Series C Preferred Stock
with respect to the Company's directors, the Company's Named Executive Officers,
and by all of the Company's directors and executive officers as a group, as
reported to the Company as of May 6, 1999. Beneficial ownership has been
determined for purposes of the following table in accordance with Rule 13d-3 of
the Exchange Act, under which a person is deemed to be the beneficial owner of
securities if he or she has or shares voting power or investment power in
respect of such securities or has the right to acquire beneficial ownership
within 60 days.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(1)(2) OWNED(1)(3)
-------------------- ----------------- -----------------
NUMBER NUMBER NUMBER
OF OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ------------------------------------ --------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS:
David P. Delaney, Jr.(4)........... 39,000 * -0- -0- -0- -0-
c/o Lancer Financial Group, Inc.
370 West Park Avenue
Long Beach, New York 11561
Rupert O.H. Morley(5).............. 4,388,353 14% 6,100 100% 1,000 100%
c/o Brierley Investments Ltd. 4th
Floor, Stratton House
London W1X 5FE
United Kingdom
J. Rex Fuqua(6).................... 1,595,563 5.1% -0- -0- -0- -0-
c/o Fuqua Capital, Inc.
1201 West Peachtree Street, N.E
Atlanta, Georgia 30309
Louis A. Lubrano(7)................ 76,200 * -0- -0- -0- -0-
c/o Herzog, Heine, Geduld, Inc.
26 Broadway
New York, New York 10004
Michael Dreyer..................... 130,000 * -0- -0- -0- -0-
c/o Dreyer, Edmonds & Associates
355 South Grand Avenue
Suite 4150
Los Angeles, CA 90071-3103
NAMED EXECUTIVE OFFICERS:
Irwin Selinger(8).................. 629,440 2% -0- -0- -0- -0-
11 High Ridge Lane
Matinecock, New York 11771
Rodney F. Price(9)................. 10,000 * -0- -0- -0- -0-
22 Chester Street
London SW1X 7BL
United Kingdom
Paul Bellamy(10)................... 100,000 * -0- -0- -0- -0-
Four North Street
Old Greenwich, CT 06870
Peter Winocur(11).................. 213,550 * -0- -0- -0- -0-
c/o Graham-Field Health Products,
Inc.
81 Spence Street
Bay Shore, New York 11706
</TABLE>
92
<PAGE> 96
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SHARES OF SERIES B SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(1)(2) OWNED(1)(3)
-------------------- ----------------- -----------------
NUMBER NUMBER NUMBER
OF OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ------------------------------------ --------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Kolodny(12)............. 159,000 * -0- -0- -0- -0-
c/o Graham-Field Health Products,
Inc.
81 Spence Street
Bay Shore, New York 11706
Ralph Liguori(13).................. 131,000 * -0- -0- -0- -0-
c/o Graham-Field Health Products,
Inc.
81 Spence Street
Bay Shore, New York 11706
Jeffrey Schwartz(14)............... 42,000 * -0- -0- -0- -0-
c/o Graham-Field Health Products,
Inc.
81 Spence Street
Bay Shore, New York 11706
All directors and executive officers
as a group (15) persons)(15)..... 6,876,345 21.4% 6,100 100% 1,000 100%
</TABLE>
- ---------------
* Less than 1%.
(1) All shares are beneficially owned and the sole voting power and investment
power is held by the persons named, except as otherwise specified herein.
(2) The Series B Preferred Stock is beneficially owned by BIL and convertible
into shares of the Common Stock (i) at the option of BIL, at a conversion
price of $20 per share (or, in the case of certain dividend payment
defaults, at a conversion price of $15.50 per share), (ii) 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 (iii) automatically on November 27, 2001 at a conversion
price of $15.50 per share. The conversion prices are subject to customary
antidilution adjustments. The shares of the Series B Preferred Stock are
entitled to 3,935,483 votes, and vote as a single class with the Common
Stock and the Series C Preferred Stock.
(3) The Series C Preferred Stock is beneficially owned by BIL and subject to
redemption as a whole at the option of the Company on the fifth anniversary
of the date of issuance at a stated value plus accrued and unpaid dividends
and, if not redeemed will be convertible into shares of Common Stock
automatically at a conversion price of $20 per share, subject to customary
antidilution adjustments. The shares of the Series C Preferred Stock are
entitled to 500,000 votes, and vote as a single class with the Common Stock
and the Series B Preferred Stock.
(4) The amount set forth above includes 30,000 shares currently issuable upon
the exercise of directors' stock options issued pursuant to the Company's
Incentive Program.
(5) Consists of shares of Common Stock owned by BIL, which Mr. Morley may be
deemed to own beneficially as the Operations Director of BIL and one of
BIL's designees to the Company's Board of Directors. Does not include up to
3,935,483 shares of Common Stock issuable upon the conversion of the shares
of the Series B Preferred Stock and up to 500,000 shares of Common Stock
issuable upon the conversion of the shares of the Series C Preferred Stock
owned by BIL (see Notes 2 and 3 above). Effective as of May 12, 1999, BIL
exchanged the BIL Note for 2,036 shares of Series D Preferred Stock. The
amount set forth in the table does not include the shares of Series D
Preferred Stock.
(6) The amount set forth above includes voting and investment power which J.
Rex Fuqua shares with J.B. Fuqua with respect to 768,600 shares held by the
Fuqua Partnership as a result of J. Rex Fuqua's status as an officer and
director of Holdings, the general partner of the Fuqua Partnership. In
addition, J. Rex
93
<PAGE> 97
Fuqua shares voting and investment power with J.B. Fuqua with respect to
146,365 shares held by the Fuqua Foundation, of which J. Rex Fuqua is a
director and officer.
(7) The amount set forth above includes 200 shares owned by the Virginia
Lubrano Trust, and 70,000 shares currently issuable upon the exercise of
directors' stock options issued pursuant to the Company's Incentive
Program.
(8) On July 29, 1998, Mr. Selinger resigned as Chief Executive Officer,
President and a director of the Company. Based on information available to
the Company as of May 6, 1999, Mr. Selinger owns 629,440 shares of Common
Stock, which includes 5,500 shares owned by his wife as to which shares Mr.
Selinger disclaims any beneficial interest.
(9) On February 4, 1999, Mr. Price resigned as Chairman of the Board and Chief
Executive Officer of the Company. Mr. Price served as Chairman of the Board
from July 25, 1998 through February 4, 1999, and as Chief Executive Officer
from July 29, 1998 through February 4, 1999. The amount set forth above
represents 10,000 shares currently issuable upon the exercise of directors'
stock options issued pursuant to the Company's Incentive Program.
(10) On March 24, 1999, Mr. Bellamy resigned as President, Chief Executive
Officer and a director of the Company. Mr. Bellamy served in various
executive capacities with the Company from March 2, 1998 through March 24,
1999, including Vice President, Chief Financial Officer, President, Chief
Executive Officer, and a director of the Company. The amount set forth
above includes 100,000 shares currently issuable upon the exercise of stock
options issued pursuant to the Company's Incentive Program. Under the terms
of Mr. Bellamy's stock option agreements, Mr. Bellamy's stock options
expire ninety (90) days following his resignation on March 24, 1999.
(11) The amount set forth above includes 171,844 shares currently issuable upon
the exercise of stock options issued pursuant to the Company's Incentive
Program, and 6,250 shares underlying stock options which are exercisable
within 60 days of May 6, 1999.
(12) The amount set forth above includes 101,267 shares currently issuable upon
the exercise of stock options issued pursuant to the Company's Incentive
Program, and 6,250 shares underlying stock options which are exercisable
within 60 days of May 6, 1999.
(13) On April 29, 1999, the Company provided Mr. Liguori with three (3) months
prior written notice of termination of employment. The amount set forth
above includes 93,131 shares currently issuable upon the exercise of stock
options issued pursuant to the Company's Incentive Program, and 5,000
shares underlying stock options which are exercisable within 60 days of May
6, 1999.
(14) The amount set forth above includes 37,000 shares currently issuable upon
the exercise of stock options issued pursuant to the Company's Incentive
Program, and 5,000 shares underlying stock options which are exercisable
within 60 days of May 6, 1999.
(15) The amount set forth above includes 581,708 shares currently issuable upon
the exercise of stock options issued pursuant to the Company's Incentive
Program, and 30,000 shares underlying stock options which are exercisable
within 60 days of May 6, 1999. Such amount excludes (i) shares of Common
Stock and (ii) shares currently issuable upon the exercise of stock options
issued pursuant to the Company's Incentive Program, held by former officers
and directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
On March 1, 1996, the Company entered into a three (3) year lease with HIP
Realty, Inc. ("HIP") for the Company's facility located in Mount Vernon, New
York. The lease terminated on February 28, 1999, and the Company has occupied
the facility on a month-to-month basis since March 1, 1999 upon the same terms
and conditions as provided under the lease. The lease with HIP Realty provided
for the payment by the Company of an annual rent of $180,000 during the 1998
fiscal year, and the payment of incremental real estate taxes over a base year.
The principal stockholders of HIP are Harvey P. Diamond, the Senior Corporate
Vice President of Sales, and Peter Winocur, the President of the Company's
Labtron Business Unit. The Company believes that the terms of the lease are at
least as favorable to it as those it would have received from an
94
<PAGE> 98
unrelated third party. On April 2, 1999, subject to the terms of the Company's
month-to-month lease arrangement with HIP, the Company subleased a portion of
the facility for a monthly rental of $2,000.
The Company, through its wholly-owned subsidiary, Lumex/Basic American
Holdings, Inc. (formerly, Fuqua Enterprises, Inc.) ("Fuqua"), subleases certain
office space located in Atlanta, Georgia to Fuqua Capital Corporation
("Capital"), an entity controlled by the Fuqua Family. The sublease has a
remaining term of one year and provides that if Fuqua moves out of the space it
shares with Capital, or there is a change in control of Fuqua, Capital has the
option of taking over the office space now occupied by Fuqua upon terms
favorable to Capital. Pursuant to the terms of the sublease, Capital pays Fuqua
approximately $4,200 per month.
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. 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.
95
<PAGE> 99
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).
- ---------------
* incorporated by reference.
96
<PAGE> 100
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........................................................
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.............................................
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>
97
<PAGE> 101
<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)........................ *
</TABLE>
98
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
<C> <S> <C>
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................................................... *
10.21 Supply Agreement, by and between Everest & Jennings, Inc.
and P.T. Dharma Polimetal, dated as of March 5, 1999........
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.................................................
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).................................................. *
</TABLE>
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<TABLE>
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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.................................................... *
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")......................................................... *
</TABLE>
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<TABLE>
<CAPTION>
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NO. DESCRIPTION NO.
- ------- ----------- ----
<C> <S> <C>
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......................... *
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................................
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........
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........ --
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................................ *
</TABLE>
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<TABLE>
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NO. DESCRIPTION NO.
- ------- ----------- ----
<C> <S> <C>
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")................................. *
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............... *
</TABLE>
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<TABLE>
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NO. DESCRIPTION NO.
- ------- ----------- ----
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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................................ *
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..........................
10.75 Letter Agreement dated as of May 12, 1999, by and between
BIL Securities (Offshore) Limited and Graham-Field..........
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...................................
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>
103
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<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
<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)
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)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- ----------- ----
<C> <S> <C>
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>
- ---------------
* Incorporated by reference.
14(b). Reports on Form 8-K
Not Applicable.
105
<PAGE> 109
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>
106
<PAGE> 1
Exhibit 3.4
AMENDMENT TO
BY-LAWS OF
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(A DELAWARE CORPORATION)
AUGUST 12, 1996
Article XI of the By-Laws of the Corporation is hereby amended in
its entirety to read as follows:
"Except as otherwise provided by the Certificate of Incorporation,
these By-laws may be amended or repealed, or new By-laws may be adopted,
at any annual or special meeting of the stockholders, by a majority of the
total votes of the stockholders and by a majority of the total votes of
each class of stock, present in person or by proxy and entitled to vote on
such action; provided, however, that the notice of such meeting shall have
been given as provided in these By-laws, which notice shall mention that
amendment or repeal of these By-laws, or the By-laws may be amended and
the new By-laws may be adopted by the Board at any meeting thereof
provided that By-laws adopted by the Board maybe amended or repealed by
the stockholders as hereinabove provided."
<PAGE> 1
Exhibit 4.5
CERTIFICATE OF DESIGNATIONS
of
SERIES D PREFERRED STOCK
of
GRAHAM-FIELD HEALTH PRODUCTS, INC.
- --------------------------------------------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
GRAHAM-FIELD HEALTH PRODUCTS, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), HEREBY
CERTIFIES that pursuant to the authority conferred upon the Board of Directors
of the Corporation by the provisions of the Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation"), and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, the following resolution creating a series of its Preferred Stock, par
value $.01 per share, designated as Series D Preferred Stock has been duly
adopted by the Board of Directors of the corporation:
RESOLVED, that a series of the class of authorized Preferred Stock, par
value $.01 per share, of the Corporation (the "Preferred Stock") be hereby
created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
of such series, are as follows:
SECTION 1. Designation and Amount.
The shares of such series shall be designated as the "Series D
Preferred Stock" (the "Series D Preferred Stock") and the number of shares
initially constituting such series shall be 2,036, which number may be increased
(but not decreased) by the Board of Directors of the Corporation (the "Board of
Directors") without a vote of stockholders. The stated value per share (the
"Stated Value") of the Series D Preferred Stock shall be $2,000.
SECTION 2. Definitions.
Capitalized terms used herein shall have the meanings set forth in this
Section 2:
"Board of Directors" has the meaning ascribed to such term in Section
1.
"Certificate of Incorporation" means the Certificate of Incorporation
of the Corporation, as it may be amended or restated from time to time,
including all certificates of designations with respect to Preferred Stock.
"Common Stock" means the common stock, par value $.025 per share, of
the Corporation.
<PAGE> 2
"Issue Date" means May 12, 1999.
"Person" means any person or entity of any nature whatsoever,
specifically including an individual, a firm, a company, a corporation, a
partnership, a trust or other entity.
"Preferred Stock" means the preferred stock, par value $.01 per share,
of the Corporation.
"Series A Preferred Stock" means the Preferred Stock designated as the
Series A Junior Participating Preferred Stock.
"Series B Preferred Stock" means the Preferred Stock designated as the
Series B Cumulative Convertible Preferred Stock.
"Series C Preferred Stock" means the Preferred Stock designated as the
Series C Cumulative Convertible Preferred Stock.
"Series D Preferred Stock" has the meaning ascribed in Section 1.
"Stated Value" has the meaning ascribed in Section 1.
SECTION 3. Dividends and Distributions.
(a) In case the Corporation shall at any time or from time to time
after the Issue Date declare, order, pay or make a dividend or other
distribution (including, without limitation, any distribution of stock or other
securities or property or rights or warrants to subscribe for securities of the
Corporation or any of its subsidiaries by way of dividend or spinoff) on the
Common Stock, then, and in each such case, the holders of shares of Series D
Preferred Stock shall be entitled to receive from the Corporation, with respect
to each one-one thousandth of a share of Series D Preferred Stock held, the same
dividend or distribution received or to be received by a holder of one share of
Common Stock.
(b) The holders of shares of Series D Preferred Stock shall not be
entitled to receive any dividends or other distributions except as provided in
this Section 3.
(c) Unless all dividends and distributions on the outstanding shares of
Series D Preferred Stock that shall have accrued and be payable as of any date
shall have been paid in full, or declared and funds or property, as appropriate,
irrevocably set apart for payment thereof, no dividend or other distribution
shall be paid to holders of Common Stock.
SECTION 4. Voting Rights.
(a) So long as any shares of Series D Preferred Stock remain
outstanding, the Corporation shall not, without the affirmative vote of the
holders of at least two-thirds of the shares of Series D Preferred Stock
outstanding at the time, either in writing or at a meeting (voting separately as
a class), amend, alter or repeal the provisions of the Certificate of
Incorporation, whether by merger, consolidation or otherwise, so as to adversely
affect any right, preference, privilege or voting power of the Series D
Preferred Stock or the holders thereof in their capacity as such.
(b) Except as provided in this Section 4 or in the Certificate of
Incorporation, or as required by law, the holders of shares of Series D
Preferred Stock shall have no special voting rights and their consent shall not
be required for the taking of any corporation action.
D-2
<PAGE> 3
SECTION 5. Reacquired Shares.
Any shares of Series D Preferred Stock converted, purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof, and, if necessary to
provide for the lawful purchase of such shares, the capital represented by such
shares shall be reduced in accordance with the DGCL. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of another series of Preferred Stock.
SECTION 6. Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary (a "Liquidation"), the holders of
shares of Series D Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to its stockholders, an
amount per share of Series D Preferred Stock equal to the greater of (i) the
Stated Value plus all accrued and unpaid dividends thereon to the date of such
payment ("Liquidation Preference"), and (ii) the aggregate amount of cash and
other property which a holder of 1,000 shares of Common Stock is entitled to
receive in connection with such Liquidation. No distribution shall be made to
the holders of shares of Common Stock upon a Liquidation unless, prior thereto,
the holders of shares of Series D Preferred Stock shall have received the amount
to which they are entitled under this paragraph (a).
(b) In the event that the assets of the Corporation available for
distribution to the holders of the Series D Preferred Stock upon any Liquidation
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to paragraph (a) of this Section 6, such assets of the
Corporation which are so available shall be allocated pro rata on a
share-by-share basis among all shares of Series D Preferred Stock at the time
outstanding.
(c) For purposes of this Section 6, a Liquidation shall be deemed to
include any sale of substantially all of the assets or equity securities of the
Corporation, consolidation, merger or other business combination of the
Corporation with or into any other Person or Persons.
SECTION 7. Registration of Transfer.
The Corporation shall keep at its principal office a register for the
registration of Series D Preferred Stock. Upon the surrender of any certificate
representing Series D Preferred Stock at such place, the Corporation shall, at
the request of the record holder of such certificate, execute and deliver (at
the Corporation's expense) a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of Series D
Preferred Stock represented by the surrendered certificate. Each such new
certificate shall be registered in such name and shall represent such number of
shares of Series D Preferred Stock as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Series D Preferred
Stock represented by such new certificate from the date to which dividends have
been fully paid on such Series D Preferred Stock represented by the surrendered
certificate.
SECTION 8. Replacement.
Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder shall be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing shares
of Series D Preferred Stock, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and
D-3
<PAGE> 4
deliver in lieu of such certificate a new certificate of like kind representing
the number of shares of Series D Preferred Stock represented by such lost,
stolen, destroyed or mutilated certificate dated the date of such lost, stolen,
destroyed or mutilated certificate, and dividends shall accrue on the Series D
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
SECTION 9. Legal Expenses.
The Corporation agrees that, in the event that a holder or holders of
Series D Preferred Stock shall bring any legal action or proceeding to enforce
or to seek damages or other relief arising from an alleged breach of any term or
provision of the Series D Preferred Stock by the Corporation and such holder or
holders prevail in any such action or proceeding, such prevailing holder or
holders shall be entitled to an award of, and the Corporation shall pay, the
reasonable fees and expenses of legal counsel to such prevailing holder or
holders.
IN WITNESS WHEREOF, Graham-Field Health Products, Inc. has caused this
Certificate of Designations of Series D Preferred Stock to be duly executed by
its President and attested to by its Secretary and has caused its corporate seal
to be affixed hereto this 14th day of May, 1999.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
By: /s/ John G. McGregor
______________________________
President
[SEAL]
Attest:
By: /s/ Richard S. Kolodny
___________________________________
Secretary
D-4
<PAGE> 1
Exhibit 10.21
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT is made and entered into as of 5 March
1999 between
EVEREST & JENNINGS, INC., a corporation organized and existing under the laws of
the State of California, U.S.A., with offices at 81 Spence Street, Bay Shore,
New York 11706, U.S.A. ("E&J") and
P.T. DHARMA POLIMETAL, a company organized and existing under the laws of
Indonesia, with offices at Jl. Raya Serang Km. 24 Balaraja, Tangerang, Indonesia
("P.T. Dharma").
RECITALS
WHEREAS, E&J is a manufacturer and seller of wheel chairs in
the United States, Canada, Mexico and Europe;
WHEREAS, P.T. Dharma manufacturers and sells for export wheel
chairs and wheel chair components;
WHEREAS, E&J is willing to provide design specifications to
P.T. Dharma to be used in the manufacture of wheel chairs and wheel chairs
components;
WHEREAS, the Parties agree that P.T. Dharma shall manufacture
the wheel chairs and wheel chair components at high quality in accordance with
the designs exclusively for E&J and its designees, as hereinafter provided;
WHEREAS, the Parties entered into a Supply Agreement and
Restated and Amended Supply Agreement (the "Existing Supply Agreements")
pursuant to which P.T. Dharma has supplied wheel chairs and wheel chair
components to E&J; and
WHEREAS, the Parties have agreed to amend and restate the
Existing Supply Agreements in their entirety;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants of the parties hereinafter expressed, it is hereby agreed as
follows:
1. MANUFACTURE AND SUPPLY: EXCLUSIVE SUPPLY CONTRACT
1.1 P.T. Dharma shall, subject to the terms and conditions of this
Agreement, manufacture and sell exclusively to E&J or its designees certain
wheel chairs and wheel chair components described in Appendix "A" (hereto (the
"Products") conforming in all material respects to the specifications referenced
in Appendix "A" hereto (the "Specifications").
<PAGE> 2
2
1.2 E&J agrees to order sufficient quantities of the Products, at the
unit prices set out in Appendix "B" hereto, which prices shall be competitive
with prevailing market prices and are subject to adjustment as provided in
Sections 1.4 and 3.
During the period of the Term of this Agreement ending on June 30, 2000
E&J agrees to order Products in a minimum aggregate gross purchase amount of US$
700,000 per month and the parties will mutually agree to purchase requirements
for each twelve (12) month period thereafter.
Should E&J fail to order sufficient quantities in any of the one year
periods, as set out above, during the Term of this Agreement to meet the minimum
aggregate gross purchase amount for that year, E&J agrees to pay to P.T. Dharma
for that year an amount equal to ten (10) percent of the difference between the
aggregate gross dollar purchase amount of the Products ordered in that contract
year, regardless of when shipped and the minimum aggregate gross purchase amount
set forth herein for that contract year as liquidated damages, unless there are
monies owing by P.T. Dharma to E&J, or any affiliated company of E&J, in which
case E&J may set-off such liquidated damages.
In the event that a failure by E&J to order sufficient quantities to
meet the minimum aggregate gross purchase amount in any of the year periods is
due to an occurrence demonstrably beyond their control in accordance with
Article 10, Force Majeure, the minimum aggregate gross purchase amount set forth
herein for that contract year and each successive contract year that performance
is suspended in whole and/or in part due to such occurrence shall be reduced by
an amount proportionate to the amount of time performance is suspended during
that contract year and any liquidated damages due P.T. Dharma shall be
calculated using the aggregate gross purchase amount so reduced.
1.3 Products ordered and cancelled pursuant to Section 2.3 of this
Agreement shall count toward meeting the minimum aggregate gross purchase amount
for the period which they were ordered.
1.4 P.T. Dharma shall supply completed wheelchairs to E&J on the same
terms and conditions as are currently being supplied by P.T. Dharma in
accordance with Appendix A and Appendix B, and as from time to time adjusted by
E&J. When such completed wheelchairs are ordered by E&J at the rate of at least
400 units per day, unit prices will be reduced by US$0.80 per wheelchair and
when ordered at the rate of 450 or more units per day, unit prices will be
reduced by US$1.60 per wheelchair. If completed wheelchairs are ordered by E&J
at the rate of less than 350 units per day, unit prices will be increased by
US$1.60 per wheelchair for each day E&J orders less than 350 units.
The Parties hereby agree that new products and unit prices will be
added to Appendix A and Appendix B, respectively, by mutual agreement from time
to time. E&J shall supply P.T. Dharma with specifications for the new products.
P.T. Dharma shall propose unit prices for the manufacture of the new products,
which E&J may accept or reject. After a new product is added to Appendix A and a
unit price therefor
<PAGE> 3
3
is added to Appendix B, orders therefor shall be used to satisfy the minimum
aggregate gross purchase amount for the year in which they are ordered.
1.5 For the purposes of this Agreement, P.T. Dharma Affiliates means
any company in which P.T. Dharma controls a majority of the indicia of ownership
or control, or is under the common control of a third party controlling such
indicia of ownership or control of another company and P.T. Dharma, as well as
their respective agents, employees, successors and assigns (hereinafter referred
to collectively as "Affiliates").
1.6 Neither P.T. Dharma nor its Affiliates, shall manufacture or sell
the Products, finished wheelchairs, or any other products comparable,
competitive with equivalent to, intended to be used with or that are a part of
Products, to any person or entity other than E&J for sale anywhere in the world
except into European markets where the Products are not competing directly with
E&J; the parties will agree the terms under which PT. Dharma may supply to
Europe on or before 30 April 1999. Notwithstanding the foregoing P.T. Dharma
shall be entitled to supply products to Orthopedia GmbH in Germany and Benecraft
in the United Kingdom, with prior written notice to E&J provided the manufacture
and sale of such products does not involve the use of E&J owned Special Tooling
or the use of E&J proprietary trade secrets.
P.T. Dharma agrees to use its best efforts to prevent the sale or
distribution of any like or comparable products manufactured or sold by P.T.
Dharma or its Affiliates, other than those sold under this Agreement, throughout
the world, except as otherwise provided herein.
1.7 P.T. Dharma represents that it has filed all required
documentation, and obtained all authorizations, approvals and consents required
by any and all applicable laws, regulations, directive and/or requirements of
any jurisdiction in which the Products are to be manufactured, to produce the
Products, sell the Products to E&J, and export them to E&J from the jurisdiction
of their manufacture, pursuant to the terms of this Agreement.
P.T. Dharma further covenants that it will at all times during the Term
of this Agreement continue to obtain and maintain in full force and effect any
and all such filings, authorizations, approvals and consents required by, and
will comply with, any and all such applicable laws, regulations, directives
and/or requirements in connection with the manufacture and sale of the Products.
1.8 Upon the effective date of this Agreement, E&J will deliver to P.T.
Dharma firm orders for the first two (2) months of the Term of this Agreement
and an estimate of its purchase requirements for the following three (3) months
of the Term of this Agreement. At the end of each month, E&J will place firm
orders for the next two months of the Term of this Agreement and provide an
estimate for the next three months of the Term of this Agreement. In no event
will firm orders for any one month differ from the estimate for that month by
more than twenty (20) percent.
1.9 P.T. Dharma may not unreasonably decline any purchase order under
this Agreement and it will be deemed accepted unless declined within 15 days of
<PAGE> 4
4
receipt. A copy of E&J's form of Purchase Order is attached as Appendix "C"
hereto, which E&J may revise from time to time upon notice to P.T. Dharma.
2. DELIVERY, CLAIMS, DELAYS, RETURNS
2.1 All products sold by P.T. Dharma shall be packaged in seaworthy
packing and delivered FOB (incoterms 1990) Jakarta, Indonesia. P.T. Dharma shall
undertake, at it's sole risk and expense, to deliver or cause to be delivered
the Products to the vessels named by E&J, at the named ports of shipment in the
manner customary at the port, at the date or within the period stipulated, and
notify E&J, without delay, that goods have been delivered to said vessels.
2.2 Delivery of any order of the Products shall be according to the
agreed upon schedule for the period in question. P.T. Dharma will make all
reasonable efforts to accommodate schedule changes when requested by E&J.
Partial shipments are allowed under this Agreement.
2.3 The Parties hereby acknowledge that time is of the essence with
respect to the delivery dates specified in individual orders. E&J reserves the
right to cancel, without liability, part or all of any order not shipped within
thirty (30) days from the period specified in the order. In the case of a
cancellation pursuant to this Section 2.3, E&J shall be entitled to receive ten
(10%) percent of the value of the cancelled order or part thereof as liquidated
damages. Such amount shall be setoff against any and all amounts then owed to
P.T. Dharma under this Agreement.
2.4 All Products shall conform to the Specifications and quality
assurance procedures and guidelines, including First Article Inspection
Qualifications, set forth in Appendix A.
