<PAGE> 1
AUGUST 11, 1999, 08:16 PM
FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
(MARK ONE)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From to
Commission file number 1-8801
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 11-2578230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
81 Spence Street, Bay Shore, New York 11706
(Address of principal executive offices)
(Zip Code)
(516) 273-2200
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes / / No / /
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $.025 Par Value --- 31,594,633 shares as of August 5, 1999
<PAGE> 2
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
Part I. Financial Information: Page
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998
(Audited) 3
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 1999 and 1998
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and 1998 (Unaudited) 5-6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. Other Information:
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------------- -------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,167,000 $ 3,290,000
Accounts receivable - less allowances for doubtful
accounts of $20,893,000 and $20,107,000, respectively 83,083,000 90,969,000
Inventories 54,299,000 63,121,000
Other current assets 6,112,000 9,252,000
Recoverable and prepaid income taxes 951,000 1,441,000
------------- -------------
TOTAL CURRENT ASSETS 146,612,000 168,073,000
PROPERTY, PLANT AND EQUIPMENT - net 40,696,000 40,188,000
EXCESS OF COST OVER NET ASSETS ACQUIRED - net of
accumulated amortization of $24,575,000 and
$20,664,000, respectively 203,735,000 207,554,000
OTHER ASSETS 12,092,000 13,044,000
------------- -------------
TOTAL ASSETS $ 403,135,000 $ 428,859,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Credit facility $ 23,127,000 $ 27,606,000
Current maturities of long-term debt 872,000 1,235,000
Accounts payable 27,546,000 28,915,000
Accrued expenses 42,202,000 33,941,000
------------- -------------
TOTAL CURRENT LIABILITIES 93,747,000 91,697,000
Long-term debt and Senior Subordinated Notes 102,103,000 106,715,000
Other long-term liabilities 10,969,000 10,580,000
------------- -------------
TOTAL LIABILITIES 206,819,000 208,992,000
STOCKHOLDERS' EQUITY:
Series A preferred stock -- --
Series B preferred stock 28,200,000 28,200,000
Series C preferred stock 3,400,000 3,400,000
Series D preferred stock 4,072,000 --
Common stock 787,000 783,000
Additional paid-in capital 287,073,000 286,503,000
Accumulated deficit (125,833,000) (97,587,000)
Accumulated other comprehensive loss (1,383,000) (1,432,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 196,316,000 219,867,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 403,135,000 $ 428,859,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- ----------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(As restated, (As restated,
see Note 5) see Note 5)
<S> <C> <C> <C> <C>
NET REVENUES:
Medical equipment and supplies $ 73,805,000 $ 97,228,000 $ 159,071,000 $ 195,121,000
Interest and other income 736,000 520,000 926,000 935,000
------------- ------------- ------------- -------------
74,541,000 97,748,000 159,997,000 196,056,000
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of revenues 51,954,000 67,251,000 111,460,000 134,629,000
Selling, general and administrative 29,804,000 30,535,000 59,918,000 59,581,000
Provision for Class Action settlement
(Note 9) 10,000,000 -- 10,000,000 --
Interest expense 3,093,000 3,039,000 6,333,000 5,807,000
------------- ------------- ------------- -------------
94,851,000 100,825,000 187,711,000 200,017,000
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (20,310,000) (3,077,000) (27,714,000) (3,961,000)
INCOME TAX BENEFIT -- (800,000) -- --
------------- ------------- ------------- -------------
NET LOSS (20,310,000) (2,277,000) (27,714,000) (3,961,000)
PREFERRED STOCK DIVIDENDS 267,000 267,000 533,000 533,000
------------- ------------- ------------- -------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (20,577,000) $ (2,544,000) $ (28,247,000) $ (4,494,000)
============= ============= ============= =============
Net loss per common share -
basic and diluted $ (.66) $ (.08) $ (.90) $ (.15)
Weighted average number of
common shares outstanding 31,412,000 31,100,000 31,382,000 30,990,000
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------------ ------------
(As restated,
see Note 5)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(27,714,000) $ (3,961,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Provision for Class Action settlement 10,000,000 --
Depreciation and amortization 7,499,000 7,470,000
Provisions for losses on accounts receivable 2,130,000 1,263,000
Gain on sale of property, plant and equipment (450,000) --
Non-cash compensation component of
stock options 108,000 954,000
Changes in operating assets and liabilities:
Accounts receivable 5,756,000 (12,216,000)
Inventories 8,822,000 (2,753,000)
Other current assets and
recoverable and prepaid income taxes 3,630,000 (5,854,000)
Accounts payable, accrued expenses and other liabilities (2,818,000) (13,021,000)
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,963,000 (28,118,000)
INVESTING ACTIVITIES
Purchases of property, plant and equipment-net (2,741,000) (5,168,000)
Proceeds from sale of asset held for sale -- 60,167,000
Acquisitions, net of cash acquired -- (393,000)
Net decrease (increase) in other assets 109,000 (495,000)
------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES $ (2,632,000) $ 54,111,000
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
------------ ------------
(As restated,
see Note 5)
<S> <C> <C>
FINANCING ACTIVITIES:
Net repayments under Credit Facility $ (4,479,000) $(30,421,000)
Principal payments on long-term debt (975,000) (1,263,000)
Proceeds from exercise of stock options -- 4,687,000
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (5,454,000) (26,997,000)
------------ ------------
DECREASE IN CASH AND CASH
EQUIVALENTS (1,123,000) (1,004,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,290,000 4,430,000
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,167,000 $ 3,426,000
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 6,460,000 $ 6,228,000
============ ============
Income taxes (received) paid $ (786,000) $ 237,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Payment of accrued dividends by issuance of
common stock $ 532,000 $ 266,000
============ ============
Repayment of long-term debt by issuance of
preferred stock $ 4,000,000
============
Investment in preferred stock received as
partial proceeds from sale of asset $ 1,539,000
============
Decrease in excess of cost over net assets acquired
offset by increase in other current assets $ 2,385,000
============
Increase in excess of cost over net assets acquired offset by adjustments to
property, plant and equipment, inventory, prepaid and deferred taxes,
accrued expense and debt $ 375,000
============
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
1. GENERAL AND BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The going concern
basis of presentation assumes the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of business.
The Company has incurred significant losses in each of the three years
in the period ended December 31, 1998 and in the first half of 1999. These
losses have arisen as a result of significant merger, restructuring and other
expenses incurred in connection with acquisitions completed in 1996 and 1997,
the failure to integrate effectively these acquisitions and realize the benefits
and synergies to be derived therefrom, the impact of intense competition within
the healthcare industry and declining sales. 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, consulting
and other advisory fees in the first and second quarters 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 (the "Class Action") which have been
consolidated into an amended complaint. The Company has reached an agreement in
principle to settle the Class Action, subject to certain contingencies described
herein. However, there can be no assurance that the settlement will be
consummated. (see Note 9).
In response to the losses incurred in 1997, 1998 and the first half of
1999, management has commenced a program to reduce operating expenses, improve
gross margins, reduce the investment in working capital and take other actions
to improve its cash flow. These actions include, but are not limited to, (i) the
completion of the activities contemplated by the Company's restructuring plan as
further described in Note 8; (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.
As further described in Note 11, on August 12, 1999, the Company
entered into an amendment (the "August 1999 Amendment") to its Senior Secured
Revolving Credit Facility (the "Credit Facility") with IBJ Whitehall Business
Credit Corporation, as agent ("IBJ"), which provided for a new $4.5 million term
loan (the "Term Loan"), secured by certain real estate and the existing
collateral under the Credit Facility. In addition, the August 1999 Amendment
provides for, among other things, a reduction in the maximum revolving advance
amount under the Credit Facility from $50 million to $35 million, the
elimination of certain availability borrowing base reserves through December 31,
1999, and an amendment to certain financial covenants. After giving effect to
the August 1999 amendment, the Company's availability to borrow under the Credit
Facility (including the Term Loan) increased by approximately $6 million. As of
August 11, 1999, after giving effect to the August 1999 Amendment (including the
Term Loan), the Company has unused availability of approximately $10 million.
Management believes that its initiatives to improve cash flow from
operations along with the Term Loan and Credit Facility will provide sufficient
liquidity to support working capital needs, capital expenditures and regularly
scheduled debt service for foreseeable future.
As further described in Note 5 to the Condensed Consolidated Financial
Statements, and as previously described in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, the 1998 quarterly results have been
restated to correct for certain improperly recorded transactions.
-7-
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
Inventories at June 30, 1999 have been valued at standard cost for
manufactured goods and at average cost for other inventories based primarily on
perpetual records, each of which approximates actual cost on the first-in,
first-out method.