In the event E&J inspects the Products prior to shipment and arranges
for an E&J inspector(s) to be present at a time and location in Indonesia as the
Parties may agree, P.T. Dharma shall pay one-half (1/2) of the cost of return
business class airline tickets from Jakarta, Indonesia to the United States for
the E&J inspector(s), and all accommodations during the stay of the E&J
inspector(s) in Indonesia for a period not to exceed seven (7) days in any one
(1) trip. Arrangements for such payment shall be agreed to between the Parties.
E&J shall promptly notify in writing the on-site representative of P.T. Dharma
of any claims for shortage, nonconformance, defect or damage that is observed in
such inspection.
E&J shall not, by such inspection, relinquish any rights of inspection
or rejection normally afforded a seller under the law governing this Agreement
consistent with the delivery terms herein. Any disputes that arise regarding the
nature or existence of any shortage, nonconformance, defect or damage shall be
settled through the use of a third party inspection service that is mutually
agreeable to the Parties.
2.5 P.T. Dharma will maintain ISO 9000 Certification throughout the
Term of this Agreement. Should P.T. Dharma fail to maintain such certification
or
<PAGE> 5
5
lose such certification during the term of this Agreement, E&J shall have the
right to terminate this Agreement in accordance with Section 5.2.
3. PRICES AND PAYMENT
3.1 Subject to the provisions of Sections 1.4 and 3.3, the unit prices
to be paid for the Products ordered during the Term of this Agreement are and
shall be set forth in Appendix "B", attached hereto and made apart hereof.
Prices include, and P.T. Dharma shall bear and pay for, all export charges
including, but not limited to, export packing and packaging charges,
warehousing, demurrage, lighterage, inland insurance, consular fees, and export
license fees.
3.2 Upon three (3) months written notice, P.T. Dharma may propose a
change in the unit price of any Products listed in Appendix "B". Such proposal
must be justified by an increase in the cost of manufacturing the Products to
P.T. Dharma. The parties will enter into good faith negotiations to reach an
agreement on revised pricing within sixty (60) days after receipt of such
proposal by E&J. In no event will the price of any Product increase more than
five (5) percent in any one (1) year of the Term of this Agreement over the
price at the end of the period year.
3.3 P.T. Dharma shall use its best efforts to contain and reduce its
cost of production and to meet E&J's specified cost goals during the Term of
this Agreement. P.T. Dharma shall consider and implement, if feasible, any
production improvement or cost saving suggestion by E&J. Any reductions in the
cost of production realized through suggestions made in part or in whole by E&J
shall be passed on to E&J through an immediate reduction in the unit prices
specified in Appendix B for the products affected.
3.4 Payment for each order during the Term of this Agreement shall be
by bank wire transfer in U.S currency to accounts in such banks as P.T. Dharma
shall direct from time to time. Payments made by bank wire transfer shall be
made within thirty (30) calendar days from the receipt of P.T. Dharma's invoice
or date of delivery to the vessel whichever is later.
Late payments shall be subject to a late payment penalty on amounts
past due calculated at an annual rate of sixteen (16%) percent. E&J shall
receive a prompt payment discount calculated at an annual rate of nine (9%)
percent for payments made within fifteen (15) days of the receipt of the invoice
or date of delivery to the vessel whichever is later.
Any set-off of accounts between the parties must be mutually agreed in
writing in advance.
Each invoice issued under this Agreement shall identify, at a minimum,
any later date of delivery to the vessel, E&J's applicable purchase order
number, a full description of the Products included, and the purchase price.
4. TAXES AND OTHER CHARGES
<PAGE> 6
6
Any and all use taxes, sales taxes, excise duties, customs inspection
or testing fees, or any other taxes, fees or charges of any nature whatsoever
imposed by any governmental authority in the country of manufacture on or with
respect to the manufacture and delivery of the Products or measured by the
transactions between the parties shall be paid by P.T. Dharma in addition to the
prices quoted and invoiced.
5. TERM AND TERMINATION
5.1 This Agreement shall become effective upon execution by both
Parties and its initial Term shall expire on 30 June, 2000 provided, however,
that on 30 June, 2000 and each 30 June thereafter, the Term shall be
automatically extended one (1) additional year unless at any time prior to 30
June of any year E&J shall give written notice to P.T. Dharma that it has
elected not to have the Term extended for any further period.
The minimum aggregate gross purchase amount of Products for any year of
the Term commencing after June 30, 2000 shall be mutually agreed to in writing
by E&J and P.T. Dharma.
P.T. Dharma shall have the right to terminate or refuse any extension
or renewal of this Agreement if E&J has failed to order fifty (50) percent of
the agreed aggregate gross purchase amount for the twelve (12) month period
immediately preceding the giving of such notice.
5.2 Either party may terminate this Agreement for any material breach
of this Agreement by the other party by giving the other party 90 days written
notice if such breach shall, at the expiration of said 90 day period, remain
uncured to the satisfaction of the notifying party. Without limiting the
foregoing, any breach by P.T. Dharma of Section 1.5, 1.6 or 2.4 hereof shall be
deemed a material breach of this Agreement.
5.3 Either party may terminate this Agreement, effective immediately
upon the giving of notice to the other, if the other party files a petition in
bankruptcy or it is adjudicated as bankrupt or takes advantage of the insolvency
laws of any state, territory, or country, or is voluntarily or involuntarily
dissolved, or has receiver, trustee, or other court officer appointed for its
property.
5.4 All payment obligations of E&J for Products therefore ordered,
delivered, and accepted, and all obligations of P.T. Dharma and rights of E&J in
Sections 6, 7, 8, 9, 12, 17, 18 and 19 shall survive termination or expiration
of this Agreement.
5.5 The parties hereto waive the application of Articles 1266 and 1267
of the Indonesian Civil Code to the extent that a judicial cancellation of this
Agreement is a prerequisite to the termination of this Agreement or an award of
damages.
6. WARRANTIES
<PAGE> 7
7
P.T. Dharma represents and warrants that each Product delivered to E&J
shall be free from defects in materials and workmanship and shall conform to
each Specification and will be suitable for its intended use.
Any claim for breach of such warranty shall be accepted only if the
breach occurred within twelve (12) months of the date the Product was first
delivered to a customer of E&J (or twenty-four (24) months after the Product was
delivered to E&J, whichever expires first). During said warranty period, P.T.
Dharma shall replace, at no charge to E&J or its Customer, any Products (or
parts of Products) that are found to be defective by E&J or its customer. E&J
shall, at P.T. Dharma's risk and expense, return such defective Products or
parts or dispose of them as P.T. Dharma requests. Any disputes that arise
regarding the nature or existence of a defect shall be settled through the use
of a third party inspection service that is mutually agreeable to the Parties.
In no event shall P.T. Dharma's liability under this warranty provision exceed
the replacement cost of the defective Products.
7. RELATIONSHIP OF THE PARTIES
This Agreement shall not be construed to make either party (or its
Affiliates, principals, officers, employees or agents) an Affiliate, agent,
partner, or joint venturer with the other party. Neither party shall have any
right or authority whatsoever to incur any liability, obligation (express or
implied), or to otherwise act in any manner in the name or on behalf of the
other, or to make any promise, warranty or representation binding on the other.
8. SPECIAL TOOLING
8.1 E&J has previously provided to P.T. Dharma, free of charge, certain
Special Tooling necessary to fabricate the Products.
8.2 Both parties to this Agreement acknowledge that the Special Tooling
provided to P.T. Dharma prior to and during the Term of this Agreement shall
remain the property of E&J. E&J may from time to time, as the parties may agree,
procure or authorize P.T. Dharma to procure additional or replacement tooling to
P.T. Dharma free of charge. All tooling provided to P.T. Dharma prior to or
during the Term of this Agreement shall be returned to or for the account of E&J
(within 90 days) upon the termination or expiration of this Agreement. P.T.
Dharma shall, at its own risk and expense, keep all tooling provided by E&J in
good working order and conduct such maintenance as may be necessary to keep said
tooling in good working order.
8.3 P.T. Dharma agrees to procure and maintain in full force and effect
throughout the Term of this Agreement a policy of general insurance in favour of
E&J (as loss payee and additional insured) covering the value of the Special
Tooling against loss or damage and any claims, liabilities or expenses asserted
by any person arising out of the use of such Special Tooling.
<PAGE> 8
8
8.4 P.T. Dharma agrees that the Special Tooling provided by E&J will be
used solely for the production of the Products sold to E&J and that neither P.T.
Dharma nor any of its Affiliates will use the Special Tooling to produce
products of any kind for any other party.
9. PATENT INFRINGEMENT
9.1 E&J agrees, at its own expense, to defend any action or suit
brought against P.T. Dharma alleging that the Product or any part thereof
manufactured according to the Specifications and obtained hereunder infringes
enforceable letters patent issued to other persons or valid trade secrets,
proprietary information, trademark, copyright, patent or other intellectual
property rights of other persons.
E&J will pay all costs and damages, including any judgement of a court
of last resort finally awarded against P.T. Dharma in such suit; provided,
however, that E&J is promptly notified in writing of such action or suit and is
given full authority and full and proper information and assistance for defense
of said action or suit. E&J shall not be responsible for any compromise or
settlement of such suit or action made without its written consent.
9.2 If the use of such Products pursuant to this Agreement becomes (or
in the opinion of E&J is likely to become) the subject of an infringement claim,
E&J may, at its option, (i) secure a right to use pursuant to this Agreement or
(ii) make modifications to the Specifications that would render the use
hereunder non-infringing.
9.3 The foregoing indemnification shall not apply if the infringement
arises from Products not manufactured per the Specifications or ordered under
this Agreement.
10. FORCE MAJEURE
Neither party shall be liable for any loss, damage or penalty as a
result of any delay in delivery or failure to manufacture, deliver or otherwise
perform hereunder due to any cause demonstrably beyond that party's reasonable
control, including without limitation: embargo; governmental act, order, ruling,
regulation or request; fire; explosion, accident; theft; vandalism; riot;
shortages; act of arson; strike; other labor difficulties; lightning; flood;
windstorm or other acts of God; causes attributable to common carriers; delay in
transportation; or inability to obtain necessary labour, fuel, materials,
supplies or power.
The party suspending performance in whole or in part as a result of any
such delay or failure shall give prompt written notice thereof to the other
party, stating therein the nature thereof, the specific reasons therefor, and
the expected duration thereof and any alternatives thereto which such party
believes may reasonably be pursued, and shall resume performance as soon as
reasonably possible. Following any occurrence that causes any party to suspend
performance in whole or in part, such party shall promptly initiate such
reasonable measures as will, if reasonably possible,
<PAGE> 9
9
remove or release such suspension to enable it to resume performance of its
obligations as soon as reasonably possible.
11. TECHNICAL ASSISTANCE
Unless otherwise agreed in writing, any technical assistance and
information provided by E&J to P.T. Dharma will be provided without charge at
E&J's sole discretion and P.T. Dharma assumes sole responsibility for results
obtained in reliance therein. E&J makes no warranty of any kind or nature with
respect to any technical assistance or information provided by it.
12. NONDISCLOSURE OF INFORMATION
Each party hereby agrees that all information relating to this
Agreement disclosed to it by the other party, which information is in fact
confidential or proprietary when disclosed to the other party or is then claimed
and marked by the disclosing party to be confidential or proprietary, will be
held and safeguarded by the receiving party as confidential information of the
disclosing party, and the receiving party shall exert all reasonable efforts to
prevent any publication or other disclosure of all confidential information
received from the other party without the express written consent of the
disclosing party. The Specifications attached hereto as Appendix A are trade
secrets of E&J and shall be treated as confidential and proprietary under this
clause.
<PAGE> 10
10
13. HEADINGS
The section headings herein are for convenience only and shall not be
deemed to affect in any way the language of the provisions to which they refer.
14. FAILURE TO ENFORCE
Failure of either Party to enforce any of the terms of this Agreement
shall not be construed as a waiver of rights thereunder preventing the
subsequent enforcement of such provisions or the recovery of damages for breach
thereof.
15. SEVERABILITY
If any portion of this Agreement is held to violate, or to be invalid
or unenforceable under, the laws of any government or subdivision thereof, this
Agreement may, at the option of E&J or P.T. Dharma be terminated immediately
upon written notice, or the portion declared to be in violation of or invalid or
unenforceable under any such law shall be treated as being of no force or
effect, and this Agreement shall be construed as though such portion had not
been inserted herein, and the remainder of this Agreement shall remain in full
force and effect.
16. ENTIRE AGREEMENT
16.1 This Agreement constitutes the entire Agreement between E&J and
P.T. Dharma superseding any prior agreement between the parties or their
predecessors or Affiliates, including, without limitation, the Existing Supply
Agreements.
16.2 This Agreement is intended to cover all transactions related
hereto. Except as agreed to herein and unless otherwise expressly agreed to in
writing, no written or printed terms and conditions in any purchase order, order
confirmation, or other document forwarded by either party shall have any effect,
and the provisions of this Agreement shall be controlling.
16.3 No modification of this Agreement shall be binding unless in
writing and signed by authorized representatives of both parties.
17. NOTICES
All notices, communications, demands, and payments under this Agreement
shall be in English and shall be made in writing by hand delivery or telefax.
Such notice shall conclusively be presumed to be given or made: (i) at the time
it is personally given or made in the case of personal delivery or transmission
by telefax (with receipt confirmed). Any notices shall be addressed as follows:
If to E&J: Everest and Jennings, Inc.
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c/o Graham-Field Health Products, Inc.
81 Spence Street, Bay Shore, New York 11706
USA
Attn.: Chief Executive Officer
Fax: 516-582 5608
If to P.T. Dharma P.T. Dharma Polimetal
Jl. Raya Serang Km. 24
Balaraja, Tangerang
Indonesia
Attn.: Joppy K. Negara
Fax: 62-21-5951628 - 35
865 5131
or to such other person or address as either party may, by like notice, specify
to the other.
18. CHOICE OF LAW
18.1 Except as set forth below, this Agreement, all transactions
executed hereunder and the relationship of the parties shall be construed,
governed and enforced in accordance with the laws of the Republic of Indonesia.
19. RESOLUTION BY NEGOTIATION: ARBITRATION
19.1 Except in the event of any litigation or proceeding commenced by
any third party against either E&J or P.T. Dharma in which the other party is an
indispensable party or potential third party defendant, and except for
enforcement of any interim or preliminary remedy (to the extent such remedy is
sought before an arbitration panel is duly appointed and convened), any dispute
or controversy between the parties involving the interpretation, construction or
application of any terms, covenants or conditions of this Agreement, or
transactions under it, or any claim arising out of or relating to this
Agreement, or transactions under it, shall, on the request of one party served
on the other, be submitted for resolution by senior executive designated by each
party, who shall attempt to resolve such dispute or controversy in good faith
and, in the event such resolution is not achieved within fifteen (15) working
days of such request, shall be submitted to arbitration in accordance with
provisions of this Section 19.
19.2 Any such dispute, controversy or claim will be settled by
arbitration conducted in the English language in Hong Kong (except as otherwise
may be agreed by the parties in their discretion) in accordance with the
International Commercial Arbitration Rules of the American Arbitration
Association then in effect, except as herein specifically otherwise stated or
amplified, and judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction over the party against whom the award
is sought to be entered.
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12
19.3 Notwithstanding anything to the contrary which may now or
hereafter be contained in the International Commercial Arbitration Rules of the
American Arbitration Association, the procedures set out in this Section 19.3
shall apply.
(a) A notice of arbitration shall set out a clear and plain
statement of the matter that the party sending the notice (the "Instituting
Party") believes to be a breach or is in dispute. The demand (the "Demand")
shall reference principal provisions of this Agreement that the Instituting
Party views as controlling or out of the interpretation of which the dispute
arises, and shall attach copies of all pertinent documents and other things then
in its possession which the Institute Party views as having direct bearing on
the relief sought under the Demand. The receiving party (the "Other Party")
shall, within 20 days of receipt of the Demand, provide to the Instituting Party
and to the arbitrators a response (the "Answer"), referencing provisions of this
Agreement that the Other Party views as controlling, and shall attach copies of
all pertinent documents and other things (other than those attached to the
Demand) then in its possession which it views as having direct bearing to
support the contentions of the Answer. Each party shall appoint one person,
conversant in English, to hear and determine the dispute within said ten days
after the Other Party's receipt of the Demand. If a party fails to so designate
its arbitrator within said ten days after the other party's receipt of the
Demand. If a party fails to so designate, its arbitrator within said ten (10)
days, then the arbitrator designated by the party designating an arbitrator
shall act as the sole arbitrator and shall be deemed to be the single,
mutually-approved arbitrator to resolve the controversy. The person(s) so chosen
shall, within 20 days, select an additional, impartial arbitrator conversant in
English. If they fail to do so within said 20 days, either party may petition
any court of competent jurisdiction in any jurisdiction to which both parties
may, in their discretion, agree to appoint the third arbitrator. The majority
decision of the arbitrator panel (or the decision of the single arbitrator)
shall be final.
(b) Each party shall pay the arbitrator it designated and
shall share cost of the third (or, if applicable, the sole) arbitrator. In the
event that the parties are unable to agree upon a rate of compensation for the
third (or sole) arbitrator, the arbitrator shall be compensated for his or her
services at a rate to be determined by the American Arbitration Association.
(c) Discovery shall be liberally allowed by the arbitrators as
contemplated by the U.S. Federal Rules of Civil Procedure, subject, however, to
such limitations as the arbitrators determine to be appropriate under the
circumstances, it being the parties mutual desire to have a prompt and efficient
arbitration.
(d) The arbitrators shall endeavor to promptly schedule the
hearings, and to hold the hearings (on consecutive days if practicable), and
shall have authority to award relief under legal or equitable principles,
including interim or preliminary relief. Nothing in this Section 19.3(d) shall
impair the right of a party to seek interim or preliminary relief in a court of
competent jurisdiction in any jurisdiction to which both parties may, in their
discretion, agree before the arbitration panel is constituted and convened.
(e) Other than attorneys' fees and expenses (which shall be
borne by the party incurring the same), the costs of the arbitration shall be
borne by the
<PAGE> 13
13
losing party or shall be allocated between the parties in such proportions as
the arbitrators decide.
(f) The arbitrators shall, upon the request of either party,
promptly (and in all events within 30 days of the conclusion of the hearing)
issue a proposed written opinion of their findings of fact and conclusions of
law which shall become final and binding in accordance with the terms thereof
unless either or both parties seek reconsideration in accordance with Section
19.3(g). In making their decision, the arbitrators shall be bound by the terms
of this Agreement.
(g) Either party shall have the right, within 20 days of
receipt of the arbitrators' proposed opinion, to file with the arbitrators a
motion to reconsider) accompanied by a reasoned memorandum), and the other party
shall have 20 days to respond to that memorandum. After receipt of such
memorandum and response, if any, the arbitrators thereupon shall reconsider the
issues raised by said motion and, promptly, either confirm or change their
majority decision which shall then be final and conclusive upon both parties.
The costs of such a motion for reconsideration and written opinion of the
arbitrators shall be borne by the moving party, or shared equally by both
parties if both parties request such reconsideration.
19.4 (a) The Parties expressly agree to waive the following Indonesian
laws: Section 15 and 108 of Law No. 1 of 1950 (Supreme Court Rules) so that
accordingly there shall be no appeal to any court or other authority from the
decision of the arbitrator. The arbitrators shall be bound by strict rules of
law in making their decision and shall not be entitled to render a decision ex
aequo et bono.
(b) The Parties waive Articles 621(1) and 650(2) of the R.V.
so that the mandate of a board of arbitration duly constituted in accordance
with the terms of this Agreement shall remain in effect until a final
arbitration award has been issued by the board of arbitration.
20. BINDING AGREEMENT
This Agreement shall be binding upon, and inure to the benefit of, the
parties hereto, their successors and assigns. This Agreement shall be assignable
by either party only with the written consent of the other, which consent shall
not be unreasonably withheld, except that either party may assign this Agreement
without consent to the purchaser of all its stock or assets, or a substantial
part of all the assets of its business to which this Agreement relates.
21. This Agreement is executed in a text using the English language which shall
be the governing language despite translation into any other language(s). If for
any reason an Indonesian language translation of this Agreement may be required,
the Parties agree that the party requiring the translation shall obtain the
translation prepared by a duly sworn translator, and such translation shall not
be contested by the other party except for manifest error.
<PAGE> 14
14
IN WITNESS WHEREOF, an authorized representative of each party has
signed this Agreement below.
EVEREST AND JENNINGS, INC.
By: /s/ Lara J. Peake
___________________________
(Signature)
Name: Lara J. Peake
Title: Power of Attorney
Date: 5 March 1999
P.T. DHARMA POLIMETAL
By: /s/ Joppy K. Negara
___________________________
(Signature)
Name: Joppy K. Negara
Title: President Director
Date: 5 March 1999
By: /s/ Iwan Budiyuwono
___________________________
(Signature)
Name: Iwan Budiyuwono
Title: Director
<PAGE> 15
DATED THIS 5TH DAY OF MARCH 1999
between
PT. DHARMA POLIMETAL
(the Borrower)
and
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(the Lender)
LOAN AGREEMENT
MAKARIM & TAIRA S.
17th& 18th Fl.
Summitmas I
Jl. Jend. Sudirman 61
Jakarta 12069
INDONESIA
Tel. (62-21) 252 1272, 252 2460
Fax. (62-21) 252 2750, 252 2751, 252 2234
E-mail: [email protected]
<PAGE> 16
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "AGREEMENT") is made the 5th (fifth) day of one
thousand nine hundred and ninety nine (1999),
Between
(1) PT. DHARMA POLIMETAL, a limited liability company duly established
under the laws of the Republic of Indonesia and having its head office
at Jalan Raya Serang Km. 24, Balaraja, Tangerang, Indonesia, in this
matter represented by Mr. Joppy Kurniadi Negara, its President
Director, and Mr. Iwan Dewono Budiyuwono, a Director in accordance with
its Articles of Association (hereinafter referred to as "BORROWER");
and
(2) MR. JOPPY KURNIADI NEGARA, private person, Indonesian citizen, residing
in Jakarta, Billi & Moon Block CH4/14, RT. 006/RW.010, Kelurahan Pondok
Kelapa, Kecamatan Duren Sawit, Jakarta Timur, Indonesia, holder of DKI
Jakarta Identity Card KTP Number 5707.11701/2305590238 (hereinafter
referred to as "JOPPY") of the one part;
and
(3) MR. IWAN DEWONO BUDIYUWONO, private person, Indonesian citizen,
residing in Jalan Tulodong Bawah III/42, Senayan, Kebayoran Baru,
Jakarta Selatan, Indonesia, holder of DKI Jakarta Identity Card KTP
Number 09.5307.021260.0161 (hereinafter referred
to as "IWAN") of the other part;
and
(4) GRAHAM-FIELD HEALTH PRODUCTS, INC., a company duly organized and
existing under the laws of the State of Delaware, having its registered
office at 81 Spence Street, Bay Shore, New York 11706, United States of
America, in this matter duly represented in accordance with its
Articles of Association (hereinafter referred to as "LENDER").
RECITALS
A. The Borrower has requested the Lender to provide to the Borrower a loan
of US$ 3,500,000 (three million five hundred thousand United States
Dollars) for the purposes of financing the Borrower's working capital
requirements, this sum
<PAGE> 17
2
having already been advanced by the Lender to the Borrower pursuant to
the Asset Purchase Agreement, as defined below.
B. The parties hereto have agreed to replace the Asset Purchase Agreement
with this Agreement and thereby effectively extend the term and
conditions of the repayment sum of US$ 3,500,000 previously advanced
pursuant to the Asset Purchase Agreement.
C. The Lender is capable and willing to provide the Borrower with a loan
of the above amount, subject to fulfillment of the terms and conditions
provided herein.
THE PARTIES AGREE AND DECLARE AS FOLLOWS:
1. DEFINITIONS
In this Agreement, unless the context otherwise requires, the following words or
expressions shall have the following meanings:
<TABLE>
<S> <C>
"Advance" means the total amount
advanced by the Lender to
the Borrower, being the sum
of US$ 3,500,000 (three
million five hundred
thousand United States
Dollars);
"Asset Purchase Agreement" means the Asset Purchase Agreement
dated 18 February 1998 between the
Lender, the Borrower, Joppy and Iwan,
including without limitation all
Exhibits to such Asset Purchase
Agreement, as amended from time to
time and including the Variation
Agreement between the Parties;
"Agreement" means this Agreement and
includes any and all other
variations or amendments to
this Agreement as may be
agreed in writing from time
to time between the Lender
and the Borrower, Joppy and
Iwan;
"Business Day" means any day excluding Saturdays and
Sundays and public holidays on which
banks are open for general banking
business in Jakarta, Indonesia;
"Default Interest Rate" means the Interest Rate plus five
percent (5%) per annum;
</TABLE>
<PAGE> 18
3
<TABLE>
<S> <C>
"Drawdown Date" means the date on which the Advance
was made hereunder being effective on
or about 18 February 1998;
"Event of Default" and "Events of Default" mean any each or all (as the context
may require) of the events of default
referred to in this Agreement;
"Everest & Jennings, Inc." means a company duly organized and
existing under the laws of the State
of California, United States of
America with offices at 81 Spence
Street, Bay Shore, New York 11706,
U.S.A., being the buyer of goods
produced by the Borrower;
"Facility" means the loan facility of US$
3,500,000 (Three Million five hundred
thousand United States Dollars);
"Guarantee Agreement" means the irrevocable joint and
several guarantee executed by the
Personal Guarantors in favour of the
Lender for the sum of US$ 3,500,000
(Three Million five hundred thousand
United States Dollars), a copy of
which is set out in Schedule Three of
this Agreement;
"Indebtedness" means any obligation of the Borrower
for the payment or repayment of money,
whether present or future, actual or
contingent;
"Interest" means the interest payable monthly for
the Facility being the Interest Rate
on the Loan;
"Insurances" means all policies and contracts of
insurance which are from time to time
taken out or entered into in respect
of the Machinery;
"Interest Rate" means 8.75% (eight point seventy five
percent), per annum which rate may be
reviewed and amended every third
Payment Date by the Lender in
accordance with the Lender's Senior
Secured Credit Facility (being the
Revolving Credit and Security
Agreement dated 10 December 1996
between the Lender et al., IBJ
Whitehall Business
</TABLE>
<PAGE> 19
4
<TABLE>
<S> <C>
Credit Corporation, National City
Commercial Finance, Inc., BTM Capital
Corporation and Deutsche Financial
Services Corporation), or any other senior
replacement credit financing facility as
adjusted from time to time;
"Loan" means the principal amount of the
Facility from time to time outstanding;
"Maturity Date" means the date being 35 (thirty five)
months from the 15 (fifteenth) day of
March 1999;
"Payment Date" means the fifteenth (15th) day of each
month during the period of the Loan
commencing 15 (fifteenth) day of March
1999. If a Payment Date falls on a day
which is not a Business Day then the
payment shall be made on the preceding
Business Day;
"Person" includes a corporation;
"Personal Guarantors" means Joppy Kurniadi Negara (holder of
Indonesian Citizen DKI Jakarta
Identification Card/KTP No.
5707.11701/2305590238 and/or Iwan
Dewono Budiyuwono (holder of
Indonesian Citizen DKI Jakarta
Identification Card/KTP
No.09.5307.021260.0161), jointly and
severally;
"Purchase Order" means the value in United States
Dollars of goods purchased by Everest
& Jennings, Inc., or any of its
affiliates, or it's nominee from the
Borrower during the term of this
Agreement;
"Security Documents" means the Guarantee Agreement, the
Share Pledge Agreements and any other
additional security documents as may
be necessary (as the context may
require), including any and all other
variations or amendments or
supplemental deeds to any one or more
of them made from time to time, and
includes any or every other document
from time to time executed to
guarantee, secure or otherwise assure
or relating to the obligations
</TABLE>
<PAGE> 20
5
<TABLE>
<S> <C>
of the Borrower under or in connection
with this Agreement;
"Security Period" means the period beginning from the date
hereof and terminating on the date that
the Borrower ceases to have any liability
in respect of the Total Indebtedness;
"Share Pledge Agreements" means the Share Pledge Agreement
between Joppy and the Lender, a copy
of which is attached as Schedule Two
to this Agreement and/or the Share
Pledge Agreement between Iwan and the
Lender, a copy of which is attached as
Schedule Two to this Agreement;
"Spousal Consent" means the spousal consent from the
legal spouses of Joppy and Iwan,
a copy of which is attached
hereto as Schedule Four of
this Agreement;
"Termination Agreement" means the Termination of the Asset
Purchase Agreement, a copy of which is
attached as Schedule One to this
Agreement;
"Total Indebtedness" means the aggregate amount advanced
under the Facility and all interests,
fees, commission, costs, expenses,
moneys, obligations and liabilities
whatsoever which are expressed to be
payable under this Agreement and/or
the Security Documents or which are
secured or intended to be secured to
the Lender by the Borrower under the
Security Documents;
"United States Dollars" means the lawful currency of the
United States of America;
"Year" means a calendar year.