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 established new rules for the reporting and display of comprehensive
income and its components, however, the adoption of this Statement had no impact
on the Company's net loss or shareholders' equity. During the three and six
month periods ended June 30, 1999, total comprehensive loss amounted to
$20,292,000 and $27,665,000, respectively. Total comprehensive loss for the
three and six month periods ended June 30, 1998 amounted to $2,387,000 and
4,078,000, respectively.
In March 1998, Statement of Position 98-1 ("SOP 98-1"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" was
issued. SOP 98-1 requires certain costs associated with developing or obtaining
software for internal use to be expended as incurred until certain
capitalization criteria are met. The Company has adopted SOP 98-01 as of January
1, 1999. Based on the Company's current information systems plans, which include
completing its Year 2000 remediation program and the upgrade of its order entry
and manufacturing system, adoption of this statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued effective for fiscal years beginning after June
15, 1999, which has subsequently been delayed. SFAS No. 133 requires the
recognition of all derivatives in the consolidated balance sheet as either
assets or liabilities measured at fair value. The Company currently does not use
derivative instruments and therefore, adoption of this statement is not expected
to impact the Company.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting only of
normal recurring adjustments, except for the provision for Class Action
settlement) necessary to present fairly the financial position as of June 30,
1999 (unaudited), the results of operations for the three and six months ended
June 30, 1999 and 1998 (unaudited) and the statements of cash flows for the six
months ended June 30, 1999 and 1998 (unaudited).
It should be noted that the accompanying financial statements and notes
thereto do not purport to be complete disclosures in conformity with generally
accepted accounting principles. While the Company believes that the disclosures
presented are adequate to make the information contained herein not misleading,
it is suggested that these financial statements be read in conjunction with the
financial statements and the notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
The results of operations for the three and six months ended June 30,
1999 and 1998 are not necessarily indicative of results for the full year.
2. EARNINGS PER SHARE
Basic and diluted net loss per common share was computed using the
weighted average number of common shares outstanding and by assuming the accrual
of a dividend of 1.5% on the Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock") and Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock") for the quarter and six months ended
June 30, 1999 and
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<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
1998. Conversion of the preferred stock and common equivalent shares was not
assumed since the result would have been antidilutive.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 12,273,000 $ 10,739,000
Work-in-process 8,540,000 5,412,000
Finished goods 33,486,000 46,970,000
------------ ------------
$ 54,299,000 $ 63,121,000
============ ============
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Land and buildings $ 20,011,000 $ 18,366,000
Equipment 36,346,000 33,909,000
Furniture and fixtures 3,157,000 3,219,000
Leasehold improvements 3,870,000 3,865,000
Construction in progress 1,100,000 1,923,000
------------ ------------
$ 64,484,000 $ 61,282,000
Accumulated depreciation and
amortization (23,788,000) (21,094,000)
------------ ------------
$ 40,696,000 $ 40,188,000
============ ============
</TABLE>
5. RESTATEMENT
As previously described in the Company's Annual Report on Form 10K for
the year ended December 31, 1998, the Company has restated its financial results
for the first, second and third quarters of 1998 to correct for certain
improperly recorded transactions. Such adjustments increased the net loss
reported in the first and second quarters of 1998 by $971,000 and $249,000,
respectively, and decreased the net loss reported in the third quarter of 1998
by $739,000. The adjustments were primarily related to previously unrecognized
stock compensation charges of $954,000 in the first quarter of 1998 and an
$800,000 reduction in the previously recorded estimated separation charges in
the third quarter of 1998.
-9-
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
The following Consolidated Statements of Operations compare the
previously reported and restated financial information for the three and six
month periods ended June 30, 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
---------------------------------- ----------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 97,456,000 $ 97,748,000 $ 195,598,000 $ 196,056,000
Cost of revenues 67,030,000 67,251,000 134,132,000 134,629,000
Selling, general and
administrative 30,239,000 30,535,000 58,449,000 59,581,000
Interest expense 3,015,000 3,039,000 5,758,000 5,807,000
------------- ------------- ------------- -------------
Income before income taxes (2,828,000) (3,077,000) (2,741,000) (3,961,000)
Income taxes (800,000) (800,000) -- --
------------- -------------
Net loss (2,028,000) (2,277,000) (2,741,000) (3,961,000)
Preferred stock dividends 267,000 267,000 533,000 533,000
------------- ------------- ------------- -------------
Net loss attributable to common
shareholders $ (2,295,000) $ (2,544,000) $ (3,274,000) $ (4,494,000)
============= ============= ============= =============
Net loss per common share -
basic and diluted $ (.07) $ (.08) $ (.11) $ (.15)
============= ============= ============= =============
</TABLE>
6. INCOME TAXES
The Company did not record an income tax benefit for the six months
ended June 30, 1999 due to the uncertainty of the future realization of such
benefits.
At June 30, 1999, the Company had a full valuation allowance recorded
against its net deferred tax assets. The Company will realize these tax benefits
when the Company generates taxable income. $12.1 million of the $44.7 million
valuation allowance is attributable to the acquired net operating loss
carryforward and other deferred tax assets of Everest & Jennings International
Ltd. When realized, the tax benefit related to acquired net operating losses
will be recorded as a reduction of the excess of cost over net assets acquired.
Realization of the future tax benefits related to the deferred tax
assets is dependent upon many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes.
7. DISPOSAL OF ASSETS
In connection with the Company's acquisition of Fuqua Enterprises, Inc.
(currently known as Lumex/Basic American Holdings, Inc.) ("Fuqua") on December
30, 1997, the Company acquired the leather operations of Fuqua (the "Leather
Operations"). It was the Company's intention to dispose of the Leather
Operations as soon as reasonably practicable following the consummation of the
acquisition of Fuqua. Accordingly, the net assets of the Leather Operations were
reflected as "assets held for sale" in the amount of $61,706,000 on the balance
sheet as of December 31, 1997. On January 27, 1998, the Company
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<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
sold the Leather Operations for $60,167,400 in cash, 5,000 shares of Series A
Preferred Stock of the buying entity with a stated value of $4,250,000 (valued
at $1,539,000) and the assumption of debt of $2,341,250. The cash proceeds from
the sale of the Leather Operations were used to repay the indebtedness incurred
under the terms of the Credit Facility, which was used to retire the Fuqua
indebtedness.
8. ACQUISITION INTEGRATION AND RESTRUCTURING PLAN
In connection with the acquisition of Fuqua on December 30, 1997, the
Company adopted a plan to implement certain strategic restructuring initiatives
(the "Restructuring Plan") and recorded $18,151,000 of restructuring charges and
$4,393,000 of indirect merger charges. The plan consists of a broad range of
efforts, including the consolidation of the Company's Temco manufacturing
operations in New Jersey into Fuqua's Lumex manufacturing facility in New York,
relocation of the Company's corporate headquarters to the Lumex facility, and
the closure and/or consolidation of certain other distribution facilities and
operations. As of June 30, 1999 the Company had substantially completed the
initiatives contemplated in the Restructuring Plan.
The following summarizes the activity in the restructuring and merger
related accrual for the quarter ended June 30, 1999:
<TABLE>
<CAPTION>
ACCRUAL BALANCE CASH PAYMENTS ACCRUAL BALANCE
DECEMBER 31, 1998 IN 1999 JUNE 30, 1999
----------------- ------------ -------------
<S> <C> <C> <C>
Facility exit and lease costs $ 11,898,000 (770,000) $ 11,128,000
Severance 144,000 (78,000) 66,000
Merger related 120,000 -- 120,000
------------ ------------ ------------
$ 12,162,000 $ (848,000) $ 11,314,000
============ ============ ============
</TABLE>
9. 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 (the "Company Common Stock"),
including former Fuqua shareholders who received shares of the Company Common
Stock when the Company acquired Fuqua in December 1997, during various periods
within the time period May 1997 to March 1998. The class actions were
consolidated into an amended consolidated class action complaint as of January
29, 1999 (the "Class Action"), and lead counsel was selected. The amended
consolidated class action complaint asserts claims against the Company and the
other defendants for violations of Sections 11, 12(2) and 15 of the Securities
Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to
alleged material misrepresentations and omissions in public filings made with
the Securities and Exchange Commission and certain press releases and other
public statements made by the Company and certain of its officers relating to
the Company's business, results of operations, financial condition and future
prospects, as a result of which, it is alleged, the market price of the Company
Common Stock was artificially inflated during the putative class periods. The
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<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
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.
The Company has reached an agreement in principle to settle the Class
Action, subject to certain contingencies described below. Under the terms of the
agreement in principle, the Class Action would be settled for a payment of $20
million, of which $10 million would be funded by the Company's insurance carrier
and $10 million by the Company. The agreement in principle contemplates that the
Company's $10 million contribution would be paid either from the proceeds of the
sale of the Company or, at the Company's option, from funds otherwise available.