</TABLE>
Words importing the singular number include the plural number and vice versa.
All references herein to any law, decree or regulation shall include any
statutory modification on or re-enactment thereof.
<PAGE> 21
6
2. HEADINGS
The headings to the clauses hereof shall not be deemed to be a part
thereof or be taken into consideration in the interpretation or
construction of this Agreement.
3. THE FACILITY
(1) The Lender relying on the representations, warranties, covenants and
undertakings contained herein hereby agrees with the Borrower that it
shall subject to the terms and conditions contained in this Agreement
make the Facility available to the Borrower, which monies have already
been advanced to the Borrower pursuant to the Asset Purchase Agreement
on 18 February 1998.
(2) The Borrower hereby expressly acknowledges it has drawn the Advance,
receipt of which is evidenced by execution of this Agreement by the
Borrower, Joppy and Iwan.
4. CONDITIONS
This Agreement is conditional upon:
(1) The written cancellation and termination of the Asset Purchase
Agreement signed by all the Parties hereto contemporaneously with the
execution of this Agreement, and simultaneous execution of the Share
Pledge Agreement, Guarantee and Spousal Consent.
(2) The prior written consent of IBJ Whitehall Business Credit Corporation.
In the event the above 2 conditions precedent are not satisfied within
10 (ten) business days of execution of this Agreement by the Borrower,
Joppy and Iwan then the parties shall execute a new Variation Agreement
to extend the terms of the Asset Purchase Agreement until 30 April
1999.
5. INTEREST
(1) The Borrower shall pay interest on the Facility at the Interest Rate.
(2) The total amount of interest payable each month by the Borrower to the
Lender shall be equal to the product of (i) the unpaid principal
balance under the Facility and (ii) the Interest Rate divided by 12
(twelve) (hereinafter referred to as the "MONTHLY INTEREST").
6. INTEREST ON OVERDUE AMOUNTS
(1) If the Borrower fails to pay any amount in accordance with this
Agreement, the Borrower shall pay interest in United States Dollars on
that amount from the date
<PAGE> 22
7
of default up to the date of actual receipt of such payment (after as
well as before judgment) at the Default Interest Rate.
(2) Interest payable under this clause, which is not paid on a Payment
Date, shall thereafter itself bear interest at the rates provided in
this clause.
7. REPAYMENT OF LOAN
(1) Repayment:
(a) Subject to the provisions of this Agreement, the Borrower
shall repay the Facility by monthly installments each to be
calculated on the basis of the table below according to the
relevant Purchase Order for the preceding month, (the "MONTHLY
INSTALLMENT"). Each Monthly Installment shall be equal to 10%
(ten percent) of the Purchase Order for the preceding month,
except that where the Purchase Order exceeds US$ 1 Million
then the Monthly Installment shall be US$ 100,000 and where
the Purchase Order is less than US$ 800,000 then the Monthly
Installment shall be US$ 50,000.
(b) Payment of the first Monthly Installment shall be made on the
first Payment Date being 15th (fifteenth) day of March 1999
and thereafter the Monthly Installment must be paid on every
following Payment Date.
(2) Prepayments:
The Borrower may not repay the Facility other than in accordance with
Clause 7.1 except in the circumstances as described in Clauses 10.1,
10.2, 10.3, 14.1 or 14.2, with the express exception of a single lump
sum payment of US$ 400,000 (four hundred thousand United States
Dollars) which shall be paid at any time prior to the Maturity Date
(the "Lump Sum") and a balloon payment due at the Maturity Date which
shall equal the then outstanding amount of the Total Indebtedness. As
at the Maturity Date the Total Indebtedness must be fully paid to the
Lender.
8. PAYMENTS GENERALLY
(1) Manner of Payment
The Borrower shall make payments to the Lender under this Agreement on
or before the Payment Date by direct transfer of cleared funds to the
bank account nominated by the Lender in writing not later than 5 (five)
Business Days before the due date for that payment.
To the maximum extent permitted by applicable law, the Borrower shall
make any payment due under this Agreement without any set-off or
counterclaim and free and clear of, and without any deduction or
withholding for or on account of, any taxes.
<PAGE> 23
8
(2) Grossing Up
If at any time any applicable law requires the Borrower to make any
deduction or withholding in respect of taxes from any payment to the
Lender under this Agreement:
(a) the Borrower shall pay to the Lender, on the Payment Date,
such additional amounts as are necessary to ensure that, after
the making of that deduction or withholding, the Lender will
receive a net sum equal to the sum which it would have
received had no such deduction or withholding been made;
(b) the Borrower shall indemnify the Lender against any losses or
costs incurred by the Lender by reason of any failure of the
Borrower to make any such deduction or withholding; and
(c) the Borrower shall promptly deliver to the Lender copies of
any receipts, certificates or other proof evidencing the
amounts (if any) paid or payable in respect of any such
deduction or withholding.
(3) Currency of Payments
Unless the Lender agrees otherwise in writing, the Borrower shall make
all payments in United States Dollars.
9. STIPULATIONS RELATING TO INTEREST AND OTHER MATTERS
It is hereby expressly agreed and declared as follows:
(a) the security under the Security Documents shall continue to be
valid and binding for all purposes notwithstanding any change
by amalgamation or consolidation of the Borrower;
(b) the Borrower shall be liable to the Lender and the security
under the Security Documents shall be security to the Lender
for any amount payable by the Borrower under this Agreement.
10. CHANGE IN CIRCUMSTANCES
(1) Illegality:
If at any time the Lender determines that it is or will become
unlawful, or any government authority shall assert it is unlawful, for
the Lender to honour its obligation to maintain, fund or give effect to
its obligations under this Agreement or to charge or receive any fees
or interest, then, if the Lender is unable to avoid the effects
thereof, upon notice from the Lender to the Borrower the Facility shall
<PAGE> 24
9
be cancelled and the Borrower shall, not later than the termination of
the grace period, if any, under applicable law repay to the Lender the
Total Indebtedness.
(2) Adversity Prepayment:
If the Borrower is required to pay the Total Indebtedness pursuant to
Clause 10 (1), the Borrower shall immediately prepay or accelerate
payment of the Total Indebtedness together with interest accrued
thereon to the date of repayment and all the other amounts payable to
the Lender under this Agreement.
(3) Change in Circumstances:
Notwithstanding anything herein contained, if there shall have been,
since the date of this Agreement, any change in the financial, economic
or political conditions in United States of America or Indonesia as
would in the reasonable opinion of the Lender render it inadvisable or
impracticable for the Lender to allow all or part of the Facility to
remain outstanding the Lender may at any time give notice in writing to
the Borrower notify that the Total Indebtedness is due and payable and
the Borrower shall forthwith repay the Total Indebtedness to the
Lender.
(4) Any certification by the Lender referred to in this Clause shall, in
the absence of manifest error, be conclusive and binding.
11. REPRESENTATIONS AND WARRANTIES
(1) The Borrower and the Personal Guarantors hereby warrants and represents
to the Lender as follows:
(a) that it is a duly established company in the Republic of
Indonesia and is validly existing under the laws of the
Republic of Indonesia;
(b) that the execution and delivery of and the performance of the
obligations and transactions contemplated in this Agreement
and/or the Security Documents and the other documents referred
to in this Agreement and/or the Security Documents have been
validly authorised by the appropriate corporate actions and
authorization of the Borrower and this Agreement and/or the
Security Documents when executed and delivered will constitute
legal, valid and binding obligations of the Borrower and the
Personal Guarantors enforceable in accordance with their
respective terms;
(c) that the certified true copies of the Articles of Association
of the Borrower relating to the approval and execution of this
Agreement delivered to the Lender is a true and accurate copy
of the corporate records of the Borrower;
(d) that all acts, conditions and things required to be done and
performed by the Borrower and/or the Personal Guarantors
precedent to the execution and
<PAGE> 25
10
delivery of this Agreement and/or the Security Documents and
the other documents referred to in this Agreement to
constitute them valid obligations of the Borrower and/or the
Personal Guarantors in accordance with their respective terms
have been done and performed in due and strict compliance with
all applicable laws and regulations;
(e) that the Borrower has full power and authority to carry on the
business currently conducted by it and full power and
authority to execute this Agreement and/or the Security
Documents and other instruments, documents and agreements
incidental hereto or thereto;
(f) that any consent, licence, approval or authorisation of any
governmental authority, bureau or agency required to be
obtained by the Borrower and Personal Guarantors in connection
with the execution, delivery, performance, validity or
enforceability of this Agreement and/or the Security Documents
has been obtained and is valid and subsisting;
(g) that the entering of the Borrower into this Agreement does not
and will not create any default or breach under any other
agreement to which the Borrower is a party;
(h) that there are no proceedings pending before any court or to
the knowledge of the Borrower threatened against or affecting
the Borrower and/or any of the Personal Guarantors and no
proceedings are before any court tribunal government agency or
administrative body pending or to the knowledge of the
Borrower threatened against the Borrower and/or any of the
Personal Guarantors which would have a material and adverse
effect on the financial condition or operations of the
Borrower and/or any of the Personal Guarantors;
(i) that to the best of the knowledge of the Borrower, no steps
have been taken or are being taken to appoint a receiver
and/or manager or judicial manager or liquidator over or to
wind up or for bankruptcy of the Borrower and/or the Personal
Guarantors;
(j) that the Borrower and/or the Personal Guarantors have filed
all tax returns which they are required by law to file and
save as disclosed to the Lender in writing have paid all
taxes, assessments, fees and other governmental charges
assessed against it or upon any of its properties, assets and
income;
(k) that the Borrower and/or the Personal Guarantors are not in
default in the payment or performance of any of their
respective obligations for borrowed money and no Event of
Default has occurred or to the knowledge of any officer or
manager of the Borrower is anticipated;
(l) that neither the execution and delivery of this Agreement and
the Security Documents nor the performance of any of the terms
hereof and thereof will:
<PAGE> 26
11
(i) contravene or constitute a default under any
provision contained in any agreement, instrument,
law, judgment, order, license, permit or consent by
which the Borrower and/or the Personal Guarantors are
bound or affected; or
(ii) cause any limitation on the Borrower or the powers of
its directors, whether imposed by or contained in its
Articles of Association or in any law, judgment,
agreement, instrument or otherwise;
(iii) create or result in or (except for this Agreement
and/or the Security Documents) oblige the Borrower
and/or the Personal Guarantors to create any lien,
charge, security, interest or other encumbrance on
the whole or any part of the Borrower's the Personal
Guarantor's property or assets, present or future;
(m) that all the information relating to the Borrower and/or the
Personal Guarantors and their respective properties and assets
furnished to the Lender for the purpose of obtaining the
Facility are true and correct in all material respects.
(2) The Lender hereby warrants and represents to the Borrower that the
entering by the Lender into this Agreement with the Borrower does not
and will not create any cross-default or breach to any other Agreement
which the Lender currently has or will have with any other third party.
(3) Each of the representations and warranties contained in this Clause
shall survive and continue in full force and effect after the execution
of this Agreement and/or the Security Documents and the Borrower hereby
warrants to the Lender that the above representations and warranties
will be true and correct and fully observed at all times during the
continuance of this Agreement and/or the Security Documents as if
repeated then by reference to the then existing circumstances.
12. COVENANTS
(1) The Borrower hereby covenants with the Lender as follows:
(a) that the Borrower shall punctually pay the Total Indebtedness
in the manner provided for by this Agreement. The Borrower
shall also duly observe, perform and comply with all the
terms, conditions, obligations, undertakings, stipulations and
covenants to be observed and performed and complied with by it
under this Agreement and/or the Security Documents or any
other documents called for by the terms of this Agreement;
(b) that the combined shareholding of Joppy and Iwan in the
Borrower shall not at any time be less than 100% (one hundred
percent) of the total issued shares in the Borrower;
<PAGE> 27
12
(c) that the Borrower shall give to the Lender such written
authorities or other directions and provide such facilities
and access as the Lender may require for inspection of the
Machinery and shall pay all costs, fees traveling and other
out-of-pockets expenses whether legal or otherwise reasonably
incurred by the Lender in respect of such inspection;
(d) that the Borrower shall promptly advise the Lender of any
material adverse change in the condition (financial or
otherwise) of the Borrower and/or any the Personal Guarantors
and notify the Lender of the institution of any litigation or
proceedings against the Borrower and/or any of the Personal
Guarantors before any court or tribunal or administrative
agency (governmental or otherwise) which might materially
affect the continued operations or financial condition of the
Borrower and/or any of the Personal Guarantors. Such advice or
notification, as the case may be, shall be given to the Lender
within seven (7) days after the Borrower has knowledge of the
said change or the institution of proceedings and shall state
the exact nature of such change or proceedings and (in the
latter case) the amount of contingent liability if such amount
is ascertainable;
(e) that the Borrower shall procure that the Personal Guarantors
shall comply with the terms and conditions of the Guarantee
Agreement;
(f) that the Borrower shall pay all its indebtedness and perform
all contractual obligations promptly pursuant to agreements to
which it is a party or by which it is bound;
(g) that the Borrower shall at its own expense execute, sign,
perfect, do and if required register every such further
assurance, document, act or thing as in the reasonable opinion
of the Lender may be necessary or desirable for the purpose of
implementing the terms and provisions of this Agreement and/or
the Security Documents or perfecting the security created or
to be created by this Agreement and/or the Security Documents;
(h) that the Borrower shall submit to the Lender annual financial
on reports on the Borrower prepared by independent auditors
acceptable to or appointed by the Lenders from time to time as
the Lender may require at the cost of the Borrower, failing
which the Lender shall be entitled to cause such annual
financial reports to be made and all sums so paid by the
Lender shall on demand be repaid to the Lenders by the
Borrower and until repayment shall be added to the Total
Indebtedness;
(i) that the Borrower shall immediately undertake the reporting of
this Agreement to Bank Indonesia, in accordance with but not
limited to the provisions of the Presidential Decree number
56, dated 8 April 1998 and the Decree of the Board of
Directors of Bank Indonesia number 31/5/KEP/PIR, dated 8 April
1998, no later than 14 (fourteen) days after the execution
date of this Agreement.
<PAGE> 28
13
13. NEGATIVE UNDERTAKINGS
(1) The Borrower further undertakes and covenants with the Lender that the
Borrower shall not, except with the prior written consent of the
Lender:
(a) undertake permit or effect any form of reorganization,
reconstruction, amalgamation, takeover, change of shareholders
or any other scheme of compromise or arrangement affecting the
Borrower;
(b) approve, permit or suffer any change in ownership (whether
registered or beneficial) or transfer of any part of its
issued share capital;
(c) sell, transfer, dispose of or encumber in any way, whether by
pledge, charge or otherwise or lease, let, license or agree to
sell, transfer, dispose of or encumber in any way, whether by
mortgage, charge or otherwise, lease, let license, or part
with possession of any of its undertakings and assets;
(d) make advances or loans to or issue guarantees on behalf of any
persons including but not limited to shareholders, directors,
employees or affiliates but excluding the subsidiaries of the
Borrower (as the case may be) which will materially affect the
financial condition of the Borrower;
(e) amend or change the Articles of Association of the Borrower,
except to amend its Articles of Association to comply with the
Indonesian company law, in such a way as to adversely affect
the Lender's rights under this Agreement and/or the Security
Documents, whether directly or indirectly;
(f) terminate any of its businesses which will substantially
affect its financial condition;
(g) place the Lenders in a less favorable position relative to the
other lenders and financiers of the Borrower in terms of
security and support.
(2) The Lender shall be entitled in its sole and unfettered discretion to
make a decision whether or not any of the negative covenants mentioned
above in Clause 13(1) may be, or have been, breached by the Borrower
therefore it shall be incumbent upon the Borrower to seek the written
opinion of the Lender in any circumstances where the possibility,
however remote, may arise whereby a breach of the negative covenants
may occur.
<PAGE> 29
14
14. EVENTS OF DEFAULT
(1) Upon the occurrence of any of the following events:
(a) if the Borrower shall fail to pay any Indebtedness on its due
date or, in the case where the amount is payable on demand, on
the Lender's demand therefor;
(b) if the Borrower fails to pay any other monies when due and
payable under the provisions of this Agreement and/or the
Security Documents;
(c) if the Borrower or any of the Personal Guarantors commit any
breach of, or fails to perform, any of the terms and
conditions stipulated in, or to comply with any of, the
covenants or provisions of this Agreement and/or the Security
Documents;
(d) if the Borrower and/or the Personal Guarantors become
insolvent and/or is declared bankrupt, is unable to pay its
debts as and when they fall due, stops or suspends payment of
all or a material part of its debts, or takes any proceedings
or other step with a view to readjustment, rescheduling or
deferral of all of its indebtedness (or any part of its
indebtedness which it will or might otherwise be unable to pay
when due) or proposes or makes a general assignment or an
arrangement or composition with or for the benefit of its
creditors or a moratorium is agreed or declared in respect of
or affecting all or a material part of its indebtedness;
(e) if the Borrower ceases to carry on its business;
(f) if any judgment in any court of law is obtained against the
Borrower or the Personal Guarantors, which may adversely
affect their respective ability to repay the Facility and the
Interest under this Agreement;
(g) if any step or petition is taken or a resolution is passed for
the dissolution or winding up of the Borrower or the Personal
Guarantors or a receiver is appointed over the assets and
properties of the Borrower or the Personal Guarantors;
(h) if the Borrower shall transfer or otherwise dispose of all or
substantially all its assets to any person, firm or
corporation unless with the prior written consent of the
Lender;
(i) if any of the Personal Guarantors shall transfer or otherwise
dispose of all or substantially all of their assets to any
person, firm or corporation;
(j) if any action, condition or thing (including the obtaining of
any necessary consent) at any time required to be taken,
fulfilled or done under the
<PAGE> 30
15
provisions of this Agreement and/or the Security Documents is
not taken, fulfilled or done or any such consent ceases to be
in full force and effect without modification or any condition
in or relating to any such consent is not complied with;
(k) if any of the Personal Guarantors gives notice to terminate
the guarantee;
(l) if an order is made or a petition is presented for the
bankruptcy of any of the Personal Guarantors;
(m) if any of the Personal Guarantors dies or is imprisoned or
there is a material adverse change in the financial or other
circumstances of any of the Personal Guarantors;
(n) if any of the Personal Guarantors becomes insolvent, is unable
pay his debts as they fall due, stops or suspends payment of
all or a material, part of his debts, or takes any proceedings
or other step with a view to readjustment, rescheduling or
deferral of all of his indebtedness (or any part of his
indebtedness which he will or might otherwise be unable to pay
when due) or proposes or makes a general assignment or an
arrangement or composition with or for the benefit of his
creditor or a moratorium is agreed or declared in respect of
or affecting all or a material part of his indebtedness;
(o) if any event of default under the Share Pledge Agreement
occurs;
(p) if any representation or warranty made or deemed to be made by
the Borrower in this Agreement and/or the Security Documents
or any other documents called for by this Agreement and/or the
Security Documents or any certificate or statement delivered
or made hereunder or thereunder shall be or become incorrect
or untrue in any material respect;
(q) if the Borrower or any of the Personal Guarantors threatens to
stop or suspend payment of all or a material part of their
debts, or begins negotiations with a view to readjustment,
rescheduling or deferral of all of their indebtedness (or any
part of their indebtedness which they will or might otherwise
be unable to pay when due);
(r) if any legal proceedings suits or actions of any kind
whatsoever (whether criminal or civil) shall be instituted
against the Borrower or the Personal Guarantors which will
materially affect the Borrower's or the Personal Guarantors'
ability to repay and discharge the Total Indebtedness and/or
to observe and perform their respective obligations under this
Agreement and/or the Security Documents to which they are
parties;
<PAGE> 31
16
(s) if an encumbrance takes possession of or a distress or
execution is levied or enforced upon or sued against any part
of any of the properties or assets of the Borrower or the
Personal Guarantors;
(t) if any present or future security on or over the assets of the
Borrower and/or the Personal Guarantors becomes enforceable;
(u) if it is or will become unlawful for the Borrower or the
Personal Guarantors to perform or comply with any one or more
their respective obligations under this Agreement or the
Security Documents;
(v) if there shall occur a material adverse change in the
business, assets or financial condition of the Borrower or the
Personal Guarantors or any situation shall have arisen, which
in the reasonable opinion of the Lender shall make it
improbable that the Borrower or the Personal Guarantors shall
be able to perform their respective obligations under this
Agreement and/or the Security Documents;
(w) if any government agency seizes, compulsorily acquires,
expropriates or nationalises all or a material part of the
assets properties or shares of the Borrower or the Personal
Guarantors;
then the Lender shall give to the Borrower written notice of the
occurrence of such default and the Total Indebtedness shall immediately
become due and payable.
(2) Upon the whole of the monies becoming due and payable pursuant to
Clause 14(1) or Clause 10 hereof:
(a) the Lender shall forthwith be entitled to exercise all rights,
powers or remedies under this Agreement and the Security
Documents; and
(b) in addition to and without prejudice to the other provisions
of this Agreement, the Borrower shall pay to the Lender
interest on the Total Indebtedness at the Default Interest
Rate from the date of the notice of the Event of Default up to
the date of payment in full by the Borrower to the Lender.
(3) Expenses of the Lender
All expenses and disbursements properly incurred by the Lender or
payments made by it in or pursuant to the exercise of any of the powers
under the Share Pledge Agreement shall bear interest thereon at the
Default Interest Rate from the date of payment thereof by the Lender up
to the date of payment by the Borrower and be payable forthwith by the
Borrower to the Lender and shall form part of the Total Indebtedness.
<PAGE> 32
17
(4) Involuntary Event of Default
Any default which is an Event of Default under this Agreement shall be
an Event of Default notwithstanding that the reason for its occurrence
is beyond the control of the Borrower or whether the default is
voluntary or involuntary or had occurred as a consequence of any law,
rule, regulation, direction or order of a statutory agency or a court
or otherwise.
15. APPLICATION OF MONIES
(1) After the occurrence of an Event of Default all monies received by the
Lender under this Agreement or pursuant to any of the Security
Documents (and which may therein be expressed to be applicable in
accordance with the provisions of this clause) shall be applied by the
Lender in the following manner:
First: To the payment of all costs, charges and expenses of the
Lender, including the reasonable compensation of its agents
and attorneys, by reason of any sale, retaking or operation of
the shares held by the Personal Guarantors in the Borrower and
all other sums payable to the Lender hereunder by reason of
any expenses and/or liabilities incurred or advances made by
it for the protection of the security or of any of its rights
hereunder or in the pursuit of any remedy hereby conferred;
and at the option of the Lender to the payment of all taxes,
assessments, or liens prior to the lien of the Lender;
Second: To the payment in full of all amounts payable under this
Agreement in the following order: (i) any amount not otherwise
listed in this paragraph, (ii) any fee, (iii) accrued interest
on any overdue amount, (iv) accrued interest on principal, and
(v) principal;
Third: Any surplus thereafter remaining, to the Borrower or
Borrower's successors in title or to whomsoever may be
lawfully entitled to receive the same.
(2) In the event that the proceeds are insufficient to pay the amounts
specified in paragraph "First" and "Second" above, the Lender shall be
entitled to collect the balance from the Borrower or any other person
liable therefor, including without limitation, the Personal Guarantors.
16. INDEMNITY
(1) Without prejudice to the foregoing terms and conditions the Borrower
shall indemnify the Lender and hold the Lender harmless from and
against all losses, damages and expenses whatsoever legal or otherwise
which the Lender may sustain suffer or incur as a consequence of any
default in the payment to the principal amount of the Facility or any
portion thereof, or any interest accrued therein, or any other amounts
payable under this Agreement and/or the Security
<PAGE> 33
18
Documents and such losses, damages and expenses shall include but not
be limited to such amount as the Lender shall certify (such
certification being accompanied by the basis and calculation of such
amount and being conclusive and binding upon the Borrower save for any
manifest error) as being necessary to compensate the Lender for (i) any
actual loss of interests incurred on account of such default, and (ii)
any interest or fees paid or payable on account of any funds borrowed
in order to carry or maintain any unpaid amount except to the extent
that such interest or fees are recovered under the other provisions to
this Agreement and/or the Security Documents.
(2) The Borrower hereby waives all of its rights and privileges under the
Indonesian Civil Code (to the extent applicable) as necessary to give
full effect to the Indemnity, including but not limited to Articles
1430, 1821, 1833, 1837, 1847, 1848 and 1849 thereof.
17. CURRENCY INDEMNITY
(1) The United States Dollar is the sole currency of account and payment
for all sums payable by the Borrower under or in connection with this
Agreement and/or the Security Documents, including damages.
(2) Any amount received or recovered in currency other than United States
Dollars (whether as a result of or the enforcement of, a judgment or
order of a court of any jurisdiction, or on the dissolution of the
Borrower or otherwise) by the Lender in respect of any sum expressed to
be due to it from the Borrower under this Agreement and/or the Security
Documents shall only constitute a discharge to the Borrower to the
extent of the United States Dollar amount which the Lender is able, in
accordance with its usual practice, to purchase with the amount so
reserved or recovered in that other currency on the date of that
receipt or recovery (or, if it is not practicable to make that purchase
on that date, on the first date on which it is practicable to do so).
(3) If the United States Dollar amount purchased is less than the United
States Dollar amount expressed to be due to the Lender under this
Agreement and/or the Security Documents, the Borrower shall indemnify
the Lender against any loss sustained by it as a result thereof. In any
event, the Borrower shall indemnify the Lender against the cost of
making any such purchase referred to in Clause 17 (2) above.
(4) The indemnity herein shall constitute a separate and independent
obligation from the other obligations in this Agreement and/or the
Security Documents, shall give rise to a separate and independent cause
of action, shall apply irrespective of any indulgence granted by the
Lender and shall continue in full force and effect despite any
judgment, order, claim or proof for a liquidated amount in respect of
any sum due under this Agreement and/or the Security Documents.
<PAGE> 34
19
18. RIGHT OF SET-OFF AND CONSOLIDATION
(1) Following an Event of Default, the Lender will be entitled but not
obliged, without notice to the Borrower, to combine, consolidate, merge
or apply all or any amount available to the Lender by way of set-off,
lien or counterclaim in or towards satisfaction of any money at any
time due and payable or to become due and payable by the Borrower to
the Lender under this Agreement.
(2) Without prejudice to any right of consolidation none of the property of
the Borrower which at the date hereof is or which at any time hereafter
shall become subject to a fiduciary transfer of proprietary rights or a
charge in favour of or vested in the Lender shall be redeemed except on
payment of not only all moneys thereby secured but also all moneys
secured by the Security Documents.
19. PROVISIONS OF THE SECURITY DOCUMENTS
(1) The provisions of this Agreement shall insofar as the same shall be
inconsistent with or contradictory to the provisions of the Security
Documents prevail and have full force and effect in respect of the
Facility herein referred to. Save as expressly herein provided, nothing
in this Agreement shall affect the validity and enforceability of or
the rights, powers and remedies of the Lender under the Security
Documents as security for the payment of all loans, advances, credit
and other banking facilities or any other sums of money now or
hereafter owing or remaining unpaid to the Lender and the provisions of
the Security Documents shall continue to apply thereto.
(2) It is hereby acknowledged and declared that the Facility herein
provided shall for all purposes be regarded and construed as forming
part of the facilities secured by the Security Documents and that all
monies herein covenanted to be paid to the Lender shall accordingly be
secured by the Security Documents.