Under the terms of the agreement in principle, in the event the shares of the
common stock of the Company are sold for an amount in excess of $3 per share
pursuant to a definitive sale/merger agreement, the shareholder class would also
be entitled to 25% of the premium in excess of $3 per share upon terms and
conditions to be agreed upon between the parties. The plaintiffs may terminate
the settlement if the Company does not enter into a definitive sale/merger
agreement on or before December 31, 1999, unless the Company has funded its $10
million contribution to the settlement prior to an election to terminate the
settlement by the plaintiffs. The Company recorded a provision of $10 million
during the second quarter of 1999 reflecting the Company's share of the proposed
settlement. The agreement in principle is subject to Board approval, the
execution of definitive documentation and subsequent court approval.
Accordingly, there can be no assurance that the settlement will be consummated.
In March 1999, the Company reported that an investigation conducted by
the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had
found certain accounting errors and irregularities with respect to the Company's
financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting
firm of Arthur Andersen LLP to assist in conducting the investigation and in
providing advice on accounting matters. Based on the results of the
investigation, the Company has restated its financial results for 1996 and 1997.
The staff of the SEC has commenced an informal investigation with respect to the
aforementioned accounting irregularities. The impact of the investigation on the
Company cannot yet be assessed.
On March 27, 1998, agents of the U.S. Customs Service and the Food and
Drug Administration arrived at the Company's principal headquarters and one
other Company location and retrieved several documents pursuant to search
warrants. The Company has subsequently been advised by an Assistant United
States Attorney for the Southern District of Florida that the Company is a
target of an ongoing grand jury investigation involving alleged fraud by one or
more of the Company's suppliers relating to the unauthorized diversion of
medical products intended for sale outside of the United States into United
States markets. The Company has also been advised that similar search warrants
were obtained with respect to approximately 14 other participants in the
distribution of medical products. The Company 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, 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
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<PAGE> 13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
potential off-site extent. In connection with the acquisition of the Lumex
Division, Fuqua assumed by contract the obligations associated with this
environmental matter. In late 1996, Fuqua conducted surficial soil remediation
at the Bay Shore facilities and reported the results to the Suffolk County
Authorities in March 1997. A ground water work plan was submitted concurrently
with the soil remediation report. In May 1997, the Suffolk County Authorities
stated that they were satisfied with the soil remediation that had been
conducted by Fuqua and provided comments on the ground water work plan.
In November 1997, the Lumex Division received the results of additional
ground water testing that had been performed in August and September 1997. The
results revealed significantly lower concentrations of contaminants than were
known at the time the "Ground Water Work Plan" was prepared in March 1997. Due
to the relatively low levels of contaminants detected, the Lumex Division
proposed sampling the groundwater on a quarterly basis for two years to ensure
that the groundwater was not significantly affected and deferred implementing
the ground water work plan. The results of the quarterly ground-water sampling
undertaken during 1998 and 1999 provide further support that the 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 June 30, 1999, the Company had reserves for the remediation costs
and additional investigation costs which will be required. Reserves are
established when it is probable that a liability has been incurred and such
costs can be reasonably estimated. The Company's estimates of these costs were
based upon currently enacted laws and regulations and the professional judgment
of independent consultants and counsel. Where available information was
sufficient to estimate the amount of liability, that estimate has been used.
Where information was only sufficient to establish a range of probable liability
and no point within the range is more likely than another, the lower end of the
range has been used. The Company has not assumed that any such costs would be
recoverable from third parties nor has the Company discounted any of its
estimated costs, although a portion of the remediation work plan will be
performed over a period of years. The amount of environmental liabilities is
difficult to estimate due to such factors as the extent to which remedial
actions may be required, laws and regulations change or the actual costs of
remediation differ when the final work plan is performed.
On August 3, 1998, the Company and another defendant, one of the
Company's employees, were served with a lawsuit initiated by JOFRA Enterprises,
Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The
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
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<PAGE> 14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
the plaintiff's allegations to be without merit, and filed a motion to dismiss
the complaint on various grounds in February 1999. The motion is scheduled to be
argued in September 1999.