20. MISCELLANEOUS
(1) Costs
The Borrower shall, on demand, pay and indemnify the Lender in respect
of all costs, fees and expenses (including, without limitation, legal
expenses on a full indemnity basis) and taxes in connection with:
(a) all costs, fees, expenses and other charges legal or otherwise
including stamp duty and the Lender's solicitors costs on a
full indemnity basis, reasonably incurred by the Lender in
connection with the preparation, execution and registration of
this Agreement and/or the Security Documents or any charges,
pledges, guarantees or other documents required by the Lender
under the provisions of this Agreement and/or the Security
Documents; and
<PAGE> 35
20
(b) all legal fees on a full indemnity basis and other costs and
disbursements reasonably incurred in connection with demanding
and enforcing payment of monies due hereunder or otherwise
howsoever in enforcing this security and/or any of the
covenants undertakings stipulations terms conditions or
provisions of the Security Documents.
(2) Notices
(a) Method of giving notices A Notice required or permitted to be
given by one party to another under this Agreement must be in
writing, addressed to the other party and:
(1) delivered to that party; or
(2) transmitted by facsimile to that party's address.
(b) Time of Receipt
A Notice given to a party in accordance with Clause 20.2 (a)
shall be treated as having been duly given and received:
(1) if delivered to a party's address, on the day of
delivery if on a Business Day, otherwise on the
subsequent Business Day;
(2) if transmitted by facsimile to a party's address and
a correct and complete transmission report is
received, on the day of transmission if a Business
Day, otherwise on the next following Business Day.
(c) Address of the Parties
For the purposes of Clause 20.2 (b), the address of a party is
the address set out below or another address of which that
party may from time to time give by written notice to each
other party:
<TABLE>
<S> <C>
To the Borrower: PT. Dharma Polimetal
Jalan Raya Serang Km. 24, Balaraja
Tangerang
Indonesia
Facsimile: 5951628
Attention: Mr. Joppy Kurniadi Negara
To Mr. Joppy Kurniadi
Negara: Mr. Joppy Kurniadi Negara
Billi & Moon Block CH4/14,
RT. 006/RW. 010
Kelurahan Pondok Kelapa,
Kecamatan Duren Sawit, Jakarta Timur
Indonesia
Facsimile:
</TABLE>
<PAGE> 36
21
<TABLE>
<S> <C>
To Mr. Iwan Dewono
Budiyuwono: Mr. Iwan Dewono Budiyuwono
Jalan Tulodong Bawah III/42
Senayan, Jakarta Selatan
Indonesia
Facsimile:
To the Lender: Graham-Field Health Products, Inc.
81 Spence Street, Bay Shore
NY 11706, USA
Facsimile: 1-516-439 5635
Attention: Chief Executive Officer
</TABLE>
(3) Law and Jurisdiction
This Agreement shall be governed by and construed in all aspects in
accordance with the laws of the Republic of Indonesia under the
condition that the Borrower hereby agrees that the Lender shall be at
liberty to take any proceedings in any courts whether in the Republic
of Indonesia or elsewhere to protect and enforce the provisions of this
Agreement or otherwise to recover payment of any sum or sums due under
this Agreement and the Borrower hereby irrevocably submits to the
jurisdiction of any of the said courts that the Lender shall take
proceedings in.
(4) Termination
The Borrower expressly waives the provisions of Articles 1266 and 1267
of the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata)
regarding indemnification or damages resulting from termination of an
agreement.
(5) Non-waiver
The failure, delay, relaxation, or indulgence on the part of any party
in exercising any power or right conferred upon that party by this
Agreement does not operate as a waiver of that power or right, nor does
any single exercise of a power or right preclude any power or right
under this Agreement. A power or right may only be waived in writing,
signed by the party to be bound by the waiver.
Failure by the Lender to exercise any and all of its rights hereunder,
or any partial exercise thereof, shall not act as a waiver of such
rights granted hereunder or by general law.
(6) Successors and Assigns
(a) This Agreement and the Security Documents executed or to be
executed by the Borrower shall be binding upon and inure to
the benefit of the Borrower and the Lender and their
respective successors in title and, in the case of the
<PAGE> 37
22
Lender, its assigns. All covenants, undertakings, agreements,
representations and warranties, given, made or entered into by
the Borrower in this Agreement and/or the Security Documents
shall survive the making of any assignments and shall be
enforceable by each assignee of the Lender.
(b) The Lender may assign all or any of its rights, benefits and
duties under this Agreement and/or the Security Documents at
any time. In the event of any such assignment by the Lender,
the Borrower may prepay the whole of the Total Indebtedness
provided always that no prepayment premium shall be chargeable
for any such prepayments.
(c) The Borrower shall have no right to assign or transfer any of
its rights under this Agreement and/or the Security Documents
and it shall remain fully liable for all of its undertakings,
agreements, duties, liabilities and obligations under this
Agreement and/or the Security Documents, and for the due and
punctual observance and performance thereof.
(d) The Borrower expressly acknowledges that the Lender may assign
all or any of its rights and benefits under this Agreement
and/or the Security Documents to IBJ Whitehall Business Credit
Corporation without the prior consent of the Borrower.
(7) Severability
Any term, condition, stipulation, provision, covenant or undertaking of
this Agreement and/or the Security Documents which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions of this Agreement and/or
the Security Documents, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable any such
term, condition, stipulation, prohibition, covenant or undertaking in
any other jurisdiction.
(8) Language
This Agreement is executed in a text using the English language, which
shall be the governing language despite translation into any other
language.
(9) Counterparts
This Agreement may be executed in any number of counterparts and all of
those counterparts taken together constitute one and the same
instrument.
IN WITNESS WHEREOF the parties have executed this Agreement the day and
year first above written.
<PAGE> 38
23
THE BORROWER
PT. DHARMA POLIMETAL
MR. JOPPY KURNIADI NEGARA
--------------------------
PRESIDENT DIRECTOR
MR. IWAN D. BUDIYUWONO
--------------------------
DIRECTOR
/s/ Joppy Kurniadi Negara
--------------------------
MR. JOPPY KURNIADI NEGARA
/s/ Iwan D. Budiyuwono
------------------------------
MR. IWAN D. BUDIYUWONO
------------------------------
THE LENDER
/s/ Lara J. Peake
---------------------------------------
GRAHAM-FIELD HEALTH PRODUCTS, INC
Lara J. Peake
under Power of Attorney
<PAGE> 39
24
SCHEDULE ONE
TERMINATION AGREEMENT
<PAGE> 40
SCHEDULE ONE
TERMINATION AGREEMENT
REGARDING THE ASSET PURCHASE AGREEMENT
THIS TERMINATION AGREEMENT REGARDING THE ASSET PURCHASE AGREEMENT (the
"Termination Agreement") is entered into as of 5th (fifth) 1999 (the
"Termination Date") by and among:
1. GRAHAM-FIELD HEALTH PRODUCTS, INC., a company duly organized and
existing under the laws of the State of Delaware, having its registered
office at 81 Spence Street, Bay Shore, NY 11706, United States of
America, in this matter duly represented in accordance with its
Articles of Association (hereinafter referred to as "GRAHAM-FIELD").
2. PT. DHARMA POLIMETAL, a limited liability company duly established
under the laws of the Republic of Indonesia and having its head office
at Jalan Raya Serang Km. 24, Balaraja, Tangerang, Indonesia, in this
matter represented by Mr. Joppy Kurniadi Negara, its President
Director, and Mr. Iwan Dewono Budiyuwono, a Director in accordance with
its Articles of Association (hereinafter referred to as "POLIMETAL").
3. MR. JOPPY KURNIADI NEGARA, private person, Indonesian citizen, residing
in Jakarta, Billi & Moon Block CH4/14, RT. 006/RW.010, Kelurahan Pondok
Kelapa, Kecamatan Duren Sawit, Jakarta Timur, Indonesia, holder of DKI
Jakarta Identity Card KTP Number 5707.11701/2305590238 (hereinafter
referred to as "JOPPY").
4. MR. IWAN DEWONO BUDIYUWONO, private person, Indonesian citizen,
residing in Jalan Tulodong Bawah III/42, Senayan, Kebayoran Baru,
Jakarta Selatan, Indonesia, holder of DKI Jakarta Identity Card KTP
Number 09.5307.021260.0161 (hereinafter referred to as "IWAN").
WHEREAS
A. Graham-Field, Polimetal, Joppy and Iwan (collectively referred to as
the "Parties") have entered into a Asset Purchase Agreement dated 18
February 1998 which was subsequently amended by the Variation Agreement
between the Parties (hereinafter referred to as the "Asset Purchase
Agreement").
B. The purpose of the Asset Purchase Agreement was to make an advance
payment of US$ 3,500,000 (three million five hundred thousand United
States Dollars) to Polimetal in consideration of the subsequent
transfer to PT. Dharma Polimetal of the Wheelchair Assets (as defined
in the Asset Purchase Agreement) owned and operated by PT. Dharma
Medipro. Due to the contraction of the economy of the Republic of
Indonesia the transfer of the
<PAGE> 41
2
Wheelchair Assets will no longer proceed. The Parties therefore agreed
to convert the Advance (as defined in the Asset Purchase Agreement ) of
US$ 3,500,000 into a loan between the Parties, as described in the
attached Loan Agreement to which this Termination Agreement forms the
Schedule One thereof.
C. The parties have now decided to terminate the Asset Purchase Agreement
and release each other from all obligations thereunder, in
consideration of the Parties entering into the attached Loan Agreement
dated 5 March 1999.
The Parties have agreed to enter into this Termination Agreement on the
following terms and conditions.
ARTICLE 1
TERMINATION OF THE ASSET PURCHASE AGREEMENT
Each of the Parties hereby agrees to terminate and cancel the provisions of the
Asset Purchase Agreement effective from the Termination Date on the condition
that the Parties enter into the attached Loan Agreement to which this
Termination Agreement forms the Schedule One thereof.
ARTICLE 2
RELEASE
Each of the Parties releases and discharges each of the other Parties from all
of their respective obligations and liabilities under the Asset Purchase
Agreement and such Parties shall have no further obligations or liabilities
whatsoever to each other party under the Asset Purchase Agreement effective from
the date of execution of the Loan Agreement which shall be 5 March 1999.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Each of the Parties represents and warrants to the other Parties that it has
taken all necessary corporate or other action to authorize its entering into
this Termination Agreement and the fulfillment of its obligations.
ARTICLE 4
GOVERNING LAW
This Termination Agreement and the performance hereof shall be governed and
construed in accordance with the laws of the Republic of Indonesia.
<PAGE> 42
3
ARTICLE 5
DOMICILE
For the purposes of this Termination Agreement, the Parties hereby elect the
District Court of Central Jakarta as their permanent and legal domicile.
ARTICLE 6
COUNTERPARTS
This Termination Agreement shall be executed in one or more counterparts each
having the same power and effect.
IN WITNESS WHEREOF the Parties have entered into this Termination Agreement the
day and year first above written.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
- -----------------------------------------
Lara J.Peake
under Power of Attorney
PT. DHARMA POLIMETAL
- --------------------------- -----------------------
Joppy K. Negara Iwan D. Budiyuwono
President Director Director
JOPPY KURNIADI NEGARA
<PAGE> 43
4
IWAN DEWONO BUDIYUWONO
- ------------------------------
<PAGE> 44
25
SCHEDULE TWO
SHARE PLEDGE AGREEMENT
<PAGE> 45
SCHEDULE TWO
PLEDGE OF SHARES AGREEMENT
THIS PLEDGE OF SHARES AGREEMENT (the "AGREEMENT") is entered into this 5th
(fifth) day of March, 1999.
BETWEEN:
(1) GRAHAM-FIELD HEALTH PRODUCTS INC., a company duly organized and
existing under the laws of the State of Delaware, with its registered
office at 81 Spence Street, Bay Shore, NY 11706 (the "PLEDGEE");
AND
(2) MR. JOPPY KURNIADI NEGARA, a private person, Indonesian citizen,
residing in Jakarta, Billi & Moon Block CH4/14, RT.006/RW.010,
Kelurahan Pondok Kelapa, Kecamatan Duren Sawit, Jakarta Timur,
Indonesia, holder of DKI Jakarta Identity Card Number
5707.11701/2305590238, and
MR. IWAN DEWONO BUDIYUWONO, a private person, Indonesian citizen,
residing in Jalan Tulodong Bawah III/42, Senayan, Kebayoran Baru,
Jakarta Selatan, Indonesia, holder of DKI Jakarta Identity Card Number
09.5307.021260.0161
(collectively known as the "PLEDGORS");
WHEREAS:
A. PT. DHARMA POLIMETAL is a limited liability company duly organized and
existing under the laws of the Republic of Indonesia and having its
principal place of business at Jalan Raya Serang Km. 24 Balaraja,
Tangerang, Indonesia ("COMPANY").
B. The Pledgors are the registered holders of all issued shares in the
total issued capital of the Company.
C. The Pledgors and the Pledgee have entered into an Loan Agreement on 5th
March 1999 to which this Agreement forms Schedule Two whereby the
Pledgee has agreed with the Pledgors to provide a loan of US$ 3,500,000
(three million five hundred United States Dollars) to the Company to
meet the working capital requirements of the Company, which loan was
advanced on 18 February 1998 pursuant to the Asset Purchase Agreement
of the same date.
D. The Pledgee would not have advanced moneys to the Company under the
Loan Agreement without security being given by the Pledgors, including
but not limited to, the security established by this Agreement.
<PAGE> 46
2
E. Pursuant to the Loan Agreement, the Pledgors agreed to pledge to the
Pledgee all of the shares held by them whether now or in the future, in
the Company, in order to secure repayment of all amounts advanced by
the Pledgee to the Company under the Loan Agreement and any agreements
supplemental or ancillary thereto (such amounts, whether now or
hereafter existing, including but not limited to the principal
hereinafter collectively referred to as the "DEBT").
OPERATIVE TERMS AND CONDITIONS:
Article 1
PLEDGE OF SHARES AND SECURITY
1.1 The Pledgors hereby irrevocably and unconditionally agree with the
Pledgee that effective from the date hereof, the Pledgors pledge and
surrender to the Pledgee all of the shares owned by the Pledgors in the
Company, being the total issued share capital of the Company and the
Pledgors further irrevocably and unconditionally covenant and agree to
immediately pledge and surrender to the Pledgee any additional shares,
rights or entitlements which they may acquire in the Company at any
time in the future by way of further security for repayment of the
entire Debt (the "Shares").
1.2 The Pledgors undertake and agree to cause all share certificates issued
to the name of the Pledgors in respect of any shareholding or other
financial interests in the Company which they may each hereafter
acquire to be delivered by the Board of Directors of the Company to the
Pledgee, or a custodian nominated by the Pledgee, for safekeeping and
security purposes.
1.3 This Agreement forms an integral part of the Loan Agreement and any
other agreements supplemental or ancillary thereto. Such agreements
would not have been entered into, nor monies advanced by the Pledgee to
the Company under the Loan Agreement without the Pledgors having
entered into this Agreement with the Pledgee. Therefore the pledge made
hereunder and the power of attorney hereunder referred to shall be
irrevocable for so long as and any part of the Debt remains outstanding
under the terms of the Loan Agreement.
1.4 The Pledgors shall immediately notify the Company and the directors and
responsible officers thereof of this Agreement, and shall instruct such
of its directors and officers to furnish the Pledgee with copies of all
notices or other correspondence which may be sent or given to any
shareholder including without limitation all notices of general and
extraordinary shareholders' meetings, notices of dividends, calls for
subscription payments, annual or other periodic reports and financial
statements or any other notice with respect to any shareholder of the
Company.
1.5 This Agreement shall have immediate force and effect from the date of
execution by the Parties.
<PAGE> 47
3
Article 2
SUBSCRIPTION RIGHTS
The Pledgors shall make all subscription payments or other payments to the
Company or any other party as the Company's Board of Directors shall direct and
shall hold the Pledgee harmless from liability caused by the Pledgors' failure
to do so.
Article 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
3.1 The Pledgors hereby represent and warrant to the Pledgee that the
Shares shall not be subject to any other pledge, lien, charge or
encumbrance of any kind whatsoever and that they are each the true and
rightful owner of the Shares and now have and shall at all times
hereafter have full power and authority over the Shares and to
surrender and deliver share certificates for the Shares to the Pledgee.
3.2 During the term of this Agreement the Pledgors shall not without prior
written consent of the Pledgee (i) sell or otherwise transfer the
Shares, (ii) grant or allow to be created any lien, charge or other
encumbrance of any kind over or in respect of the Shares, (iii)
subject, or attempt to subject, the Shares to any other pledge, or (iv)
cause any further shares to be issued in the Company.
3.3 The Pledgors shall cause the pledge hereby created over the Shares to
be recorded in the special register of charges, pledges and other
encumbrances over share capital which is kept and maintained by each of
the Company.
Article 4
UNCONDITIONAL AGREEMENT
The pledge created by this Agreement, the delivery of share certificates
covering the Shares at the appropriate time, and the obligations of the Pledgors
hereunder, are unconditional and shall not be affected by any invalidity or
unenforceability of this Agreement or any provision hereof, or any agreement
supplemental or ancillary thereto. The liability, responsibilities and rights
and obligations of each Pledgor are joint and several.
Article 5
ENFORCEMENT SALE
5.1 In the event that:
(a) any of the Pledgors default upon their responsibilities and
obligations and/or breach any representation, warranty or
covenant as defined in the Loan Agreement or any agreement
executed by the Pledgors pursuant to the Loan Agreement,
including without limitation this Agreement; or
(b) any event occurs which, upon the giving of notice or the lapse
of time or both, would constitute an event of default as
described in paragraph (a).
<PAGE> 48
4
the Pledgee may take whatever action it, in its sole and absolute
discretion, deems necessary to protect its rights hereunder including,
but not by way of limitation, selling or otherwise transferring the
Shares to any person or entity (including itself) by private in good
faith transaction, after due solicitations of interest from prospective
buyers, public sale, or by any other type of sale pursuant to the laws
of the Republic of Indonesia at whatever time, location and price, on
such terms and conditions as the Pledgee may in its reasonable opinion
deem to be appropriate.
5.2 If the Pledgee takes any action pursuant to Article 5.1, then the
Pledgors unconditionally and irrevocably undertakes, promises and
covenants to cooperate fully with the Pledgee and any third parties in
respect of such action and that it will not take any action to
challenge the validity of the Pledgee's actions or to limit or diminish
the rights of the Pledgee in respect of such matters.
The Pledgors hereby irrevocably and unconditionally agree to forego and
waive all rights to assert any interest, claim or right of redemption
with respect to the Shares against any purchaser or other transferee
nominated by the Pledgee, whether or not such interest, claim, or right
may exist under the laws or regulations of the jurisdiction where the
Shares are situated or any other jurisdiction.
5.3 Upon the occurrence of such sale and transfer, the Pledgors shall be
entitled to receive the balance of any net proceeds from the sale of
the Shares in excess of the Total Indebtedness (as defined in the
attached Loan Agreement) and conversely in the event there is a
shortfall in the said net proceeds then the Pledgors shall be obligated
to make good the deficiency and interest shall accrue on the
outstanding amount at the rate of 8.75% (eight point seventy five
percent) per annum until such time as the Pledgee receives full
satisfaction of the Debt.
Article 6
POWER OF ATTORNEY
In order to ensure and protect the Pledgee's rights pursuant to the Loan
Agreement, including without limitation, the Pledgee's rights under Article 5 of
this Agreement, the Pledgors hereby irrevocably and unconditionally appoint each
of the directors of the Pledgee and / or its attorneys to be its lawful
attorney, with full right of substitution, to take any and all actions in the
name of the Pledgors (including execution of any documents) to:
(a) exercise of all of the rights attaching to the Shares or as shareholder
of the Company, to receive notices, and the Pledgors' share of the
assets of the Company or the proceeds thereof in the event of any
voluntary liquidation or dissolution of the Company; and
(b) sell or transfer all or some of the Shares by any means whatsoever, and
to execute, issue or replace all or any share certificates, notices,
advertisements or other documents relating thereto.
Article 7
TAXES
<PAGE> 49
5
The Pledgors hereby represent and warrant to the Pledgee that all taxes,
charges, fees, duties and assessments with respect to the Shares have been fully
paid, and agrees to pay promptly any and all taxes, charges, fees, duties and
assessments which may be levied or become due with respect thereto in the
future.
Article 8
COSTS AND EXPENSES
Any and all costs (including legal fees with the exception of those legal fees
incurred in the preparation of this Agreement) incurred with respect to the
securing or protecting of any of the rights of the Pledgee under this Agreement
shall be for the account of the Pledgors and costs associated with any sale or
transfer of any or all of the Shares pursuant to Article 5 hereof, shall be for
the account of the Pledgors and, if not paid promptly upon demand of the
Pledgee, the Debt shall be deemed to be increased by the amount thereof.
Article 9
MISCELLANEOUS
9.1 Notices
Any notices, by way of demand or otherwise, shall be in writing and
shall be given by registered airmail (return receipt requested) or by
personal delivery addressed to the addresses stated above for the
Pledgors and the Pledgee, or to such other address as may be designated
in writing by either party in accordance with the foregoing.
Any registered airmail notice so given shall be deemed to have been
received ten (10) working days following the day sent, and notice by
personal delivery shall be deemed received when delivered.
9.2 Variation
The terms of this Agreement may only be amended, waived, discharged or
terminated by instrument in writing signed by each of the Pledgors and
the Pledgee.
9.3 Non-waiver
Failure by the Pledgee to exercise any and all of its rights hereunder,
or any partial exercise thereof, shall not act as a waiver of such
rights granted hereunder or by general law.
9.4 Severability
If one or more of the provisions hereof shall be invalid, illegal or
unenforceable in any respect under any applicable law or decision, the
validity, legality and enforceability of the remaining provisions
contained herein shall not be effected or impaired in any way. The
Pledgors shall in any such event execute such additional
<PAGE> 50
6
documents as the Pledgee may request in order to give effect to any
provision hereof which is determined to be invalid, illegal or
unenforceable.
9.5 Governing Law
This Agreement and the performance hereof will be governed by the laws
of the Republic of Indonesia, and the forum for the resolution of any
dispute in respect of this Agreement shall be as set out in the Loan
Agreement.
9.6 Language
This Agreement is executed in a text using the English language which
shall be the governing language despite translation into any other
language. If another language translation of this Agreement be required
for any purpose whatsoever, the parties agree that the Pledgee shall
provide such translation prepared by a sworn translator at the
Pledgors's cost, which shall not be contested by the Pledgors save for
manifest error.
9.7 Assignment
The Pledgee may assign or transfer any of its rights or obligations
hereunder, or any part thereof, to any party, provided, that upon such
assignment or transfer it shall thereafter give written notice thereof
to the Pledgors and to the Company, to be registered in the Company's
register of shareholders and special register of shares.
The Pledgors shall not assign or transfer any of their rights or
obligations hereunder, or any part thereof to any party without the
prior written consent of the Pledgee.
The Pledgors expressly acknowledge that the Pledgee may assign all or
any of its rights or benefits under this Agreement to IBJ Whitehall
Business Credit Corporation.
9.8 Headings
The headings of the Sections of this Agreement are inserted for
convenience of reference only and shall not constitute a part hereof or
affect in any way the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF the parties hereto have executed and entered into this
Agreement on the date set out above.
JOPPY KURNIADI NEGARA
<PAGE> 51
7
- ---------------------------
...........................
Signature of Witness
Lara J. Peake c/o Makarim & Taira S.
Full name and address of Witness
IWAN DEWONO BUDIYUWONO
- ---------------------------
...........................
Signature of Witness
Lara J. Peake c/o Makarim & Taira S.
Full name and address of Witness
<PAGE> 52
8
SIGNED for and on behalf of )
GRAHAM-FIELD HEALTH, INC, )
in accordance with its articles of association )
by its duly authorised officer ) Lara J. Peake
under Power of Attorney
....................................
Signature of Witness
Susy Eva Murty
Full name and address of Witness
<PAGE> 53
26
SCHEDULE THREE
GUARANTEE AGREEMENT
<PAGE> 54
SCHEDULE THREE
GUARANTEE AGREEMENT
- -On this day the 5th (fifth) day of March nineteen hundred and ninety nine
(05-03-1999);
MR. JOPPY KURNIADI NEGARA, businessman, holder of DKI Jakarta Identity Card KTP
Number 5707.11701/2305590238, residing in Jakarta, Billi & Moon Block CH4/14,
RT. 006/RW.010, Kelurahan Pondok Kelapa, Kecamatan Duren Sawit, Jakarta Timur,
Indonesia, according to his statement in this matter acting in his private
capacity as a shareholder of PT. Dharma Polimetal (hereinafter the "GUARANTOR")
GRAHAM-FIELD HEALTH PRODUCTS, INC., a company duly organized and existing under
the laws of the State of Delaware, having its registered office at 81 Spence
Street, Bay Shore, NY 11706, United States of America (hereinafter
"GRAHAM-FIELD")
- -Whereas PT. Dharma Polimetal, a limited liability company duly organized and
existing under the laws of Indonesia (hereinafter the "BORROWER"), and
Graham-Field have entered into a Loan Agreement dated 5 March 1999 (this
agreement as from time to time amended or renewed and hereinafter referred to as
the "LOAN AGREEMENT") pursuant to which Graham-Field has agreed, subject to the
terms and conditions of the Loan Agreement, to provide a loan to the Borrower in
the amount of US$ 3,500,000 (three million five hundred thousand United States
Dollars).
- -The loan of US$ 3,500,000 is required to finance the working capital
requirements of the Borrower, this sum having already been advanced by the
Lender to the Borrower pursuant to the Asset Purchase Agreement (hereinafter
defined).
- -Whereas in order to secure the due and punctual payment when due of all amounts
now or hereafter payable by the Borrower to Graham-Field under the Loan
Agreement
<PAGE> 55
2
(hereinafter the "OBLIGATIONS"), the Guarantor has agreed to guarantee the
performance of and payment by the Borrower to Graham-Field of the Obligations.
- -NOW THEREFORE, the parties do hereby enter into this Guarantee Agreement
(hereinafter the "Agreement") under the following terms and conditions:
ARTICLE 1
Unless otherwise defined herein, all terms used herein shall have the meanings
set forth in the Loan Agreement.
ARTICLE 2
In consideration of Graham-Field entering into the Loan Agreement with the
Borrower, the Guarantor hereby unconditionally and irrevocably guarantees to
make full payment to Graham-Field at demand of Graham-Field to the Guarantor of
the Obligations, together with all expenses incurred by Graham-Field in
enforcing any rights hereunder.
ARTICLE 3
The Guarantor hereby consents and agrees that Graham-Field may at any time, or
from time to time, may in its sole discretion:
(a) extend or change the time, manner, place and terms of payment of all or
any of the Obligations or amend the Loan Agreement for the purpose of
adding any provisions or changing in any manner the rights thereunder
of any or all of the parties thereto;
(b) settle or compromise with the Borrower, any and all of the Obligations,
or subordinate the payment of the same, or any part thereof, to the
payment of any other debts or claims which may at any time and from
time to time be due or owing to Graham-Field, all in such manner and
upon such terms as
<PAGE> 56
3
Graham-Field deems proper, and without notice to or further consent
from the Guarantor, and without affecting the liabilities and
obligations of the Guarantor hereunder.
ARTICLE 4
- -The Guarantor hereby represents and warrants to Graham-Field that:
(a) the making and performance by the Guarantor of this Agreement will not
violate any applicable laws, regulations, or other governmental
directive having the force of law, order of any courts or regulatory
body or arbitral tribunal, and will not conflict with or result in the
breach of any provision of and will not constitute a default or an
event by which the passage of time or giving of notice, or both, would
constitute a default under any agreement or instrument to which the
Guarantor is a party or by which he or any of his property or assets
are bound;
(b) all consents, approvals, licences and authorizations of, filings and
registration with, any governmental authority required under applicable
laws and regulations for the making and performance by the Guarantor of
this Agreement, have been obtained or made and are in full force and
effect;
(c) no litigation or administrative proceeding of or before any court or
governmental authority or any agency, the result of which would or
would be likely to have material adverse effect on its business, assets
or financial condition, is pending or threatened against him;
(d) this Agreement herein constitute legal, valid and binding obligations
of the Guarantor and enforceable in accordance with its terms and
conditions.
ARTICLE 5
5.1 The Guarantor hereby covenants and undertakes that he will not:
<PAGE> 57
4
(a) apply for or obtain any security from the Borrower which may,
directly or indirectly, reduce the ability of the Borrower to
pay the Obligations to Graham-Field pursuant to the Loan
Agreement or any agreements related thereto;
(b) in respect of the dissolution, winding up, or bankruptcy of
the Borrower or any other person presently or in the future
liable for the payment of the moneys hereby secured:
(i) directly or indirectly receive the benefit of any
distribution, dividend or payment; or
(ii) prove or claim in competition with Graham-Field so as
to diminish any distribution or dividend which but
for such proof or claim Graham-Field would be
entitled to receive, until all of the moneys hereby
secured have been paid to Graham-Field, and
Graham-Field is of the bona fide opinion that no part
of any such payment is void or voidable.
5.2 If a claim by any person that any payment to Graham-Field under or
incidental to the Loan Agreement (the "Payment") is void, voidable or
otherwise unenforceable is upheld, conceded or compromised:
(a) Graham-Field shall forthwith upon such claim being upheld,
conceded or compromised become entitled against the Guarantor
to all such rights in respect of the moneys hereby secured as
it would have had if the Payment or so much thereof as is held
or conceded to be void or voidable or as is foregone on
compromise had not taken place; and
(b) the Guarantor shall upon such claim being upheld, conceded or
compromised take all such steps and sign all such documents as
may
<PAGE> 58
5
be necessary or convenient to restore to Graham-Field this
Agreement immediately prior to such Payment.
ARTICLE 6
The Guarantor hereby waives notice of presentment, demand, protest and notice of
dishonour of any or all of the Obligations, promptness in commencing suit
against any party thereto or liable thereon, and in giving any notice to or of
making any claim or demand hereunder upon the Guarantor. No failure or delay by
Graham-Field to exercise any right, power of privilege granted hereunder shall
operate as a waiver thereor nor shall any single or partial exercise of such
right, power of privilege preclude any further exercise thereof or of any other
right, power or privilege.
ARTICLE 7
The guarantee hereunder shall be in addition to and shall not in any way be
prejudiced or affected by any other security or guarantee now held or hereafter
to be held by Graham-Field for all part of the amounts of money secured by this
guarantee. Also, any other guarantee granted or to be granted by any other
guarantors, if any, in favour of Graham-Field shall not in any way be prejudiced
or affected by this guarantee.
ARTICLE 8
The guarantee hereunder shall be applicable to the ultimate balance of the
Obligations that may become due and payable by the Borrower to Graham-Field
under the Loan Agreement and until all the said amounts have been duly paid, the
Guarantor shall not be entitled as against Graham-Field, to any right or surety
and/or to discharge its liability in respect of all amounts owed by the Borrower
to Graham-Field, unless and until all the Obligations shall have first been
completely discharged and satisfied.
ARTICLE 9
<PAGE> 59
6
The Guarantor hereby agrees that all amounts of money which cannot be obtained
by Graham-Field from the Borrower under the Loan Agreement whether because of
limitations according to the laws, incapability or incompetency of the Borrower,
or because of limitations of the person(s) acting in the name of the Borrower or
because of the Loan Agreement or any documents related thereto are not made by
the person(s) or party(ies) entitled thereto or because of a defect or mistake
in the document, shall be paid by the Guarantor as if the Guarantor was the sole
or principal debtor under the terms and conditions of the Loan Agreement.
ARTICLE 10
10.1 If for the purpose of obtaining judgement in any court in any country,
it becomes necessary to convert any amount due hereunder in currency
other than that provided for in the Loan Agreement, the conversion
shall be made at the rate of exchange prevailing either on the date of
default or on the Business Day prior to the date on which the judgement
is given, whichever shall be more favourable to Graham-Field.
10.2 If there is a change in the rate of exchange prevailing between the
date of default or the Business Day prior to the judgement date (as
applicable) and the date of payment of the amount due, the Guarantor
shall pay such additional amounts, if any, as may be necessary to
ensure that the amount paid on such date is the amount in the currency
in which the judgement was given, which when converted at the rate of
exchange prevailing on the date of payment equals the amount due
hereunder in the currency as provided for in the Loan Agreement.
10.3 Any additional amounts due from the Guarantor under this Article shall
be due as a separate obligation and shall not be affected by judgement
being obtained for any other sums due under or in respect of this
Agreement.
ARTICLE 11
<PAGE> 60
7
11.1 The Guarantor hereby grants an irrevocable power of attorney to
Graham-Field and its attorneys, to exercise all the rights and claims
which the Guarantor presently has or will have against the Borrower and
the Borrower's assets, with respect to: (i) any rights arising pursuant
to Article 1401 section 2, Article 1402 section 3 in conjunction with
Article 1840 of the Indonesian Civil Code; (ii) the proceeds or assets
of the Borrower in the event that the Borrower is liquidated; and (iii)
any moneys owing for any reason by the Borrower to the Guarantor,
provided that the assignment and authority granted with respect to this
sub-clause (iii) may be exercised by Graham-Field only upon the
occurrence of an Event of Default.
11.2 Any amounts received by the Guarantor from the Borrower being the
subject of the assignment under Article 11.1., shall be deemed to have
been received by the Guarantor and held by the Guarantor as agent for
and on behalf of Graham-Field. The Guarantor shall immediately notify
Graham-Field upon receipt of such amounts and pay the same to
Graham-Field.
ARTICLE 12
The obligations of the Guarantor hereunder are undertaken jointly and severally
with the obligations of the Borrower under the Loan Agreement or any other
persons giving security thereof under any other agreements supplemental or
ancillary to the Loan Agreement, each of the foregoing agreements as amended
from time to time, and action or actions may be brought or prosecuted against
the Guarantor whether or not action is brought against any other guarantor and
whether or not the Borrower or any other guarantor is joined in any such action
or actions for such purpose.
ARTICLE 13
13.1 Upon notice by Graham-Field to the Guarantor (which notice shall
constitute conclusive evidence of the liabilities and obligations of
the Guarantor hereunder) stating that a sum is hereunder, the Guarantor
shall immediately
<PAGE> 61
8
pay such sum in the currency specified in the notice in same day funds
to Graham-Field's account as it may then specify.
13.2 All sums owing hereunder shall be paid free and clear of any deduction
for any and all present and future taxes, duties, deductions or
withholdings. Should any such payment hereunder be made subject to any
such taxes, duties, deductions or withholdings whatsoever, the
Guarantor shall pay to Graham-Field such additional amounts as may be
necessary to equal to the full amounts due hereunder and the Guarantor
shall indemnify and save harmless Graham-Field by payment in cash
immediately upon demand from and against all taxes, duties, deductions
or withholdings with respect to this Agreement and the transaction
herein contemplated.
13.3 If any sum becomes due for payment hereunder on a day which is not a
Business Day such payment shall be made on the next succeeding Business
Day, or if the next succeeding Business Day falls within another
calendar month, then on the immediate preceding Business Day.
13.4 The Guarantor hereby expressly agrees that promulgation of any rule,
regulation or law or any interpretation thereof, having the effect of
restricting, prohibiting or impending in any way the remittance in any
amount due from the Borrower and the Guarantor to Graham-Field, shall
under no circumstances, constitute a ground for asserting the existence
of a force majeure situation and as such shall not excuse the Guarantor
from the due performance of its obligations hereunder.
ARTICLE 14
In the event that Graham-Field transfers or assigns any of its rights or
obligations in accordance with the Loan Agreement, such transferee or assignee
shall automatically become vested with all of the rights, powers, privileges and
duties of Graham-Field under this Agreement.
<PAGE> 62
9
The Guarantor hereby acknowledges that Graham-Field may assign all or any of its
rights or benefits hereunder to IBJ Whitehall Business Credit Corporation.
ARTICLE 15
15.1 The Guarantee provided herein is a continuing guarantee and shall be
automatically reinstated if, for any reason, any payment by or on
behalf of the Borrower shall be rescinded or must otherwise be
restored, whether as a result of any proceedings in bankruptcy or
reorganization or the like or otherwise. The guarantee provided herein
is the primary obligation of the Guarantor.
15.2 The Guarantor's present and future liability and the rights of
Graham-Field under this Agreement shall not be affected by Graham-Field
becoming party to or bound by any compromise, assignment of property,
scheme of arrangement, composition of debts or scheme of reconstruction
by or relating to the Borrower, any co-guarantor or any other person.
ARTICLE 16
The Guarantor hereby waives all of its rights and privileges under the
Indonesian Civil Code (to the extent applicable) as necessary to give full
effect to the Guarantee, including but not limited to Articles 1430, 1821, 1831,
1833, 1837, 1847, 1848 and 1849 thereof.
ARTICLE 17
17.1 Assignment. This Agreement shall be binding upon the Guarantor, its
assigns and transferees, and shall inure to the benefit of, and be
enforceable by Graham-Field, its successors, assigns and transferees,
provided, however that the Guarantor shall not assign or transfer its
rights and obligations hereunder without the prior written consent of
Graham-Field.
<PAGE> 63
10
17.2 Waiver. Failure by Graham-Field to exercise any or all of its rights
hereunder, or any partial exercise thereof, shall not act as a waiver
of such rights granted hereunder or by general law and there shall be
no need to wait for the occurrence or re-occurrence of a similar or any
other event giving rise to such rights.
17.3 Severability. If one or more of the provisions hereof shall be invalid,
illegal or unenforceable in any respect under any applicable law or
decision, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected or impaired in any
way. The Guarantor shall in any such event execute such additional
documents as Graham-Field may request in order to give effect to any
provision hereof which is determined to be invalid, illegal or
unenforceable.
17.4 Notices. All notices, requests, demands or other communications to or
upon the respective parties hereto shall be in writing and shall be
deemed to be duly given or made when delivered (in the case of personal
delivery) and when dispatched (in the case of facsimile provided that
answerback relating thereto has been received) to the party to which
such notice, request, demand or other communication is required or
permitted to be given under this Agreement addressed as follows:
IN CASE OF THE GUARANTOR, to:
Mr. Joppy Kurniadi Negara
Billi & Moon Block CH4/14,
RT. 006/RW. 010 Kelurahan Pondok Kelapa,
Kecamatan Duren Sawit, Jakarta Timur
Indonesia
Facsimile:
IN CASE OF GRAHAM-FIELD, to:
81 Spence Street, Bay Shore
NY 11706, USA
Facsimile: 1-516-439 5635
Attention: Mr. Richard S. Kolodny
<PAGE> 64
11
-or to such other address as may be designated in writing by any party
in accordance with the foregoing.
17.5 Governing Law. This Agreement and the performance hereof shall be
governed by the laws of the Republic of Indonesia.
17.6 Legal Domicile. For the purpose of this Agreement, the Guarantor hereby
chooses the Clerk's Office of the District Court in Central Jakarta
(Kantor Panitera Pengadilan Negeri Jakarta Pusat) as its legal and
permanent domicile. Notwithstanding anything hereinbefore mentioned the
Guarantor agrees that Graham-Field may, in its absolute discretion,
submit any dispute which may arise in connection with this Agreement to
any other District Court of Jakarta or to the District Court having
jurisdiction over the Guarantor or elsewhere.
<PAGE> 65
12
- ------------------------
JOPPY KURNIADI NEGARA
- -------------------------------
GRAHAM-FIELD HEALTH PRODUCTS, INC.
Lara J. Peake
under Power of Attorney
<PAGE> 66
SCHEDULE THREE
GUARANTEE AGREEMENT
- -On this day the 5th (fifth) day of March nineteen hundred and ninety nine
(05-03-1999);
MR. IWAN DEWONO BUDIYUWONO, businessman, residing in Jalan Tulodong Bawah
III/42, Senayan, Kebayoran Baru, Jakarta Selatan, Indonesia, holder of DKI
Jakarta Identity Card KTP Number 09.5307.021260.0161, according to his statement
in this matter acting in his private capacity as a shareholder of PT. Dharma
Polimetal (hereinafter the "GUARANTOR")
GRAHAM-FIELD HEALTH PRODUCTS, INC., a company duly organized and existing under
the laws of the State of Delaware, having its registered office at 81 Spence
Street, Bay Shore, NY 11706, United States of America (hereinafter
"GRAHAM-FIELD")
- -Whereas PT. Dharma Polimetal, a limited liability company duly organized and
existing under the laws of Indonesia (hereinafter the "BORROWER"), and
Graham-Field have entered into a Loan Agreement dated 5 March 1999 (this
agreement as from time to time amended or renewed and hereinafter referred to as
the "LOAN AGREEMENT") pursuant to which Graham-Field has agreed, subject to the
terms and conditions of the Loan Agreement, to provide a loan to the Borrower in
the amount of US$ 3,500,000 (three million five hundred thousand United States
Dollars).
- -The loan of US$ 3,500,000 is required to finance the working capital
requirements of the Borrower, this sum having already been advanced by the
Lender to the Borrower pursuant to the Asset Purchase Agreement (hereinafter
defined).
- -Whereas in order to secure the due and punctual payment when due of all amounts
now or hereafter payable by the Borrower to Graham-Field under the Loan
Agreement
<PAGE> 67
2
(hereinafter the "OBLIGATIONS"), the Guarantor has agreed to guarantee the
performance of and payment by the Borrower to Graham-Field of the Obligations.
- -NOW THEREFORE, the parties do hereby enter into this Guarantee Agreement
(hereinafter the "Agreement") under the following terms and conditions:
ARTICLE 1
Unless otherwise defined herein, all terms used herein shall have the meanings
set forth in the Loan Agreement.
ARTICLE 2
In consideration of Graham-Field entering into the Loan Agreement with the
Borrower, the Guarantor hereby unconditionally and irrevocably guarantees to
make full payment to Graham-Field at demand of Graham-Field to the Guarantor of
the Obligations, together with all expenses incurred by Graham-Field in
enforcing any rights hereunder.
ARTICLE 3
The Guarantor hereby consents and agrees that Graham-Field may at any time, or
from time to time, may in its sole discretion:
(a) extend or change the time, manner, place and terms of payment of all or
any of the Obligations or amend the Loan Agreement for the purpose of
adding any provisions or changing in any manner the rights thereunder
of any or all of the parties thereto;
(b) settle or compromise with the Borrower, any and all of the Obligations,
or subordinate the payment of the same, or any part thereof, to the
payment of any other debts or claims which may at any time and from
time to time be due or owing to Graham-Field, all in such manner and
upon such terms as
<PAGE> 68
3
Graham-Field deems proper, and without notice to or further consent
from the Guarantor, and without affecting the liabilities and
obligations of the Guarantor hereunder.
ARTICLE 4
- -The Guarantor hereby represents and warrants to Graham-Field that:
(a) the making and performance by the Guarantor of this Agreement will not
violate any applicable laws, regulations, or other governmental
directive having the force of law, order of any courts or regulatory
body or arbitral tribunal, and will not conflict with or result in the
breach of any provision of and will not constitute a default or an
event by which the passage of time or giving of notice, or both, would
constitute a default under any agreement or instrument to which the
Guarantor is a party or by which he or any of his property or assets
are bound;
(b) all consents, approvals, licences and authorizations of, filings and
registration with, any governmental authority required under applicable
laws and regulations for the making and performance by the Guarantor of
this Agreement, have been obtained or made and are in full force and
effect;
(c) no litigation or administrative proceeding of or before any court or
governmental authority or any agency, the result of which would or
would be likely to have material adverse effect on its business, assets
or financial condition, is pending or threatened against him;
(d) this Agreement herein constitute legal, valid and binding obligations
of the Guarantor and enforceable in accordance with its terms and
conditions.
ARTICLE 5
5.1 The Guarantor hereby covenants and undertakes that he will not:
<PAGE> 69
4
(a) apply for or obtain any security from the Borrower which may,
directly or indirectly, reduce the ability of the Borrower to
pay the Obligations to Graham-Field pursuant to the Loan
Agreement or any agreements related thereto;
(b) in respect of the dissolution, winding up, or bankruptcy of
the Borrower or any other person presently or in the future
liable for the payment of the moneys hereby secured:
(i) directly or indirectly receive the benefit of any
distribution, dividend or payment; or
(ii) prove or claim in competition with Graham-Field so as
to diminish any distribution or dividend which but
for such proof or claim Graham-Field would be
entitled to receive, until all of the moneys hereby
secured have been paid to Graham-Field, and
Graham-Field is of the bona fide opinion that no part
of any such payment is void or voidable.
5.2 If a claim by any person that any payment to Graham-Field under or
incidental to the Loan Agreement (the "Payment") is void, voidable or
otherwise unenforceable is upheld, conceded or compromised:
(a) Graham-Field shall forthwith upon such claim being upheld,
conceded or compromised become entitled against the Guarantor
to all such rights in respect of the moneys hereby secured as
it would have had if the Payment or so much thereof as is held
or conceded to be void or voidable or as is foregone on
compromise had not taken place; and
(b) the Guarantor shall upon such claim being upheld, conceded or
compromised take all such steps and sign all such documents as
may
<PAGE> 70
5
be necessary or convenient to restore to Graham-Field this
Agreement immediately prior to such Payment.
ARTICLE 6
The Guarantor hereby waives notice of presentment, demand, protest and notice of
dishonour of any or all of the Obligations, promptness in commencing suit
against any party thereto or liable thereon, and in giving any notice to or of
making any claim or demand hereunder upon the Guarantor. No failure or delay by
Graham-Field to exercise any right, power of privilege granted hereunder shall
operate as a waiver thereor nor shall any single or partial exercise of such
right, power of privilege preclude any further exercise thereof or of any other
right, power or privilege.
ARTICLE 7
The guarantee hereunder shall be in addition to and shall not in any way be
prejudiced or affected by any other security or guarantee now held or hereafter
to be held by Graham-Field for all part of the amounts of money secured by this
guarantee. Also, any other guarantee granted or to be granted by any other
guarantors, if any, in favour of Graham-Field shall not in any way be prejudiced
or affected by this guarantee.
ARTICLE 8
The guarantee hereunder shall be applicable to the ultimate balance of the
Obligations that may become due and payable by the Borrower to Graham-Field
under the Loan Agreement and until all the said amounts have been duly paid, the
Guarantor shall not be entitled as against Graham-Field, to any right or surety
and/or to discharge its liability in respect of all amounts owed by the Borrower
to Graham-Field, unless and until all the Obligations shall have first been
completely discharged and satisfied.
ARTICLE 9
<PAGE> 71
6
The Guarantor hereby agrees that all amounts of money which cannot be obtained
by Graham-Field from the Borrower under the Loan Agreement whether because of
limitations according to the laws, incapability or incompetency of the Borrower,
or because of limitations of the person(s) acting in the name of the Borrower or
because of the Loan Agreement or any documents related thereto are not made by
the person(s) or party(ies) entitled thereto or because of a defect or mistake
in the document, shall be paid by the Guarantor as if the Guarantor was the sole
or principal debtor under the terms and conditions of the Loan Agreement.
ARTICLE 10
10.1 If for the purpose of obtaining judgement in any court in any country,
it becomes necessary to convert any amount due hereunder in currency
other than that provided for in the Loan Agreement, the conversion
shall be made at the rate of exchange prevailing either on the date of
default or on the Business Day prior to the date on which the judgement
is given, whichever shall be more favourable to Graham-Field.
10.2 If there is a change in the rate of exchange prevailing between the
date of default or the Business Day prior to the judgement date (as
applicable) and the date of payment of the amount due, the Guarantor
shall pay such additional amounts, if any, as may be necessary to
ensure that the amount paid on such date is the amount in the currency
in which the judgement was given, which when converted at the rate of
exchange prevailing on the date of payment equals the amount due
hereunder in the currency as provided for in the Loan Agreement.
10.3 Any additional amounts due from the Guarantor under this Article shall
be due as a separate obligation and shall not be affected by judgement
being obtained for any other sums due under or in respect of this
Agreement.
ARTICLE 11
<PAGE> 72
7
11.1 The Guarantor hereby grants an irrevocable power of attorney to
Graham-Field and its attorneys, to exercise all the rights and claims
which the Guarantor presently has or will have against the Borrower and
the Borrower's assets, with respect to: (i) any rights arising pursuant
to Article 1401 section 2, Article 1402 section 3 in conjunction with
Article 1840 of the Indonesian Civil Code; (ii) the proceeds or assets
of the Borrower in the event that the Borrower is liquidated; and (iii)
any moneys owing for any reason by the Borrower to the Guarantor,
provided that the assignment and authority granted with respect to this
sub-clause (iii) may be exercised by Graham-Field only upon the
occurrence of an Event of Default.
11.2 Any amounts received by the Guarantor from the Borrower being the
subject of the assignment under Article 11.2., shall be deemed to have
been received by the Guarantor and held by the Guarantor as agent for
and on behalf of Graham-Field. The Guarantor shall immediately notify
Graham-Field upon receipt of such amounts and pay the same to
Graham-Field.
ARTICLE 12
The obligations of the Guarantor hereunder are undertaken jointly and severally
with the obligations of the Borrower under the Loan Agreement or any other
persons giving security thereof under any other agreements supplemental or
ancillary to the Loan Agreement, each of the foregoing agreements as amended
from time to time, and action or actions may be brought or prosecuted against
the Guarantor whether or not action is brought against any other guarantor and
whether or not the Borrower or any other guarantor is joined in any such action
or actions for such purpose.
ARTICLE 13
13.1 Upon notice by Graham-Field to the Guarantor (which notice shall
constitute conclusive evidence of the liabilities and obligations of
the Guarantor hereunder) stating that a sum is hereunder, the Guarantor
shall immediately
<PAGE> 73
8
pay such sum in the currency specified in the notice in same day funds
to Graham-Field's account as it may then specify.
13.2 All sums owing hereunder shall be paid free and clear of any deduction
for any and all present and future taxes, duties, deductions or
withholdings. Should any such payment hereunder be made subject to any
such taxes, duties, deductions or withholdings whatsoever, the
Guarantor shall pay to Graham-Field such additional amounts as may be
necessary to equal to the full amounts due hereunder and the Guarantor
shall indemnify and save harmless Graham-Field by payment in cash
immediately upon demand from and against all taxes, duties, deductions
or withholdings with respect to this Agreement and the transaction
herein contemplated.
13.3 If any sum becomes due for payment hereunder on a day which is not a
Business Day such payment shall be made on the next succeeding Business
Day, or if the next succeeding Business Day falls within another
calendar month, then on the immediate preceding Business Day.
13.4 The Guarantor hereby expressly agrees that promulgation of any rule,
regulation or law or any interpretation thereof, having the effect of
restricting, prohibiting or impending in any way the remittance in any
amount due from the Borrower and the Guarantor to Graham-Field, shall
under no circumstances, constitute a ground for asserting the existence
of a force majeure situation and as such shall not excuse the Guarantor
from the due performance of its obligations hereunder.
ARTICLE 14
In the event that Graham-Field transfers or assigns any of its rights or
obligation in accordance with the Loan Agreement, such transferee or assignee
shall automatically become vested with all of the rights, powers, privileges and
duties of Graham-Field under this Agreement.
<PAGE> 74
9
The Guarantor hereby acknowledges that Graham-Field may assign all or any of its
rights or benefits hereunder to IBJ Whitehall Business Credit Corporation.
ARTICLE 15
15.1 The Guarantee provided herein is a continuing guarantee and shall be
automatically reinstated if, for any reason, any payment by or on
behalf of the Borrower shall be rescinded or must otherwise be
restored, whether as a result of any proceedings in bankruptcy or
reorganization or the like or otherwise. The guarantee provided herein
is the primary obligation of the Guarantor.
15.2 The Guarantor's present and future liability and the rights of
Graham-Field under this Agreement shall not be affected by Graham-Field
becoming party to or bound by any compromise, assignment of property,
scheme of arrangement, composition of debts or scheme of reconstruction
by or relating to the Borrower, any co-guarantor or any other person.
ARTICLE 16
The Guarantor hereby waives all of its rights and privileges under the
Indonesian Civil Code (to the extent applicable) as necessary to give full
effect to the Guarantee, including but not limited to Articles 1430, 1821, 1831,
1833, 1837, 1847, 1848 and 1849 thereof.
ARTICLE 17
17.1 Assignment. This Agreement shall be binding upon the Guarantor, its
assigns and transferees, and shall inure to the benefit of, and be
enforceable by Graham-Field, its successors, assigns and transferees,
provided, however that the Guarantor shall not assign or transfer its
rights and obligations hereunder without the prior written consent of
Graham-Field.
<PAGE> 75
10
17.2 Waiver. Failure by Graham-Field to exercise any or all of its rights
hereunder, or any partial exercise thereof, shall not act as a waiver
of such rights granted hereunder or by general law and there shall be
no need to wait for the occurrence or re-occurrence of a similar or any
other event giving rise to such rights.
17.3 Severability. If one or more of the provisions hereof shall be invalid,
illegal or unenforceable in any respect under any applicable law or
decision, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected or impaired in any
way. The Guarantor shall in any such event execute such additional
documents as Graham-Field may request in order to give effect to any
provision hereof which is determined to be invalid, illegal or
unenforceable.
17.4 Notices. All notices, requests, demands or other communications to or
upon the respective parties hereto shall be in writing and shall be
deemed to be duly given or made when delivered (in the case of personal
delivery) and when dispatched (in the case of facsimile provided that
answerback relating thereto has been received) to the party to which
such notice, request, demand or other communication is required or
permitted to be given under this Agreement addressed as follows:
IN CASE OF THE GUARANTOR, to:
Mr. Iwan Dewono Budiyuwono
Jalan Tulodong Bawah III/42, Senayan
Kebayoran Baru, Jakarta Selatan
Indonesia
Facsimile:
IN CASE OF GRAHAM-FIELD, to:
81 Spence Street, Bay Shore
NY 11706, USA
Facsimile: 1-516-439 5635
Attention: Mr. Richard S. Kolodny
-or to such other address as may be designated in writing by any party
in accordance with the foregoing.
<PAGE> 76
11
17.5 Governing Law. This Agreement and the performance hereof shall be
governed by the laws of the Republic of Indonesia.
17.6 Legal Domicile. For the purpose of this Agreement, the Guarantor hereby
chooses the Clerk's Office of the District Court in Central Jakarta
(Kantor Panitera Pengadilan Negeri Jakarta Pusat) as its legal and
permanent domicile. Notwithstanding anything hereinbefore mentioned the
Guarantor agrees that Graham-Field may, in its absolute discretion,
submit any dispute which may arise in connection with this Agreement to
any other District Court of Jakarta or to the District Court having
jurisdiction over the Guarantor or elsewhere.
- ------------------------
IWAN DEWONO BUDIYUWONO
- -------------------------------
GRAHAM-FIELD HEALTH PRODUCTS, INC.
Lara J. Peake
under Power of Attorney
<PAGE> 77
27
SCHEDULE FOUR
SPOUSAL CONSENT
<PAGE> 78
SCHEDULE 4
SPOUSAL CONSENT
I, Ellyanawati, the legal spouse of JOPPY KURNIADI NEGARA, do hereby give my
consent to my husband, to enter into and bind himself to various agreements
including, but not limited to the agreements and documents herein below
mentioned, with GRAHAM-FIELD HEALTH PRODUCTS, INC., a company duly incorporated
under the laws of the State of Delaware, with regard to his shareholding in the
authorized capital of PT. DHARMA POLIMETAL, a limited liability company
established pursuant to the laws of the Republic of Indonesia.
The agreements to be signed by my husband include, but are not limited to:
1. Loan Agreement;
2. Pledge of Shares Agreement;
3. Guarantee;
4. Any other agreements related to or connected with the above mentioned
agreements.
This consent is irrevocably and unconditionally granted on the 5th day of March,
1999 and is effective immediately.
/s/ Ellyanawati Negara
<PAGE> 79
SCHEDULE 4
SPOUSAL CONSENT
I, Inge Nangoi the legal spouse of IWAN DEWONO BUDIYUWONO, do hereby give my
consent to my husband, to enter into and bind himself to various agreements
including, but not limited to the agreements and documents herein below
mentioned, with GRAHAM-FIELD HEALTH PRODUCTS, INC., a company duly incorporated
under the laws of the State of Delaware, with regard to his shareholding in the
authorized capital of PT. DHARMA POLIMETAL, a limited liability company
established pursuant to the laws of the Republic of Indonesia.
The agreements to be signed by my husband include, but are not limited to:
1. Loan Agreement;
2. Pledge of Shares Agreement;
3. Guarantee;
4. Any other agreements related to or connected with the above mentioned
agreements.
This consent is irrevocably and unconditionally granted on the 5th day of March,
1999 and is effective immediately.
/s/ Inge Nangoi Budiyuwono
<PAGE> 1
Exhibit 10.24
January 26, 1999
VIA TELECOPIER
Elisabeth Ducottet
Thuasne, S.A.
65, Avenue Charles de Gaulle
92200 Neuilly-Sur-Seine
Paris, France
Mr. James M. Sack
Thaler Associates, Inc.
1331 F Street, NW, Suite 800
Washington, DC 20004
RE: DISTRIBUTION AGREEMENT BETWEEN
GRAHAM-FIELD AND THUASNE
Dear Elisabeth and James,
This letter hereby confirms that Graham-Field has agreed to convert
the current exclusive distribution agreement to a non-exclusive distribution
agreement effective immediately, until each of the parties can create a viable
structure for the future. Accordingly, if you are in agreement with converting
the current exclusive distribution agreement to a non-exclusive arrangement,
please indicate so by signing below.
If you have any questions or comments, please call me at (516)
439-5614.
Very truly yours,
Richard S. Kolodny
Executive Vice President,
General Counsel
ACCEPTED AND AGREED TO:
THUASNE
By: /s/ Elisabeth Ducottet
_____________________________
Name:
Title
Copy: Mr. Paul Bellamy
President and Chief Operating Officer
<PAGE> 2
Graham-Field Health Products, Inc.
81Spence Street
Bay Shore, New York 11706
<PAGE> 1
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated September 15, 1998, made by and among GRAHAM-FIELD
HEALTH PRODUCTS, INC., a corporation organized under the laws of the State of
Delaware ("Holdings"), GRAHAM-FIELD, INC., a corporation organized under the
laws of the State of New York ("Field"), EVEREST & JENNINGS, INC., a corporation
organized under the laws of the State of California ("E & J"), MEDICAL SUPPLIES
OF AMERICA, INC., a corporation organized under the laws of the State of Florida
("Medapex"), LUMEX/BASIC AMERICAN HOLDINGS, INC., a corporation organized under
the laws of the State of Delaware ("Lumex"), BASIC AMERICAN MEDICAL PRODUCTS,
INC., a corporation organized under the laws of the State of Georgia ("Basic
American"), LUMEX MEDICAL PRODUCTS, INC., a corporation organized under the laws
of the State of Delaware ("Lumex Medical"), PRISM ENTERPRISES, INC., a
corporation organized under the laws of the State of Delaware ("Prism") and
EVEREST & JENNINGS INTERNATIONAL LTD., a corporation organized under the laws of
the State of Delaware ("International") (Holdings, Field, E&J, Medapex, Lumex,
Basic American, Lumex Medical, Prism and International, each a "Pledgor" and,
jointly and severally, "Pledgors") to IBJ SCHRODER BUSINESS CREDIT CORPORATION,
as Agent (the "Pledgee").
BACKGROUND TO THE AGREEMENT
Pledgors (other than International), various other borrowers, various
lenders ("Lenders") and Pledgee are parties to a Revolving Credit and Security
Agreement dated as of December 10, 1996, as amended, modified and supplemented
from time to time, (the "Loan Agreement") pursuant to which Lenders and Pledgee
have agreed, subject to the terms and conditions contained therein, to provide
certain financial accommodations to Pledgors and such other borrowers.
In order to induce Pledgee to waive certain Events of Default and amend
certain financial covenants, Pledgors have agreed to pledge and grant a security
interest to Pledgee in the Pledged Collateral (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, Pledgor hereby agrees with Pledgee as follows:
SECTION 1. Defined Terms
Unless otherwise defined herein, terms defined in the Loan Agreement shall
have such defined meanings when used herein.
SECTION 2. Pledge
Each Pledgor hereby pledges, assigns, hypothecates, transfers and grants a
security interest to Pledgee in all of the following (the "Pledged Collateral"):
<PAGE> 2
(a) the shares of stock set forth on Schedule A annexed hereto and
expressly made a part hereof (the "Pledged Stock") applicable to such Pledgor,
the certificates representing the Pledged Stock and all dividends, cash,
instruments and other property or proceeds from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the Pledged Stock;
(b) all additional shares of stock of any issuer of the Pledged Stock (the
"Issuer") from time to time acquired by such Pledgor in any manner, including,
without limitation, stock dividends or a distribution in connection with any
increase or reduction of capital, reclassification, merger, consolidation, sale
of assets, combination of shares, stock split, spin-off or split-off (which
shares shall be deemed to be part of the Pledged Collateral), and the
certificates representing such additional shares, and all dividends, cash,
instruments and other property or proceeds from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of such shares; and
(c) all options and rights, whether as an addition to, in substitution of
or in exchange for any shares of the Pledged Stock and all dividends, cash and
instruments.
SECTION 3. Indebtedness Secured
This pledge is made to secure and the Pledged Collateral is security for
the payment of (a) all the Obligations and (b) any and all other indebtedness,
obligations and liabilities of Pledgors to Pledgee whether now existing or
hereafter arising, direct or indirect, liquidated or unliquidated, absolute or
contingent, due or not due and whether under, pursuant to or evidenced by a
note, agreement, guaranty, other instrument or otherwise ((a) and (b)
collectively, the "Indebtedness").
SECTION 4. Delivery of Pledged Collateral
All certificates representing or evidencing the Pledged Stock shall be
delivered to and held by or on behalf of Pledgee pursuant hereto and shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to Pledgee. Pledgors hereby authorize the
Issuer upon demand by Pledgee to deliver any certificates, instruments or other
distributions issued in connection with the Pledged Collateral directly to
Pledgee, in each case to be held by Pledgee, subject to the terms hereof. Upon
an Event of Default, Pledgee shall have the right, at any time in its discretion
and without notice to the Pledgors, to transfer to or to register in the name of
Pledgee or any of its nominees any or all of the Pledged Stock. In addition,
Pledgee shall have the right at any time to exchange certificates or instruments
representing or evidencing Pledged Stock for certificates or instruments of
smaller or larger denominations.
SECTION 5. Representations and Warranties
Pledgors represent and warrant to Pledgee that:
(a) Pledgors have the requisite power and authority to enter into this
Agreement, to
2
<PAGE> 3
pledge the Pledged Collateral for the purposes described herein and to carry out
the transactions contemplated by this Agreement.
(b) The execution, delivery and performance by Pledgors of this Agreement
have been duly and properly authorized and does not and will not result in any
violation of any agreement, indenture or other instrument, license, judgment,
decree, order, law, statute, ordinance or other governmental rule or regulation
applicable to Pledgors.
(c) This Agreement constitutes a legal, valid and binding obligation of
Pledgors enforceable in accordance with its terms.
(d) Each Pledgor is the direct and beneficial owner of each share of the
Pledged Stock which it has pledged pursuant hereto.
(e) All of the shares of the Pledged Stock have been duly authorized,
validly issued and are fully paid and nonassessable.
(f) Upon delivery of the Pledged Stock to Pledgee or an agent for Pledgee,
this Agreement creates and grants a valid first lien on and perfected security
interest in the Pledged Collateral and the proceeds thereof, subject to no prior
Lien, or to any agreement purporting to grant to any third party a Lien upon the
property or assets of Pledgors which would include the Pledged Collateral.
(g) There are no restrictions on transfer of the Pledged Stock contained
in the Certificate of Incorporation or by-laws of the Issuer or otherwise which
have not otherwise been enforceably and legally waived by the necessary parties.
(h) None of the Pledged Stock has been issued or transferred in violation
of the securities registration, securities disclosure or similar laws of any
jurisdiction to which such issuance or transfer may be subject.
(i) No consent, approval, authorization or other order of any Person and
no consent, authorization, approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required by the
Pledgor either (i) for the pledge of the Pledged Collateral pursuant to this
Agreement or for the execution, delivery or performance of this Agreement or
(ii) for the exercise by the Pledgee of the voting or other rights provided for
in this Agreement or the remedies in respect of the Pledged Collateral pursuant
to this Agreement, except as may be required in connection with such disposition
by laws affecting the offering and sale of securities generally.
(j) No notification of the pledge evidenced hereby to any Person is
required.
(k) As of the date hereof, there are no existing options, warrants, calls
or commitments of any such character whatsoever relating to any Pledged Stock
and no indebtedness or other security convertible into any Pledged Stock.
3
<PAGE> 4
(l) The Pledged Stock constitutes the percentage of the issued and
outstanding shares of capital stock of the Issuers thereof set forth on Schedule
A annexed hereto.
The representations and warranties set forth in this Section 5 shall
survive the execution and delivery of this Agreement.
SECTION 6. Covenants
Pledgors covenant that, until the Indebtedness shall be satisfied in full
and the Loan Agreement is irrevocably terminated:
(a) Except as otherwise permitted in the Loan Agreement, no Pledgor will
sell, assign, transfer, convey, or otherwise dispose of its rights in or to the
Pledged Collateral or any interest therein; nor will any Pledgor create, incur
or permit to exist any Lien whatsoever with respect to any of the Pledged
Collateral or the proceeds thereof other than that created hereby.
(b) Each Pledgor will, at its expense, defend Pledgee's right, title and
security interest in and to the Pledged Collateral against the claims of any
Person.
(c) Each Pledgor shall at any time, and from time to time, upon the
written request of Pledgee, execute and deliver such further documents and do
such further acts and things as Pledgee may reasonably request in order to
effect the purposes of this Agreement including, but without limitation,
delivering to Pledgee upon the occurrence of an Event of Default irrevocable
proxies in respect of the Pledged Collateral in form satisfactory to Pledgee.
Until receipt thereof, this Agreement shall constitute such Pledgor's proxy to
Pledgee or its nominee to vote all shares of Pledged Collateral then registered
in such Pledgor's name in accordance with Section 7 hereof.
(d) No Pledgor will consent to or approve the issuance of (i) any
additional shares of any class of capital stock of the Issuer; (ii) any
securities convertible either voluntarily by the holder thereof or automatically
upon the occurrence or nonoccurrence of any event or condition into, or any
securities exchangeable for, any such shares; or (iii) any warrants, options,
contracts or other commitments entitling any person to purchase or otherwise
acquire any such shares.
SECTION 7. Voting Rights and Dividends
In addition to Pledgee's rights and remedies set forth in Section 9
hereof, in case an Event of Default shall have occurred and has been declared by
Pledgee, Pledgee shall (i) vote the Pledged Collateral (ii) be entitled to give
consents, waivers and ratifications in respect of the Pledged Collateral
(Pledgors hereby irrevocably constituting and appointing Pledgee, with full
power of substitution, the proxy and attorney-in-fact of Pledgors for such
purposes) and (iii) be entitled to collect and receive for its own use cash
dividends paid on the Pledged Collateral. Pledgors shall not be permitted to
exercise or refrain from exercising any voting rights or other powers if, in the
reasonable judgment of Pledgee, such action would have a material adverse effect
on the value of the Pledged Collateral or any part thereof; and, provided,
further, that each Pledgor shall give at least five (5) days' written notice of
the manner in which such Pledgor
4
<PAGE> 5
intends to exercise, or the reasons for refraining from exercising, any voting
rights or other powers other than with respect to any election of directors and
voting with respect to any incidental matters. All dividends and all other
distributions in respect of any of the Pledged Collateral, whenever paid or
made, shall be delivered to Pledgee to hold as Pledged Collateral and shall, if
received by any Pledgor, be received in trust for the benefit of Pledgee, be
segregated from the other property or funds of such Pledgor, and be forthwith
delivered to Pledgee as Pledged Collateral in the same form as so received (with
any necessary endorsement).
SECTION 8. Event of Default
An Event of Default shall be deemed to have occurred and may be declared
by Pledgee upon the happening of any of the following events:
(a) An Event of Default shall occur under the Loan Agreement;
(b) Any Pledgor shall default in the performance of any of its obligations
under this Agreement or any other material agreement between such Pledgor and
Pledgee which is not cured within any applicable grace period; or
(c) Any representation or warranty made or furnished to Pledgee by or on
behalf of any Pledgor in this Agreement proves to have been false in any
material respect when made or furnished or any covenant made or furnished to
Pledgee by or on behalf of any Pledgor is breached, violated or not complied
with.
SECTION 9. Remedies
In case an Event of Default shall have occurred and be declared by
Pledgee, Pledgee may:
(a) Transfer any or all of the Pledged Collateral into its name, or
into the name of its nominee or nominees;
(b) Exercise all corporate rights with respect to the Pledged Collateral
including, without limitation, all rights of conversion, exchange, subscription
or any other rights, privileges or options pertaining to any shares of the
Pledged Collateral as if it were the absolute owner thereof, including, but
without limitation, the right to exchange, at its discretion, any or all of the
Pledged Collateral upon the merger, consolidation, reorganization,
recapitalization or other readjustment of the Issuer thereof, or upon the
exercise by the Issuer of any right, privilege or option pertaining to any of
the Pledged Collateral, and, in connection therewith, to deposit and deliver any
and all of the Pledged Collateral with any committee, depository, transfer
agent, registrar or other designated agent upon such terms and conditions as it
may determine, all without liability except to account for property actually
received by it;
(c) Subject to any requirement of applicable law, sell, assign and deliver
the whole or, from time to time, any part of the Pledged Collateral at the time
held by Pledgee, at any private sale or at public auction, with or without
demand, advertisement or notice of the time or
5
<PAGE> 6
place of sale or adjournment thereof or otherwise (all of which are hereby
waived, except such notice as is required by applicable law and cannot be
waived), for cash or credit or for other property for immediate or future
delivery, and for such price or prices and on such terms as Pledgee in its sole
discretion may determine, or as may be required by applicable law.
Each Pledgor hereby waives and releases any and all right or equity of
redemption, whether before or after sale hereunder. At any such sale, unless
prohibited by applicable law, Pledgee may bid for and purchase the whole or any
part of the Pledged Collateral so sold free from any such right or equity of
redemption. All moneys received by Pledgee hereunder whether upon sale of the
Pledged Collateral or any part thereof or otherwise shall be held by Pledgee and
applied by it as provided in Section 12 hereof. No failure or delay on the part
of Pledgee in exercising any rights hereunder shall operate as a waiver of any
such rights nor shall any single or partial exercise of any such rights preclude
any other or future exercise thereof or the exercise of any other rights
hereunder. Pledgee shall have no duty as to the collection or protection of the
Pledged Collateral or any income thereon nor any duty as to preservation of any
rights pertaining thereto, except to apply the funds in accordance with the
requirements of Section 12 hereof. Pledgee may exercise its rights with respect
to property held hereunder without resort to other security for or sources of
reimbursement for the Indebtedness. In addition to the foregoing, Pledgee shall
have all of the rights, remedies and privileges of a secured party under the
Uniform Commercial Code of New York regardless of the jurisdiction in which
enforcement hereof is sought.
SECTION 10. INTENTIONALLY OMITTED.
SECTION 11. Private Sale
Notwithstanding anything contained in Section 10, each Pledgor recognizes
that Pledgee may be unable to effect (or to do so only after delay which would
adversely affect the value that might be realized from the Pledged Collateral) a
public sale of all or part of the Pledged Collateral by reason of certain
prohibitions contained in the Securities Act of 1933, as amended (the
"Securities Act"), and may be compelled to resort to one or more private sales
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire such Pledged Collateral for their own account, for investment
and not with a view to the distribution or resale thereof. Each Pledgor agrees
that any such private sale may be at prices and on terms less favorable to the
seller than if sold at public sales and that such private sales shall be deemed
to have been made in a commercially reasonable manner. Each Pledgor agrees that
Pledgee has no obligation to delay sale of any Pledged Collateral for the period
of time necessary to permit the Issuer to register the Pledged Collateral for
public sale under the Securities Act.
SECTION 12. Proceeds of Sale
The proceeds of any collection, recovery, receipt, appropriation,
realization or sale of the Pledged Collateral shall be applied by Pledgee as
follows:
(a) First, to the payment of all costs, expenses and charges of Pledgee,
as such, or the reimbursement of Pledgee for the prior payment of such costs,
expenses and charges incurred in
6
<PAGE> 7
connection with the care and safekeeping of any of the Pledged Collateral
(including, without limitation, the expenses of any sale or other proceeding,
the expenses of any taking, reasonable attorneys' fees and expenses, court
costs, any other expenses incurred or expenditures or advances made by Pledgee
in the protection, enforcement or exercise of its rights, powers or remedies
hereunder) with interest on any such reimbursement at the rate prescribed in the
Loan Agreement as the Default Rate from the date of payment.
(b) Second, to the payment of the Indebtedness, in whole or in part, in
such order as Pledgee may elect, whether such Indebtedness is then due or not
due.
(c) Third, to such Persons as required by applicable law including,
without limitation, Section 9-504(1)(c) of the Uniform Commercial Code.
(d) Fourth, to the extent of any surplus thereafter remaining, to Pledgors
or as a court of competent jurisdiction may direct.
In the event that the proceeds of any collection, recovery, receipt,
appropriation, realization or sale are insufficient to satisfy the Indebtedness,
Pledgors shall be liable for the deficiency together with interest thereon at
the rate prescribed in the Loan Agreement as the Default Rate plus the
reasonable fees of any attorneys employed by Pledgee to collect such deficiency.
SECTION 13. Information
Each Pledgor will promptly give or cause to be given written notice to
Pledgee of any notices or other documents received by it with respect to Pledged
Collateral registered in the name of such Pledgor.
SECTION 14. Termination
This Agreement shall terminate and Pledgors shall be entitled to the
return, at Pledgors' expense, of such of the Pledged Collateral as has not
theretofore been sold or otherwise applied pursuant to this Agreement, together
with any moneys at any time held by Pledgee, upon payment in full of the
Indebtedness and irrevocable termination of the Loan Agreement, provided,
however, upon any permitted sale of any Pledged Collateral pursuant to the terms
of the Loan Agreement, Pledgors shall be entitled to the return of such Pledged
Collateral so long as it has not been sold or otherwise applied pursuant to this
Agreement.
SECTION 15. Concerning Pledgee
The recitals of fact herein shall be taken as statements of Pledgors for
which Pledgee assumes no responsibility. Pledgee makes no representation to
anyone as to the value of the Pledged Collateral or any part thereof or as to
the validity or adequacy of the security afforded or intended to be afforded
thereby or as to the validity of this Agreement. Pledgee shall be protected in
relying upon any notice, consent, request or other paper or document believed by
it to be genuine and correct and to have been signed by a proper person. The
permissive rights of
7
<PAGE> 8
Pledgee hereunder shall not be construed as duties of Pledgee. Pledgee shall be
under no obligation to take any action toward the enforcement of this Agreement
or rights or remedies in respect of any of the Pledged Collateral. Pledgee shall
not be personally liable for any action taken or omitted by it in good faith and
reasonably believed by it to be within the power or discretion conferred upon it
by this Agreement.
SECTION 16. Notices
Any notice or request hereunder may be given to Pledgors or to Pledgee at
their respective addresses set forth below or at such other address as may
hereafter be specified in a notice designated as a notice of change of address
under this Section. Any notice or request hereunder shall be given by (a) hand
delivery, (b) registered or certified mail, return receipt requested, (c)
telefax to the number set out below (or such other number as may hereafter be
specified in a notice designated as a notice of change of address) with
electronic confirmation of its receipt. Any notice or other communication
required or permitted pursuant to this Agreement shall be deemed given (a) when
personally delivered to any officer of the party to whom it is addressed, (b) on
the earlier of actual receipt thereof or three (3) days following posting
thereof by certified or registered mail, postage prepaid, or (c) upon actual
receipt thereof when sent by a recognized overnight delivery service or (d) upon
actual receipt thereof when sent by telecopier to the number set forth below
with electronic confirmation of receipt, in each case addressed to each party at
its address set forth below or at such other address as has been furnished in
writing by a party to the other by like notice:
(A) If to Pledgee, at: IBJ Schroder Business Credit Corporation
One State Street
New York, New York 10004
Attention: James M. Steffy
Telephone: (212) 858-2094
Telecopier: (212) 858-2151
with a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118-0075
Attention: Steven J. Seif, Esq.
Telephone: (212) 946-0294
Telecopier: (212) 594-7167
(B) If to Pledgor, at: c/o Graham-Field Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
Attention: Vice President Finance
Telephone: (516) 582-5900
Telecopier: (516) 582-5608
8
<PAGE> 9
with a copy to: Graham-Field Health Products, Inc.
400 Rabro Drive East
Hauppauge, New York 11788
Attention: Richard S. Kolodny, Esq.
Vice President and General Counsel
Telephone: (516) 582-5900
Telecopier: (516) 582-5608
SECTION 17. Governing Law.
This Agreement and all rights and obligations hereunder shall be governed
by and construed in accordance with the laws of the State of New York applied to
contracts to be performed wholly within the State of New York.
SECTION 18 Waivers.
PLEDGORS AND PLEDGEE EACH HEREBY EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR
THE TRANSACTIONS RELATING HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING
OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE; AND
PLEDGORS AND PLEDGEE EACH HEREBY AGREE AND CONSENT THAT ANY SUCH ACTIONS OR
PROCEEDINGS SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT EITHER PARTY
MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER PARTY TO THE WAIVER OF ITS RIGHT TO
TRIAL BY JURY.
SECTION 19. Litigation.
EACH PLEDGOR EXPRESSLY CONSENTS TO THE JURISDICTION AND VENUE OF THE
SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, AND OF THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR ALL PURPOSES IN
CONNECTION WITH THIS AGREEMENT. ANY JUDICIAL PROCEEDING BY ANY PLEDGOR AGAINST
PLEDGEE INVOLVING, DIRECTLY OR INDIRECTLY ANY MATTER OR CLAIM IN ANY WAY ARISING
OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE
SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK OR THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. EACH PLEDGOR FURTHER
CONSENTS THAT ANY SUMMONS, SUBPOENA OR OTHER PROCESS OR PAPERS (INCLUDING,
WITHOUT LIMITATION, ANY NOTICE OR MOTION OR OTHER APPLICATION TO EITHER OF THE
AFOREMENTIONED COURTS OR A JUDGE THEREOF) OR ANY NOTICE IN CONNECTION WITH ANY
PROCEEDINGS HEREUNDER, MAY BE SERVED INSIDE OR
9
<PAGE> 10
OUTSIDE OF THE STATE OF NEW YORK OR THE SOUTHERN DISTRICT OF NEW YORK BY
REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY PERSONAL SERVICE
PROVIDED A REASONABLE TIME FOR APPEARANCE IS PERMITTED, OR IN SUCH OTHER MANNER
AS MAY BE PERMISSIBLE UNDER THE RULES OF SAID COURTS. EACH PLEDGOR WAIVES ANY
OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREON AND SHALL
NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON
FORUM NON CONVENIENS.
SECTION 20. No Waiver; Cumulative Remedies.
No failure on the part of Pledgee to exercise, and no delay in exercising,
any right, power or remedy hereunder shall operate as a waiver thereof nor shall
any single or partial exercise of any such right, power or remedy by Pledgee
preclude any other or further exercise thereof or the exercise of any right,
power or remedy. All remedies hereunder are cumulative and are not exclusive of
any other remedies provided by law.
SECTION 21. Severability.
In case any security interest or other right of Pledgee shall be held to
be invalid, illegal or unenforceable, such invalidity, illegality or
unenforceability shall not affect any other security interest or other right,
privilege or power granted under this Agreement.
SECTION 22. Counterparts.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which when taken together shall
constitute one and the same agreement.
SECTION 23. Miscellaneous
Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing, signed by
Pledgee and Pledgors. The provisions of this Agreement shall be binding upon the
successors and assigns of Pledgors. The term "Pledgee", as used herein, shall
include any successor or assign of Pledgee at the time entitled to the pledged
interest in the Pledged Collateral. The headings in this Agreement are for
purposes of reference only and shall not limit or define the meaning hereof.
SECTION 24. Captions
The captions at various places in this Agreement are intended for
convenience only and do not constitute and shall not be interpreted as part of
this Agreement.
SECTION 25. Recapture
Anything in this Agreement to the contrary notwithstanding, if Pledgee
receives any
10
<PAGE> 11
payment or payments on account of the Indebtedness, which payment or payments or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver, or
any other party under the United States Bankruptcy Code, as amended, or any
other federal or state bankruptcy, reorganization, moratorium or insolvency law
relating to or affecting the enforcement of creditors' rights generally, common
law or equitable doctrine, then to the extent of any sum not finally retained by
Pledgee, Pledgors' obligations to Pledgee shall be reinstated and this Agreement
shall remain in full force and effect (or be reinstated) until payment shall
have been made to Pledgee, which payment shall be due on demand.
IN WITNESS WHEREOF, Pledgors have caused this Agreement to be duly
executed as of the ___ day of September, 1998.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
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.
EVEREST & JENNINGS INTERNATIONAL, LTD.
By: /s/ Rodney F. Price
-----------------------------------------
Its: Chairman of the Board and
Chief Executive Officer
IBJ SCHRODER BUSINESS CREDIT CORPORATION, As
Agent
By: /s/ Signature Illegible
-----------------------------------------
Its: Vice President
11
<PAGE> 12
STATE OF NEW YORK )
: ss.:
COUNTY OF )
On the ___ day of September, 1998, before me personally came Rodney F.
Price, to me known, who being by me duly sworn, did depose and say that he is an
Officer of each Pledgor, the corporations described in and which executed the
above instrument; and that he signed his name thereto by like order of the board
of directors of said corporations.
/s/ Beatrice Scherer
----------------------------------
Notary Public
BEATRICE SCHERER
Notary Public, State of New York
No. 4640263
Qualified in Suffolk County
Commission Expires September 30, 1998
12
<PAGE> 13
SCHEDULE A
TO PLEDGE AGREEMENT DATED AS OF September 15, 1998, made by and among
GRAHAM-FIELD HEALTH PRODUCTS, INC., a corporation organized under the laws of
the State of Delaware ("Holdings"), GRAHAM-FIELD, INC., a corporation organized
under the laws of the State of New York ("Field"), EVEREST & JENNINGS, INC., a
corporation organized under the laws of the State of California ("E & J"),
MEDICAL SUPPLIES OF AMERICA, INC., a corporation organized under the laws of the
State of Florida ("Medapex"), LUMEX/BASIC AMERICAN HOLDINGS, INC., a corporation
organized under the laws of the State of Delaware ("Lumex"), BASIC AMERICAN
MEDICAL PRODUCTS, INC., a corporation organized under the laws of the State of
Georgia ("Basic American"), LUMEX MEDICAL PRODUCTS, INC., a corporation
organized under the laws of the State of Delaware ("Lumex Medical"), PRISM
ENTERPRISES, INC., a corporation organized under the laws of the State of
Delaware ("Prism") and EVEREST & JENNINGS INTERNATIONAL LTD., a corporation
organized under the laws of the State of Delaware ("International") (Holdings,
Field, E&J, Medapex, Lumex, Basic American, Lumex Medical, Prism and
International each a "Pledgor" and, jointly and severally, "Pledgors") to IBJ
SCHRODER BUSINESS CREDIT CORPORATION, as Agent (the "Pledgee").
SEE ATTACHED
<PAGE> 14
1. GRAHAM-FIELD HEALTH PRODUCTS, INC.
<TABLE>
<CAPTION>
% OF ISSUED
STOCK AND
CLASS OF CERTIFICATE PAR NUMBER OF OUTSTANDING
ISSUER STOCK NUMBER VALUE SHARES STOCK
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
a. Graham-Field Express, Inc. -- Merged into Graham-Field, Inc. as of June 18, 1998 (see Schedule I to
Amendment Number 6)
- --------------------------------------------------------------------------------------------------------------
b. Graham-Field, Inc. Class A 1 $1.00 5,000 100%
Common
Class B 2 $1.00 5,000 100%
Common
- --------------------------------------------------------------------------------------------------------------
c. Zens Data Systems, Inc. Common 1 $1.00 100 100%
(formerly known as
Medisco, Inc.)
- --------------------------------------------------------------------------------------------------------------
d. Graham-Field Express Common 1 $ .01 10 100%
(Puerto Rico), Inc.
- --------------------------------------------------------------------------------------------------------------
e. Everest & Jennings Common 1 $ .01 100 100%
International Ltd.*
- --------------------------------------------------------------------------------------------------------------
f. LaBac Systems, Inc. Common 1 No Par 54,406 100%
- --------------------------------------------------------------------------------------------------------------
g. Medical Supplies of Common 1 $1.00 2,100 100%
America, Inc.
- --------------------------------------------------------------------------------------------------------------
h. Lumex/Basic American Common 1 $ .01 100 100%
Holdings, Inc.
- --------------------------------------------------------------------------------------------------------------
i. Graham-Field Sales Corp. Common 1 $ .01 100 100%
- --------------------------------------------------------------------------------------------------------------
j. Graham-Field Express Common 1 $ .01 100 100%
(Dallas), Inc.
- --------------------------------------------------------------------------------------------------------------
k. Rabson Medical Sales, Common 1 No Par 200 100%
Inc.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* E&J Acquisition Corp. merged with and into Everest & Jennings International
Ltd. and the capital stock of E&J Acquisition Corp. was converted into the
capital stock of Everest & Jennings International Ltd. pursuant to the
Graham-Field Everest & Jennings merger completed on November 27, 1996.
<PAGE> 15
2. Everest & Jennings International Ltd.
<TABLE>
<CAPTION>
% of Issued
Stock and
Class of Certificate Par Number of Outstanding
Issuer Stock Number Value Shares Stock
- ------ -------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
a. Everest & Jennings, Inc. Common 87 $100.00 8,906 100%
b. Everest & Jennings de
Mexico, S.A. de C.V. Common 1 N/A 217,100 65%
C. Smith & Davis
Manufacturing Company Common 1 $ 1.00 100,000 100%
</TABLE>
3. Everest & Jennings, Inc.
<TABLE>
<CAPTION>
% of Issued
Stock and
Class of Certificate Par Number of Outstanding
Issuer Stock Number Value Shares Stock
- ------ -------- ----------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
a. Everest & Jennings
Canadian, Limited Common 17 No Par 6,500 65%
b. Kuschall of America, Inc. Common 1 $.01 2,542,448 100%
</TABLE>
4. Graham-Field, Inc.
<TABLE>
<CAPTION>
% of Issued
Stock and
Class of Certificate Par Number of Outstanding
Issuer Stock Number Value Shares Stock
- ------ -------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
a. Aqua Therm Corp.
(formerly known as
AquaTherm Acquisition
Corp.) Common 1 $.01 100 100%
b. Graham-Field Temco, Inc. Common 1 $.01 10 100%
c. Graham-Field European
Distribution Corporation
Limited Common 1 One Irish 2 100%
Pound
d. Graham-Field
Distribution, Inc. Common 1 $.01 10 100%
e. Graham-Field Bandage,
Inc. Common 1 $.01 10 100%
</TABLE>
<PAGE> 16
5. MEDICAL SUPPLIES OF AMERICA, INC.
<TABLE>
<CAPTION>
% OF ISSUED
STOCK AND
CLASS OF CERTIFICATE PAR NUMBER OF OUTSTANDING
ISSUER STOCK NUMBER VALUE SHARES STOCK
------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
a. Health Care Wholesalers, Inc. Common 1 $1.00 500 100%
b. HC Wholesalers, Inc. Common 4 $1.00 500 100%
c. Critical Care Associates, Inc. Common 1 $1.00 100 100%
Common 2 $1.00 400
</TABLE>
6. LUMEX/BASIC AMERICAN HOLDINGS, INC.
<TABLE>
<CAPTION>
% OF ISSUED
STOCK AND
CLASS OF CERTIFICATE PAR NUMBER OF OUTSTANDING
ISSUER STOCK NUMBER VALUE SHARES STOCK
------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
a. Basic American Medical Products, Inc. Common 1 $.01 100 100%
b. Prism Enterprises, Inc. Class A A-10 $.01 1,000 100%
Common
c. Lumex Medical Products, Inc. Common 1 $.01 1,000 100%
(formerly known as MUL Acquisition
Corp. I)
</TABLE>
7. LUMEX MEDICAL PRODUCTS, INC.
<TABLE>
<CAPTION>
% OF ISSUED
STOCK AND
CLASS OF CERTIFICATE PAR NUMBER OF OUTSTANDING
ISSUER STOCK NUMBER VALUE SHARES STOCK
------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
a. Lumex Sales and Distribution Co., Inc. Common 1 $1.00 1,000 100%
b. MUL Acquisition Corp. II Common 1 $.01 1,000 100%
</TABLE>
<PAGE> 17
8. Prism Enterprises, Inc.
<TABLE>
<CAPTION>
% of Issued
Stock and
Class of Certificate Par Number of Outstanding
Issuer Stock Number Value Shares Stock
- ------ -------- ----------- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
a. PrisTech, Inc. Common 1 $.01 1,000 100%
</TABLE>
9. Basic American Medical Products, Inc.
<TABLE>
<CAPTION>
% of Issued
Stock and
Class of Certificate Par Number of Outstanding
Issuer Stock Number Value Shares Stock
- ------ -------- ----------- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
a. Basic American Sales Common 1 $1.00 1,000 100%
and Distribution
Co., Inc.
</TABLE>
<PAGE> 1
WAIVER AND AMENDMENT NO. 7
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS WAIVER AND AMENDMENT NO. 7 ("Amendment") is entered into as of
April 22, 1999, by and among GRAHAM-FIELD HEALTH PRODUCTS, INC., a corporation
organized under the laws of the State of Delaware ("Holdings"), GRAHAM-FIELD,
INC., a corporation organized under the laws of the State of New York ("Field"),
GRAHAM-FIELD TEMCO, INC., a corporation organized under the laws of the State of
New Jersey ("Temco"), GRAHAM-FIELD DISTRIBUTION, INC., a corporation organized
under the laws of the State of Missouri ("Distribution"), GRAHAM-FIELD BANDAGE,
INC., a corporation organized under the laws of the State of Rhode Island
("Bandage"), GRAHAM-FIELD EXPRESS (PUERTO RICO), INC., a corporation organized
under the laws of the State of Delaware ("GFPR"), EVEREST & JENNINGS, INC., a
corporation organized under the laws of the State of California ("E & J"), LABAC
SYSTEMS, INC., a corporation organized under the laws of the State of Colorado
("LaBac"), MEDICAL SUPPLIES OF AMERICA, INC., a corporation organized under the
laws of the State of Florida ("Medapex"), HEALTH CARE WHOLESALERS, INC., a
corporation organized under the laws of the State of Georgia ("Health Care"), H
C WHOLESALERS, INC., a corporation organized under the laws of the State of
Georgia ("HCW"), CRITICAL CARE ASSOCIATES, INC., a corporation organized under
the laws of the State of Georgia ("Critical"), LUMEX/BASIC AMERICAN HOLDINGS,
INC., a corporation organized under the laws of the State of Delaware ("Lumex"),
BASIC AMERICAN MEDICAL PRODUCTS, INC., a corporation organized under the laws of
the State of Georgia ("Basic American"), LUMEX MEDICAL PRODUCTS, INC., a
corporation organized under the laws of the State of Delaware ("Lumex Medical"),
PRISM ENTERPRISES, INC., a corporation organized under the laws of the State of
Delaware ("Prism"), BASIC AMERICAN SALES AND DISTRIBUTION CO., INC., a
corporation organized under the laws of the State of Delaware ("Basic
Distribution"), PRISTECH, INC., a corporation organized under the laws of the
State of Delaware ("Pristech"), LUMEX SALES AND DISTRIBUTION CO., INC., a
corporation organized under the laws of the State of Delaware ("Lumex
Distribution") and MUL ACQUISITION CORP. II, a corporation organized under the
laws of the State of Delaware ("Mul Acquisition") (each a "Borrower" and
collectively "Borrowers"), the financial institutions which are now or which
hereafter become a party to (collectively, the "Lenders" and individually a
"Lender") the Loan Agreement (as defined below) and IBJ WHITEHALL BUSINESS
CREDIT CORPORATION, a New York corporation ("IBJ"), as agent for Lenders (IBJ,
in such capacity, the "Agent").
BACKGROUND
Borrowers, Lenders and Agent are parties to a Revolving Credit and
Security Agreement dated as of December 10, 1996, as amended by an Amendment
Letter dated May 15, 1997, Amendment No. 1 dated June 25, 1997, Amendment No. 2
dated July 9, 1997, Amendment No. 3 dated July 9, 1997, a Letter Amendment dated
September 18, 1997, Amendment No. 4 and
<PAGE> 2
Joinder Agreement dated December 30, 1997, an Amendment No. 5 dated as of April
13, 1998 and an Amendment No. 6 dated August 18, 1998 (as further amended,
supplemented or otherwise modified from time to time, the "Loan Agreement")
pursuant to which Lenders provide Borrowers with certain financial
accommodations.
Borrowers have requested that Agent and Lenders waive various Events of
Default that have occurred and make certain amendments to the Loan Agreement,
and Agent and Lenders are willing to do so on the terms and conditions set forth
below.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrowers by Agent
and/or Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings given to them in the Loan Agreement.
2. Waiver. Subject to the satisfaction of the conditions precedent set
forth in Section 6 below, Agent and Lenders hereby waive the Events of Default
that have occurred as a result of Borrowers' non-compliance with (i) Sections
6.6(b) and (c) of the Loan Agreement for the fiscal periods ending December 31,
1998 and March 31, 1999, but only to the extent Net Cash Flow for the fiscal
quarter ending (x) December 31, 1998 for the immediately preceding six (6) month
period was not less than $(35,000,000) and (y) March 31, 1999 for the
immediately preceding nine (9) month period was not less than $(42,000,000),
(ii) Sections 6.7(e) and (f) of the Loan Agreement but only to the extent EBITDA
for the fiscal quarter ending (x) December 31, 1998 was not less than
$(21,000,000) and (y) March 31, 1999 was not less than $(7,000,000), (iii)
Section 9.7 of the Loan Agreement but only to the extent the annual financial
statements are delivered to Agent by on or prior to May 15, 1999, (iv) Section
9.9 of the Loan Agreement for the months of January, February and March, 1999
but only to the extent the monthly financial statements required thereunder for
such months are delivered to Agent by May 15, 1999, (v) Sections 9.10, 9.12 and
9.13 of the Loan Agreement prior to the Amendment No. 7 Effective Date, (vi)
Section 10.10 of the Loan Agreement to the extent that a Material Adverse Effect
occurred as a result of write-offs taken by Borrowers as of December 31, 1998,
and (vii) Section 10.12 of the Loan Agreement to the extent any events of
default that have occurred under the BIL Note are waived or cured prior to the
Amendment No. 7 Effective Date.
3. Amendment to Loan Agreement. Subject to satisfaction of the
conditions precedent set forth in Section 6 below, the Loan Agreement is amended
as follows:
(a) The following definitions are added to Section 1.2:
"Amendment No. 7" shall mean Waiver and Amendment No. 7 to
Revolving Credit and Security Agreement dated as of April 22,
1999.
"Amendment No. 7 Effective Date" shall mean the date all of the
conditions set forth in Section 6 of Amendment No. 7 have been
satisfied.
2
<PAGE> 3
"Business Plan" shall have the meaning set forth in Section 6.15
hereof.
"June 30th, 1999 Waiver Fee" shall have the meaning set forth in
Section 6.17 hereof.
"Net Book Value" shall mean the book value of assets as
reflected on the books and records of Holdings (net of
allowances for accumulated depreciation and doubtful accounts)
in accordance with GAAP.
"Payment Date" shall have the meaning set forth in Section 6.17
hereof.
(b) The following definitions in Section 1.2 are amended as follows:
"Availability Reserve" shall mean $16,500,000.
"Maximum Revolving Advance Amount" shall mean $50,000,000.
"Restructuring Charge Reserve" shall mean $0.
(c) Section 2.1(a) of the Loan Agreement is amended in its entirety
to provide as follows:
"2.1. (a) Revolving Advances. Subject to the terms and
conditions set forth in this Agreement, each Lender, severally
and not jointly, will make Revolving Advances to Borrowers in
aggregate amounts outstanding at any time equal to such Lender's
Commitment Percentage of the lesser of (x) the Maximum Revolving
Advance Amount less the sum of (i) the aggregate amount of
outstanding Letters of Credit and Acceptances and Spot Contracts
and (ii) the FX Reserve or (y) an amount equal to the sum of:
(i) up to 85%, subject to the provisions of Section
2.1(b) hereof ("Receivables Advance Rate"), of Eligible
Receivables, plus
(ii) up to the lesser of (A) 20%, subject to the
provisions of Section 2.1(b) hereof ("Inventory Advance
Rate"), of the value of the Eligible Inventory (the
Receivables Advance Rate and the Inventory Advance Rate shall
be referred to collectively, as the "Advance Rates") or (B)
$40,000,000 in the aggregate at any one time (inclusive of
amounts advanced pursuant to clause (iii) below), plus
(iii) the product of (a) the aggregate amount of
outstanding trade Letters of Credit times (b) the Inventory
Advance Rate, minus
3
<PAGE> 4
(iv) the aggregate amount of outstanding Letters of
Credit and Acceptances and Spot Contracts, minus
(v) the FX Reserve, minus
(vi) the Availability Reserve, minus
(vii) such reserves as determined in good faith by
Agent from time to time in the exercise of its discretion in a
reasonable manner, including, without limitation, reserves for
Liens permitted under subparagraphs (h) and (i) under the
definition of Permitted Encumbrances.
The amount derived from the sum of (x) Sections
2.1(a)(y)(i) and (ii) and (iii) minus the sum of (y) Sections
2.1 (a)(y)(v) and (vi) and (vii) at any time and from time to
time shall be referred to as the "Formula Amount". The
Revolving Advances shall be evidenced by the secured
promissory notes ("Revolving Credit Notes") substantially in
the form attached hereto as Exhibit 2.1(a).
At such time and for so long as (i) the Receivables
and Inventory of E & J Canada are subject to a first priority
perfected security interest in favor of Agent and (ii) the
eligibility criteria set forth in this Agreement are met (it
being deemed for purposes of this determination that E & J
Canada is a "Borrower"), the determination of the Formula
Amount shall include the Eligible Receivables and Eligible
Inventory of E & J Canada."
(d) A new Section 5.23 is added to the Loan Agreement which
provides as follows:
"5.23. Year 2000. Borrowers and their Subsidiaries have
reviewed and are in the process of reviewing the areas within their
business and operations which could be adversely affected by, and have
developed or are developing a program to address on a timely basis, the
risk that certain computer applications used by Borrowers and their
Subsidiaries (or any of their respective material suppliers, customers
or vendors) may be unable to recognize and perform properly
date-sensitive functions involving dates prior to and after December
31, 1999 (the "Year 2000 Problem")."
(e) Sections 6.6(d), (e), (f) and (g) of the Loan Agreement
are amended in their entirety to provide as follows:
(d) Cause Net Cash Flow to be equal to or greater than
($12,000,000) at the end of the fiscal quarter ending June 30, 1999 for
the immediately preceding fiscal quarter;
4
<PAGE> 5
(e) Cause Net Cash Flow to be equal to or greater than
($12,000,000) at the end of the fiscal quarter ending September 30,
1999 for the immediately preceding fiscal quarter;
(f) Cause Net Cash Flow to be equal to or greater than
($5,000,000) at the end of the fiscal quarter ending December 31, 1999
for the immediately preceding fiscal quarter;
(g) Cause Net Cash Flow to be equal to or greater than $0 at
the end of the fiscal quarter ending March 31, 2000 and at the end of
each fiscal quarter thereafter, in each case with respect to such
fiscal quarter then ended.
For purposes of calculating Net Cash Flow pursuant to this
Section 6.6, the financial impact of the Selinger Separation Agreement
shall be excluded."
(f) Sections 6.7(g), (h) and (i) are deleted in their entirety.
(g) New Sections 6.15, 6.16 and 6.17 are added to the Loan Agreement
which provide as follows:
"6.15. Business Plan. Borrowers shall provide agent with a new business
plan (the "Business Plan") on or prior to June 30, 1999. The Business
Plan shall be reasonably satisfactory to Agent in all respects in the
exercise of its good faith.
6.16. Manager. Borrowers shall continue to use Jay Alix and Associates,
a crisis manager or other management personnel reasonably acceptable to
Agent in its sole discretion until the Obligations have been paid in
full and the Loan Agreement irrevocably terminated.
6.17. June 30th, 1999 Waiver Fee. In the event that the Obligations
have not been repaid in full and the Loan Agreement irrevocably
terminated on or prior to June 30, 1999 (the "Payment Date"); Borrowers
shall pay Lenders a waiver fee of $400,000 (the "June 30th, 1999 Waiver
Fee"), provided, however, if Borrowers have submitted the Business Plan
on or prior to June 30, 1999 and the terms and conditions of the
Business Plan are satisfactory to all Lenders in their sole discretion,
then Lenders, in their sole and absolute discretion, shall consider
waiving Borrowers' requirement to pay the June 30th, 1999 Waiver Fee
and any such waiver shall only be effective upon the written consent of
all Lenders; provided, however, that Lenders shall not have any
obligation whatsoever to waive such fee. Notwithstanding the foregoing,
in the event Borrowers are in receipt on or before June 30, 1999 of a
letter of intent (which is satisfactory to Agent in its reasonable
discretion), a binding commitment
5
<PAGE> 6
letter or a binding agreement (Agent in its reasonable discretion shall
determine whether such commitment letter or agreement is binding) to (x)
sell all or a part of Borrowers' assets or equity securities in a sale,
merger, consolidation or other similar transaction, which results in the
repayment in cash of all outstanding Obligations or (y) refinance and
repay in cash all outstanding Obligations (the transactions referred to
in clauses (x) and (y) are individually referred to as a "Significant
Transaction"), the payment date for the June 30th, 1999 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, or September 30, 1999. For purposes of this
Section 6.17 only, the term "Lenders" shall include only those financial
institutions that were Lenders on the Amendment No. 7 Effective Date."
(h) Section 7.1(b)(iv)(a) is amended by deleting the reference to
"$1,000,000" and replacing such amount with the following language: "a
Net Book Value of $2,000,000".
(i) the following sentence is added at the end of Section 7.1(b):
"Notwithstanding the foregoing, Section 7.1(b)(ii) and (iii)
shall not be applicable in connection with sales which comply with
Section 7.1(b)(iv)(a)."
(j) Section 7.4 is amended in its entirety to provide as follows:
"7.4. Investments. Make any investment or purchase or acquire
obligations or stock of, or any other interest in, any Person."
(k) Section 7.6 is amended in its entirety to provide as follows:
"7.6. Capital Expenditures. Contract for, purchase or make any
expenditure or commitments for fixed or capital assets (including
capitalized leases) in any fiscal year in an aggregate amount for all
Borrowers in excess of $12,000,000.
(l) Section 7.1(c) is amended in its entirety to provide as follows:
(c) Except as set forth in Section 7.7 hereof, issue, sell,
transfer or otherwise dispose of, or make an equity offering for the
sale of, any stock of any of the Borrowers, provided, however (i)
Holdings may issue, sell, transfer or otherwise dispose of the common
stock of Express and may make an offering of, sell or issue additional
shares of its own common stock or other securities and (ii) Express
may issue additional shares of common stock and make an equity
offering of its own common stock, if in each case set forth in clauses
(i) and (ii) above, after giving effect to such issuance and related
sale, disposition or offering, as respects
6
<PAGE> 7
Holdings no Change of Control has occurred and as respects Express,
Holdings or any Subsidiary of Holdings owns at least fifty-one percent
(51%) of the outstanding stock of Express, and, the proceeds, if any,
of such sale, disposition or offering are remitted to Agent to be
applied to the Obligations in such order as Agent may in its sole
discretion determine.
(m) Article X is amended by deleting the period at the end thereof and
adding the following language at the end thereof:
"or 10.22 failure by Borrowers to deliver to Agent by May 15, 1999
audited financial statements for the period ending December 31, 1998,
together with an unqualified audit opinion by Ernst & Young LLP."
(n) Section 13.1 is amended in its entirety to provide as follows:
"13.1. Term. This Agreement, which shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns
of each Borrower, Agent and each Lender (except that only the
financial institutions that were Lenders on the Amendment No. 7
Effective Date shall be entitled to share the June 30th, 1999 Waiver
Fee), shall become effective on the date hereof and shall continue in
full force and effect until April 30, 2000 (the "Term") unless sooner
terminated as herein provided. Borrowers may terminate this Agreement
at any time upon thirty (30) days' prior written notice upon payment
in full of the Obligations. In the event the Obligations are prepaid
in full prior to the last day of the Term (the date of such prepayment
hereinafter referred to as the "Early Termination Date"), Borrowers
shall pay to Agent for the pro rata benefit of Lenders (based on their
Commitment Percentages) an early termination fee in an amount equal to
one percent (1.00%) of the Maximum Revolving Advance Amount if the
Early Termination Date occurs on or after the Closing Date to and
including April 29, 2000; provided, however, that Borrowers shall not
be required to pay such early termination fee if Borrowers paid the
June 30th, 1999 Waiver Fee on or prior to the Early Termination Date."
4. E&J Canada Release. Upon E&J Canada obtaining financing of its assets on
terms and conditions reasonably satisfactory to Agent and Required Lenders and
upon repayment of Revolving Advances in an amount equal to the Receivables
Advance Rate multiplied by the amount of Eligible Receivables plus an amount
equal to the Inventory Advance Rate multiplied by the amount of Eligible
Inventory of E&J Canada, Agent shall, at Borrowers' sole cost and expense,
release its security interest in the assets of E&J Canada. In addition, Agent
and Lenders agree that for purposes of calculating Eligible Inventory, the
$7,700,000 reserve which Agent and Lenders instituted prior to the Amendment No.
7 Effective Date shall be eliminated, provided, however, Agent and Lenders may
reinstate such reserve or other reserves at any time in accordance with the
terms of the Loan Agreement.
7
<PAGE> 8
5. Consent. Agent and Lenders agree that notwithstanding the provisions of
the Loan Agreement, Borrower may (i) enter into the Agreement for Purchase and
Sale of Real Property attached hereto and sell the Real Estate owned by Holdings
in DeKalb County, Georgia substantially in accordance with the terms and
provisions of the Agreement for Purchase and Sale of Real Property thereto and
(ii) enter into the Asset Purchase Agreement attached hereto and sell certain
assets of Lumex Medical substantially in accordance with the terms thereof,
provided that all proceeds of each such sale are remitted to Agent as a
repayment of outstanding Revolving Advances.
6. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Agent shall have received
(i) eight (8) copies of this Amendment executed by Borrowers and Lenders and
consented and agreed to by Guarantor, (ii) a $200,000 Amendment Fee for the
ratable benefit of Lenders, (iii) payment of all amounts due under the fee
letter of even date herewith between Agent and Borrowers, (iv) waivers of all
defaults by BIL under the BIL Note, and (v) such other certificates,
instruments, documents, agreements and opinions of counsel as may be required by
Agent, Lenders or their counsel, each of which shall be in form and substance
satisfactory to Agent, Lenders and their counsel.
7. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of Borrowers and are enforceable against
Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, each Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or
would exist after giving effect to this Amendment.
(d) No Borrower has any defense, counterclaim or offset with respect to
the Loan Agreement.
8. Effect on the Loan Agreement.
(a) Upon the effectiveness of this Amendment, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
8
<PAGE> 9
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided in Section 2, operate as a waiver of any
right, power or remedy of Agent or Lenders, nor constitute a waiver of any
provision of the Loan Agreement, or any other documents, instruments or
agreements executed and/or delivered under or in connection therewith.
(d) The Obligations under the Loan Agreement as amended pursuant to this
Amendment benefit fully from all collateral security and guaranties with respect
thereto.
9. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
10. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
11. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
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.
MUL ACQUISITION CORP. II
By:
------------------------------------
Name:___________________________
Title:________ of each of the
foregoing corporations
ATTEST:
- ------------------------------
Name:
Title:
10
<PAGE> 11
CONSENTED AND AGREED TO:
EVEREST & JENNINGS CANADIAN LIMITED
By:
----------------------
Name:
--------------------
Title:
-------------------
IBJ WHITEHALL BUSINESS CREDIT CORPORATION,
as Lender and as Agent
By:
---------------------------------------
James M. Steffy, Vice President
One State Street
New York, New York 10004
Commitment Percentage: 25.00%
NATIONAL CITY COMMERCIAL FINANCE, INC.
By:
---------------------------------------
Name: Kathryn Ellero
Title:
---------------------------------
1965 East Sixth Street, Suite 400
Cleveland, Ohio 44114
Commitment Percentage: 25.00%
PNC BANK, NATIONAL ASSOCIATION
By:
---------------------------------------
Name: William Gennario
Title:
---------------------------------
Two Tower Center
East Brunswick, New Jersey 08816
Commitment Percentage: 25.00%
11
<PAGE> 12
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:
------------------------------------
Name: David Mintert
Title:
------------------------------
1630 Des Peres Road
Suite 305
P.O. Box 31626
St. Louis, MO 63131
Commitment Percentage: 25.00%
12
<PAGE> 1
EXHIBIT 10.43
May 21, 1999
IBJ Whitehall Business Credit Corporation, as Agent
One State Street
New York, NY 10004
Gentlemen:
Reference is made to that certain Revolving Credit and
Security Agreement dated December 10, 1996 (as amended, the "Loan Agreement") by
and among each of the undersigned borrowers, IBJ Whitehall Business Credit
Corporation ("IBJ"), the financial institutions named in the Loan Agreement and
which hereafter become parties thereto (IBJ and each of the other financial
institutions, collectively, the "Lenders"), and IBJ as agent for the Lenders
(IBJ in such capacity, the "Agent"). All capitalized terms used herein which are
not defined shall have the meanings given to them in the Loan Agreement.
We are hereby notifying you that certain financial statements
due pursuant to the Loan Agreement will not be delivered within the time frames
set forth in the Loan Agreement. We are hereby requesting that you (i) waive our
failure to deliver such statements by such dates and (ii) extend the term of the
Loan Agreement.
By their execution of this letter below and for value
received, Borrowers, Agent and Lenders agree as follows:
1. Agent and Lenders hereby waive the Events of Default that
have occurred under (i) Section 9.7 of the Loan Agreement with respect to the
delivery of the annual financial statements for the fiscal year ending December
31, 1998, (ii) Section 9.9 of the Loan Agreement with respect to the delivery of
monthly financial statements for the months of January, February and March 1999,
(iii) Section 9.8 of the Loan Agreement with respect to the delivery of
quarterly financial statements for the fiscal quarter ended March 31, 1999, and
(iv) Section 10.22 of the Loan Agreement, but only to the extent the statements
required under each of the foregoing sections are delivered to Agent on or prior
to May 31, 1999.
2. Section 13.1 is amended as follows:
(i) the date "April 30, 2000" is deleted and replaced with
"May 31, 2000."
(ii) the date "April 29, 2000" is deleted and replaced with
"May 30, 2000."
<PAGE> 2
3. Except as set forth herein all of the representations,
warranties, terms and conditions of the Loan Agreement and the Other Documents
remain unamended and unwaived and in full force and effect in accordance with
their terms. The agreements set forth herein shall be limited precisely as
provided herein and shall not be deemed a waiver of, amendment of, consent to or
modification of any other term or provision of the Loan Agreement or the Other
Documents or any transaction or future action on the part of Borrowers which
would require Agent's or any Lender's consent thereunder.
This agreement may be executed by the parties hereto in one or
more counterparts, each of which shall be deemed an original and all of which
when taken together shall constitute one and the same agreement. Delivery of an
executed signature page of this agreement by facsimile transmission shall be
effective as delivery of manually executed counterpart hereof.
Very truly yours,
GRAHAM-FIELD HEALTH PRODUCTS, INC.
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.
MUL ACQUISITION CORP. II
By:_________________________________
Name:___________________________
Title:________ of each of the foregoing corporations
<PAGE> 3
CONSENTED AND AGREED TO:
IBJ WHITEHALL BUSINESS CREDIT CORPORATION,
as Lender and as Agent
By:_______________________________________
Name:
Title:
One State Street
New York, New York 10004
Commitment Percentage: 25.00%
NATIONAL CITY COMMERCIAL FINANCE, INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
1965 East Sixth Street, Suite 400
Cleveland, Ohio 44114
Commitment Percentage: 25.00%
PNC BANK, NATIONAL ASSOCIATION
By:_______________________________________
Name:_____________________________________
Title:____________________________________
Two Tower Center
East Brunswick, New Jersey 08816
Commitment Percentage: 25.00%
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:_______________________________________
Name:_____________________________________
Title:____________________________________
1630 Des Peres Road
Suite 305
St. Louis, Missouri 63131
Commitment Percentage: 25.00%
<PAGE> 4
EVEREST & JENNINGS CANADIAN LIMITED
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE> 5
June 3, 1999
IBJ Whitehall Business Credit Corporation, as Agent
One State Street
New York, NY 10004
Gentlemen:
Reference is made to that certain Revolving Credit and Security
Agreement dated December 10, 1996 (as amended, the "Loan Agreement") by and
among each of the undersigned borrowers, IBJ Whitehall Business Credit
Corporation ("IBJ"), the financial institutions named in the Loan Agreement and
which hereafter become parties thereto (IBJ and each of the other financial
institutions, collectively, the "Lenders"), and IBJ as agent for the Lenders
(IBJ in such capacity, the "Agent"). All capitalized terms used herein which are
not defined shall have the meanings given to them in the Loan Agreement.
We are hereby notifying you that certain financial statements due
pursuant to the Loan Agreement will not be delivered within the time frames set
forth in the Loan Agreement. We are hereby requesting that you (i) waive our
failure to deliver such statements by such dates and (ii) extend the term of the
Loan Agreement.
By their execution of this letter below and for value received,
Borrowers, Agent and Lenders agree as follows:
1. Agent and Lenders hereby waive the Events of Default that have
occurred under (i) Section 9.7 of the Loan Agreement with respect to the
delivery of the annual financial statements for the fiscal year ending December
31, 1998, (ii) Section 9.9 of the Loan Agreement with respect to the delivery of
monthly financial statements for the months of January, February, March and
April 1999, (iii) Section 9.8 of the Loan Agreement with respect to the delivery
of quarterly financial statements for the fiscal quarter ended March 31, 1999,
and (iv) Section 10.22 of the Loan Agreement, but only to the extent the
statements required under each of the foregoing sections are delivered to Agent
on or prior to June 15, 1999.
2. A new Section 5.24 is added to the Loan Agreement which provides as
follows:
"5.24 Undrawn Availability. Immediately prior to the
payment of any regular scheduled interest payments
payable in connection with the Senior Subordinated
Notes, Borrowers shall have Undrawn Availability of
at least $8,500,000 and after giving effect to the
payment of any regular scheduled interest payments
payable in connection with the Senior Subordinated
Notes, Borrowers shall have Undrawn Availability of
at least $3,500,000 "
3. The word "unqualified" in Section 10.22 is deleted and replaced with
the phrase "qualified with a going concern qualification".
4. This letter shall become effective upon satisfaction of the
following conditions precedent: Agent shall have received (i) five (5) copies of
this letter executed by Borrowers and Lenders and consented and agreed to by
Guarantor, (ii) a $50,000 waiver fee to be shared pro rata by the Lenders who
execute this letter on or prior to June 3, 1999, and (iii) an opinion of
<PAGE> 6
counsel reasonably satisfactory to Agent regarding the authority of Borrowers to
enter into this letter agreement and that the entering into this letter
agreement by Borrowers will not conflict with, or constitute an event of default
under, the indenture governing the Senior Subordinated Notes.
5. Except as set forth herein all of the representations, warranties,
terms and conditions of the Loan Agreement and the Other Documents remain
unamended and unwaived and in full force and effect in accordance with their
terms. The agreements set forth herein shall be limited precisely as provided
herein and shall not be deemed a waiver of, amendment of, consent to or
modification of any other term or provision of the Loan Agreement or the Other
Documents or any transaction or future action on the part of Borrowers which
would require Agent's or any Lender's consent thereunder.
This agreement may be executed by the parties hereto in one or more
counterparts, each of which shall be deemed an original and all of which when
taken together shall constitute one and the same agreement. Delivery of an
executed signature page of this agreement by facsimile transmission shall be
effective as delivery of manually executed counterpart hereof.
Very truly yours,
GRAHAM-FIELD HEALTH PRODUCTS, INC.
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.
MUL ACQUISITION CORP. II
By:_________________________________
Name:___________________________
Title:________ of each of the foregoing
corporations
<PAGE> 7
CONSENTED AND AGREED TO:
IBJ WHITEHALL BUSINESS CREDIT CORPORATION,
as Lender and as Agent
By:________________________________
Name:
Title:
One State Street
New York, New York 10004
Commitment Percentage: 25.00%
NATIONAL CITY COMMERCIAL FINANCE, INC.
By:_______________________________
Name:_____________________________
Title:______________________________
1965 East Sixth Street, Suite 400
Cleveland, Ohio 44114
Commitment Percentage: 25.00%
PNC BANK, NATIONAL ASSOCIATION
By:_________________________________
Name:_______________________________
Title:______________________________
Two Tower Center
East Brunswick, New Jersey 08816
Commitment Percentage: 25.00%
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:_________________________________
Name:_______________________________
Title:______________________________
1630 Des Peres Road
Suite 305
St. Louis, Missouri 63131
Commitment Percentage: 25.00%
<PAGE> 8
EVEREST & JENNINGS CANADIAN LIMITED
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE> 1
Exhibit 10.74
JAY ALIX & ASSOCIATES
575 FIFTH AVENUE, 21ST FLOOR, NEW YORK, NY 10017
TELEPHONE: (212) 490-2500 FAX: (212) 490-1344
March 24, 1999
VIA FACSIMILE
Board of Directors
Graham-Field Health Products, Inc.
81 Spence Street
Bay Shore, NY 11706
Re: Crisis Management and Interim Executive Leadership
Gentlemen:
This letter outlines the understanding between Jay Alix & Associates, a Michigan
corporation ("JA&A") and Graham-Field Health Products, Inc. (the "Company") of
the objective, tasks, work product and fees for the engagement of JA&A to
provide crisis management and interim executive leadership services to the
Company.
OBJECTIVE
To provide services to the Company customarily provided by a Chief Executive
Officer and Chief Financial Officer of the Company and to assist the Board of
Directors in stabilization of the Company and management, as well as in the
development of an operating and business plan, developing and proposing a
turnaround plan that maximizes value for the Company's stakeholders as well as
assisting in the exploration of strategic alternatives on behalf of the Company
to maximize its value.
TASKS
- - Assume the position of the Company's President and Chief Executive Officer
("CEO") with responsibility for the Company's operations. In this regard,
it is understood and agreed that in our role as CEO we shall report to the
Board of Directors or a Committee of the Board.
- - Assume the position of the Company's Chief Financial Officer ("CFO")
reporting to the CEO.
- - Assist in the assessment of the current financial position of the Company.
<PAGE> 2
Board of Directors Page 2
Graham-Field Health Products, Inc. March 24, 1999
- - Meet with Company management to review their assessment of the current
situation and evaluate their input for the Company's turnaround.
- - Assist in the development of intermediate and long-term operating plans.
- - Meet with lenders and other outside parties as may be required from time
to time.
- - Develop and lead employee teams that will be focused on integration of
mergers, rationalization of product lines, reduction of overhead spending,
realizing supply chain economies and maintaining and enhancing customer
relationships.
- - Work with the Company's outside auditors in finalizing the 1998 financial
statements and filings of reports required by the New York Stock Exchange
and the Securities and Exchange Commission.
- - Report to and attend all meetings of the Board of Directors.
- - Perform such other tasks as may normally be associated with the positions
of CEO and CFO or as may be mutually agreed upon.
WORK PRODUCT
Our work product will be in the form of:
- - Information to be discussed with you and others, as you may direct.
- - Written reports and analysis worksheets to support our suggestions as we
deem necessary or as you may request.
STAFFING
Jack McGregor will become the Company's CEO and will be the principal
responsible for the overall engagement. Al Koch, Managing Principal of JA&A,
will advise him and play an active role in the engagement. Soren Reynertson will
act as the Company's CFO. They will be assisted by a staff of consultants at
various levels, all of whom have a wide range of skills and abilities related to
this type of assignment. In addition, we have relationships with and
periodically retain independent contractors with specialized skills and
abilities to assist us.
TIMING, FEES AND EXPENSES
<PAGE> 3
Board of Directors Page 3
Graham-Field Health Products, Inc. March 24, 1999
We will commence this engagement immediately upon receipt of a signed engagement
letter and retainer.
HOURLY FEES. This engagement will be staffed with professionals at various
levels as the tasks require. For purposes of semi-monthly billings, our fees
will be based on the hours charged at our hourly rates, which are:
<TABLE>
<S> <C>
Jack McGregor, principal $500
Debra Kuptz, principal $450
Soren Reynertson, senior associate $350
Associates $295 to $335
Accountants and Consultants $190 to $225
</TABLE>
CASH EXPENSES. In addition to the fees set forth above, the Company shall pay
directly or reimburse JA&A upon receipt of periodic billings, for all reasonable
out-of-pocket expenses incurred in connection with the assignment such as
travel, lodging, postage, telephone and facsimile charges.
CONTINGENT SUCCESS FEES. In addition to hourly fees, the Company
agrees that it will pay JA&A the following contingent success fees:
(1) An option on 200,000 shares of the Company's stock. The option shall be
granted at the lowest average closing price for five consecutive trading
days during the 90-day period beginning with the date of this letter. The
option shall be exercisable at the earlier of: (1) the date of a
transaction involving the sale of substantially all of the Company's
business or (2) beginning with the 7th month following termination of
JA&A's engagement. The option shall expire four years from the date of
this letter.
(2) A contingent success fee equal to 1/2 of the 1% of the gross proceeds of a
transaction involving the sale of all or a portion of the Company's
business. Gross proceeds shall be equal to the sum of (a) purchase price
of the Company's common stock or the fair value of shares given in
exchange therefor, plus (b) cash or other consideration that is paid to
the Company, plus (c) redemption value of the Company's preferred stock
that is redeemed or otherwise retired as part of the transaction, plus (d)
any debt that is either assumed or repaid as part of the transaction. Such
contingent success fee shall be payable for transactions beginning with
the date of this letter and ending on the later of: (1) 12 months from the
termination of JA&A's engagement, or (2) two times the number of months
that JA&A's engagement hereunder continues beginning with the termination
date of JA&A's engagement. For example, if JA&A's engagement lasts seven
months from the date of this letter, then the contingent success fee
payable
<PAGE> 4
Board of Directors Page 4
Graham-Field Health Products, Inc. March 24, 1999
hereunder shall expire 14 months after the end of JA&A's
engagement.
RETAINER AND BILLING FOR SERVICES. We will require a retainer of $300,000 to be
applied against the time charges, excluding expenses, specific to the
engagement. We will submit semi-monthly invoices for services rendered and
expenses incurred as described above, and we will offset such invoices against
the retainer. Payment will be due upon receipt of the invoices to replenish the
retainer to the agreed upon amount. Any unearned portion of the retainer will be
returned to you at the termination of the engagement.
RELATIONSHIP OF THE PARTIES
The parties intend that an independent contractor relationship will be created
by this agreement. JA&A is not to be considered an employee or agent of the
Company and the employees of JA&A are not entitled to any of the benefits that
the Company provides for the Company's employees.
The Company also agrees not to solicit, recruit or hire any employees or agents
of JA&A for a period of two years subsequent to the completion and/or
termination of this agreement.
CONFIDENTIALITY
JA&A agrees to keep confidential all information obtained from the Company. JA&A
agrees that neither it nor its directors, officers, principals, employees,
agents or attorneys will disclose to any other person or entity, or use for any
purpose other than specified herein, any information pertaining to the Company
or any affiliate thereof which is either non-public, confidential or proprietary
in nature ("Information") which it obtains or is given access to during the
performance of the services provided hereunder. JA&A may make reasonable
disclosures of Information to third parties in connection with their performance
of their obligations and assignments hereunder. In addition, JA&A will have the
right to disclose to others in the normal course of business its involvement
with the Company.
Information includes data, plans, reports, schedules, drawings, accounts,
records, calculations, specifications, flow sheets, computer programs, source or
object codes, results, models, or any work product relating to the business of
the Company, its subsidiaries, distributors, affiliates, vendors, customers,
employees, contractors and consultants.
The Company acknowledges that all advice (written or oral) given by JA&A to the
Company in connection with JA&A's engagement is
<PAGE> 5
Board of Directors Page 5
Graham-Field Health Products, Inc. March 24, 1999
intended solely for the benefit and use of the Company (limited to its Board and
management) in considering the transactions to which it relates. The Company
agrees that no such advice shall be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time in any manner or for any purpose
other than accomplishing the tasks and programs referred to herein or in
discussions with the Company's lenders or debt holders, without JA&A's prior
approval (which shall not be unreasonably withheld) except as required by law.
This agreement will survive the termination of the engagement.
FRAMEWORK OF THE ENGAGEMENT
The Company acknowledges that it is hiring JA&A to provide interim executive
leadership and to assist and advise the Company in business planning and
restructuring. JA&A's engagement shall not constitute an audit, review or
compilation, or any other type of financial statement reporting engagement that
is subject to the rules of the AICPA or other such state and national
professional bodies.
INDEMNIFICATION OF JA&A
In engagements of this nature where we act as crisis managers, it is our
practice to receive indemnification. Accordingly, in consideration of our
agreement to act on your behalf in connection with this engagement, you agree to
indemnify, hold harmless, and defend us (including our principals, employees and
agents) from and against all claims, liabilities, losses, damages and reasonable
expenses as they are incurred, including reasonable legal fees and disbursements
of counsel, and the costs of our professional time (our professional time will
be reimbursed at our rates in effect when such future time is required),
relating to or arising out of the engagement, including any legal proceeding in
which we may be required or agree to participate but in which we are not a
party. We, our principals, employees and agents may, but are not required to,
engage a single firm of separate counsel of our choice in connection with any of
the matters to which this indemnification agreement relates. This
indemnification agreement does not apply to actions taken or omitted to be taken
by us in bad faith.
INDEMNIFICATION OF OFFICERS
In addition to the foregoing indemnification, Jack McGregor and Soren Reynertson
shall be deemed to be officers of the Company and shall, along with other JA&A
personnel who serve as officers of the company, be individually covered by the
same indemnification and directors' and officers' liability insurance as is
applicable to other officers of the Company.
<PAGE> 6
Board of Directors Page 6
Graham-Field Health Products, Inc. March 24, 1999
The Company agrees that it will use its best efforts to specifically include and
cover any JA&A appointees under the Company's policy for directors' and
officers' insurance. In the event that the Company is unable to include JA&A
appointees under the Company's policy or does not have first dollar coverage as
outlined in the preceding paragraph in effect for at least $10 million, it is
agreed that JA&A will attempt to purchase a separate directors' and officers'
policy that will cover its employees and agents only and that the cost of same
shall be invoiced to the Company as an out of pocket cash expense. If JA&A is
unable to purchase such directors' and officers' insurance then we reserve the
right to terminate this agreement.
TERMINATION AND SURVIVAL
The agreement may be terminated at any time by written notice by one party to
the other; provided, however, that notwithstanding such termination JA&A will be
entitled to any fees and expenses due under the provisions of the agreement. It
is further understood and agreed that unless the Company acts in bad faith or
has not remained current with its payment obligations to our firm as articulated
in this letter, JA&A will not terminate the engagement without providing at
least 90 days notice. Such payment obligation shall inure to the benefit of any
successor or assignee of JA&A.
It is further understood and agreed that if the Company elects to terminate this
agreement of if JA&A ceases to be the Company's CEO on an involuntary basis
before JA&A has been paid an aggregate of at least $1,000,000 in fees, including
the contingent success fee #2 on page 3, then any shortfall between $1,000,000
and amounts paid to JA&A shall be paid to JA&A as additional compensation.
Furthermore, it is agreed that JA&A's rights to contingent success fees shall
not be terminated if JA&A receives a payment hereunder, but rather such rights
to contingent success fees shall be unaffected and continue in full force and
effect as outlined elsewhere in this engagement letter.
The obligations of the parties under the Indemnification of JA&A,
Indemnification of Officers, Confidentiality and Termination and Survival
sections of this agreement shall survive the termination of the agreement as
well as the other sections of this agreement which expressly provide that they
shall survive termination of this agreement.
GOVERNING LAW
This letter agreement is governed by and construed in accordance with the laws
of the State of New York with respect to contracts made and to be performed
entirely therein and without regard to choice of law or principles thereof.
<PAGE> 7
Board of Directors Page 7
Graham-Field Health Products, Inc. March 24, 1999
If we have a dispute with respect to any of the provisions of this agreement and
are unable to agree on a mutually satisfactory resolution within 30 days, either
party may require the matter to be settled by binding arbitration. If such
arbitration shall occur, it shall be in New York City. We shall attempt for two
weeks to agree on a single arbitrator. If that effort shall fail, each party
shall appoint one arbitrator. The two arbitrators so chosen shall attempt for
two weeks to select a third. If they are unable to agree, the American
Arbitration Association in New York City shall choose the third. The arbitration
shall occur using the rules and procedures of the American Arbitration
Association. The decision of the arbitrator(s) shall be final, binding and
non-appealable.
CONFLICTS
We know of no fact or situation that would represent a conflict of interest for
us with regard to the Company.
SEVERABILITY
If any portion of the letter agreement shall be determined to be invalid or
unenforceable, we each agree that the remainder shall be valid and enforceable
to the maximum extent possible.
ENTIRE AGREEMENT
All of the above contains the entire understanding of the parties relating to
the services to be rendered by JA&A and may not be amended or modifies in any
respect except in writing signed by the parties. JA&A will not be responsible
for performing any services not specifically described in this letter or in a
subsequent writing signed by the parties.
NOTICES
All notices required or permitted to be delivered under this letter agreement
shall be sent, if to us, to the address set forth at the head of this letter, to
the attention of Mr. Melvin R. Christiansen, and if to you, to the address for
you set forth above, to the attention of your General Counsel, or to such other
name or address as may be given in writing to the other party. All notices under
the agreement shall be sufficient if delivered by facsimile or overnight mail.
Any notice shall be deemed to be given only upon actual receipt.
If these terms meet with your approval, please sign and return the enclosed copy
of this letter and wire transfer the amount to establish the retainer.
<PAGE> 8
Board of Directors Page 8
Graham-Field Health Products, Inc. March 24, 1999
We look forward to working with you.
Sincerely yours,
JAY ALIX & ASSOCIATES
John G. McGregor
Principal
<PAGE> 9
Board of Directors Page 9
Graham-Field Health Products, Inc. March 24, 1999
John G. McGregor
Jay Alix & Associates
4000 Town Center, Suite 500
Southfield, MI 48070
Dear Sirs:
The foregoing engagement letter is acknowledged and agreed to by Graham-Field
Health Products, Inc.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
By:___________________________________________
Its:__________________________________________
Date:_________________________________________
<PAGE> 1
Exhibit 10.75
GRAHAM-FIELD HEALTH PRODUCTS, INC.
May 12, 1999
BIL Securities (Offshore) Limited
c/o Brierley Investments Limited
Level 6 Colonial Building
22-24 Victoria Street
Wellington, New Zealand
Gentlemen:
This will confirm our agreement with respect to the matters set forth
below.
1. Exchange of Note for Stock. Effective as of the date of this letter
agreement, BIL Securities (Offshore) Limited, a company organized under the laws
of New Zealand ("BIL" or "you") will exchange, transfer, assign and surrender
all of BIL's right, title and interest in, to and under that certain 7.7% Note
due April 1, 2001, dated December 10, 1996, in the original principal amount of
$4,000,000, given by Graham-Field Health Products, Inc. (the "Company") to BIL,
and the obligations evidenced thereby, and in consideration therefor the Company
will issue, sell and convey to BIL 2,036 fully-paid, validly-issued,
nonassessable shares of its Series D Preferred Stock, par value $.01 per share
(the "Series D Shares"). The Series D Shares will be issued pursuant to a
Certificate of Designations in the form attached as Annex A, a copy of which
will have been duly executed, acknowledged and filed in accordance with the
requirements of the General Corporation Law of the State of Delaware. BIL
represents and warrants that it is the sole owner of the Note, that the Note has
not been pledged or assigned and that no other person or entity has any claim on
or interest in the Note. All of BIL's rights in respect of accrued unpaid
interest on the Note will be conveyed with the Note and accordingly no further
payments of interest or principal will be made on the Note.
2. Deliveries. In order to give effect to the foregoing, (i) BIL will deliver to
the Company (x) the original Note, marked "CANCELLED" and (y) a duly executed
Release and Waiver in the form attached as Annex B; and (ii) the Company will
deliver to BIL a certificate in respect of the Series D Shares, in proper form
to convey title to the Series D Shares to BIL free and clear of liens,
encumbrances, security agreements, claims, charges, restrictions or other
interests. These deliveries shall take place at the principal business offices
of the Company at 81 Spence Road, Bay Shore, New York, or at such other time and
place as BIL and the Company may agree, not later than 5:00 P.M. on Friday, May
14, 1999.
3. Securities Law Matters. You represent and agree that you are acquiring the
Series D Shares for investment purposes only and not with a view to any resale
or distribution, that future transfers of the Series D Shares will be subject to
restrictions imposed under the federal securities laws and that any certificates
issued in respect of the Series D Shares will bear legends in customary form
reflecting those restrictions.
4. Stockholders Agreement. The Series D Shares shall be subject to the
provisions of the Stockholders Agreement, dated as of September 3, 1996, as
amended and as may be further amended
<PAGE> 2
from time to time in the future, among the Company, BIL and Irwin Selinger, as
if those shares were shares of Common Stock.
5. Representations and Warranties of the Company.
(a) The Company has the power, authority and legal capacity to enter into
this letter agreement and to perform all of its obligations hereunder. This
letter agreement constitutes the valid and legally binding obligation of the
Company, enforceable in accordance with its terms.
(b) The execution and delivery of this letter agreement and the consummation
of the transactions provided for herein will not result in default under or
cancellation or termination of any material contract, agreement, commitment or
engagement of the Company.
6. Indemnification.
(a) The Company shall indemnify, save and hold harmless BIL, its affiliates
(as defined in Rule 405 under the Securities Act of 1933, as amended) and their
respective successors and assigns from and against any loss, liability or
expense (including without limitation reasonable attorneys' fees) sustained or
incurred by any of them resulting from or arising out of or by virtue of any
breach of any representation, warranty or covenant of the Company in this letter
agreement.
(b) BIL shall indemnify, save and hold harmless the Company, its affiliates
and their respective successors and assigns from and against any loss, liability
or expense (including without limitation reasonable attorneys' fees) sustained
or incurred by any of them resulting from or arising out of or by virtue of any
breach of any representation, warranty or covenant of BIL in this letter
agreement.
7. Miscellaneous.
(a) This letter agreement replaces and supersedes all prior agreements and
negotiations between BIL and the Company with respect to the subject matter
hereof and constitutes the entire agreement of BIL and the Company with respect
to such subject matter.
(b) This letter agreement shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws principles.
(c) This letter agreement shall inure to the benefit of and be binding upon
BIL, the Company and their respective successors and assigns.
* * *
If the foregoing accurately reflects your understanding of our
agreement, kindly so indicate by signing in the space provided below, whereupon
this letter agreement will constitute the binding obligation of the Company and
BIL.
Very truly yours,
GRAHAM-FIELD HEALTH PRODUCTS, INC.
By:_______________________________
2
<PAGE> 3
Accepted and agreed as of the
date first written above:
BIL SECURITIES (OFFSHORE)
LIMITED
By: _________________________
3
<PAGE> 1
Exhibit 10.76
AGREEMENT, dated as of May 12, 1999 (the "Agreement"), by and among
BIL Securities (Offshore) Limited ("BIL Offshore"), BIL (Far East Holdings)
Limited ("BIL Far East"; BIL Offshore and BIL Far East are collectively referred
to as "BIL"), and Graham-Field Health Products, Inc. ("Graham-Field").
RECITALS:
WHEREAS, BIL Offshore has agreed, in an agreement dated as of the date
hereof, between itself and Graham-Field, to cancel a certain note obligation
dated as of December 10, 1996, in the original principal amount of $4,000,000
with unpaid accrued interest of $72,000, in exchange for 2,036 shares of Series
D Preferred Stock (the "Preferred Stock") of Graham-Field issued on the date
hereof.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, and for other good and valuable consideration the receipt and adequacy
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Graham-Field shall have the sole and exclusive option for a period of
one (1) year following the date hereof 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 vote
or obtain applicable corporate approval to exchange (the "Exchange")
each share of Preferred Stock for 1,000 shares of common stock of
Graham-Field.
2. BIL hereby agrees that, if a meeting or other corporate action
contemplated is held or taken by Graham-Field, BIL will vote all of its
voting securities of Graham-Field in favor of the Exchange in accordance
with Section 1.
3. BIL hereby agrees to effect the Exchange immediately following the
receipt by Graham-Field of applicable stockholder or other corporate
approval, subject only to compliance with applicable laws and regulatory
requirements of the New York Stock Exchange.
4. This Agreement shall be binding upon and inure to the benefit of each
party hereto and its successors and assigns. Any permitted assignee or
transferee of voting securities held by BIL, in accordance with the
terms of that certain Amended and Restated Stockholders Agreement dated
as of September 23, 1996, as amended, by and between BIL Far East and
Graham-Field, shall agree as a condition to such permitted assignment or
transfer to be bound by the terms and provisions of this Agreement prior
to such assignment or transfer.
<PAGE> 2
5. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
6. This Agreement may be executed in counterparts, each of which will be an
original, but all of which will continue but one and the same
instrument.
IN WITNESS WHEREOF, the parties have entered into this Agreement the
day and year set forth above.
BIL SECURITIES (OFFSHORE) LIMITED
By: /s/ Rupert O.H. Morley
---------------------------------
Name: Rupert O.H. Morley
Title: Operations Director
BIL SECURITIES (FAR EAST) LIMITED
By: /s/ Rupert O.H. Morley
---------------------------------
Name: Rupert O.H. Morley
Title: Operations Director
GRAHAM-FIELD HEALTH PRODUCTS, INC.
By: /s/ John G. McGregor
---------------------------------
Name: John G. McGregor
Title: President, Chief
Executive Officer
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, No. 333-43493, No. 333-43567, No. 33-48860, No. 33-37179, No.
33-38656, No. 33-60679, No. 333-16993, and No. 333-43499) of our report dated
June 3, 1999 with respect to the consolidated financial statements and schedule
of Graham-Field Health Products, Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1998.
/S/ ERNST & YOUNG LLP
Melville, New York
June 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AS
INCLUDED IN THE FORM 10K FOR THE YEAR ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,290
<SECURITIES> 0
<RECEIVABLES> 90,969
<ALLOWANCES> 0
<INVENTORY> 63,121
<CURRENT-ASSETS> 168,073
<PP&E> 40,188
<DEPRECIATION> 0
<TOTAL-ASSETS> 428,859
<CURRENT-LIABILITIES> 91,697
<BONDS> 106,715
0
31,600
<COMMON> 783
<OTHER-SE> 187,484
<TOTAL-LIABILITY-AND-EQUITY> 428,859
<SALES> 378,840
<TOTAL-REVENUES> 380,866
<CGS> 265,360
<TOTAL-COSTS> 265,360
<OTHER-EXPENSES> 135,439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,652
<INCOME-PRETAX> (32,585)
<INCOME-TAX> 16,407
<INCOME-CONTINUING> (48,992)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,992)
<EPS-BASIC> (1.61)
<EPS-DILUTED> (1.61)
</TABLE>