In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"),
a company acquired by Graham-Field in June 1997, asserted certain claims in the
aggregate amount of approximately $3.2 million (inclusive of prejudgment
interest) against Graham-Field relating to alleged material misrepresentations
and omissions contained in the purchase agreement, certain press releases and
other public filings made by the Company with the Securities and Exchange
Commission relating to the Company's business, results of operations and
financial condition. Under the terms of the purchase agreement pursuant to which
Graham-Field acquired LaBac for approximately $9.1 million in common stock of
Graham-Field, all claims that are not resolved between the parties are to be
submitted to arbitration. The Company intends to defend the claims vigorously,
but the Company is not currently able to evaluate the likelihood of success in
this case or the range of potential loss.
On June 28, 1999, the Irving Tanning Company ("ITC"), a company
acquired as part of the acquisition of Fuqua on December 30, 1997 and sold by
Graham-Field on January 27, 1998 to a group including the former management of
ITC, asserted a claim for indemnification in the amount of $6.75 million, plus
attorney's fees and costs, against Graham-Field for certain alleged
misrepresentations contained in the purchase agreement. The claim relates to an
alleged material adverse change in the business of ITC from November 22, 1997
through January 27, 1998 and possibly prior to November 22, 1997. Under the
terms of the purchase agreement, all claims that are not resolved between the
parties may be submitted to arbitration and no indemnity payments shall be made
unless all indemnity claims exceed $1.3 million. The Company considers the
indemnity claims to be without merit and intends to defend the claims
vigorously.
The 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.
10. SERIES D PREFERRED STOCK
Effective as of May 12, 1999, BIL Securities (Offshore) Ltd. ("BIL")
waived certain events of default under a $4 million note owing by the Company to
BIL (the "BIL Note") and exchanged all of its right, title and interest under
the BIL Note, in consideration of the issuance of 2,036 fully paid, validly
issued, non-assessable shares of the Company's Series D Preferred Stock (the
"Series D Preferred Stock"). The shares of Series D Preferred Stock are
non-voting, but have substantially the same economic rights as 2,036,000 shares
of Common Stock. Based on the closing price of the Common Stock on May 12, 1999,
that number of shares would have a market value of $4,072,000, which equals the
aggregate of the unpaid principal amount and accrued interest on the BIL Note.
Simultaneously with the closing of such transaction, Graham-Field and BIL
entered into an agreement dated as of May 12, 1999, which provided Graham-Field
with the sole and exclusive option for a period of one year following May 12,
1999, to convene a meeting of its stockholders or take such other corporate
action, in accordance with applicable laws and regulatory requirements, as may
be required to obtain applicable corporate approval to exchange each share of
Series D Preferred Stock for 1,000 shares of Common Stock.
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<PAGE> 15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
(UNAUDITED)
11. CREDIT FACILITY
On August 12, 1999, the Company entered into the August 1999 Amendment
to its Credit Facility, which provides for borrowings including letters of
credit and bankers acceptances. Under the terms of the August 1999 Amendment,
the Company was provided with a Term Loan of $4.5 million, secured by certain
real estate and the existing collateral under the Credit Facility. The Term Loan
bears interest at IBJ's prime rate plus 2% and provides for the repayment of
principal at the rate of $250,000 per month commencing on September 1, 1999, and
increasing to $500,000 on January 1, 2000, with a balloon payment due upon the
maturity date of the Credit Facility. In addition, the August 1999 Amendment
provides for, among other things, a reduction in the maximum revolving advance
amount under the Credit Facility from $50 million to $35 million, the
elimination of certain availability borrowing base reserves through December 31,
1999, and an amendment to certain financial covenants. Under the terms of the
August 1999 Amendment, the interest rate on borrowings was increased from IBJ's
prime rate (7.75% at June 30, 1999) plus one percent to IBJ's prime rate plus
two percent. After giving effect to the August 1999 Amendment, the Company's
availability to borrow under the Credit Facility (including the Term Loan)
increased by approximately $6 million. As of August 11, 1999, after giving
effect to the August 1999 Amendment (including the Term Loan), the Company had
unused availability of approximately $10 million. In connection with the August
1999 Amendment, the Company paid a commitment fee of $300,000 and a waiver fee
of $400,000, which was provided for under the terms of the 1999 Amendment (as
hereinafter defined).
Under the terms of the August 1999 Amendment, the Company is required
to pay an additional waiver fee (the "Waiver Fee") in the amount of $200,000 on
or before December 31, 1999, unless the Company either presents an acceptable
business plan to the banks on or before December 31, 1999, or repays in full all
outstanding obligations under the Credit Facility on or before December 31,
1999. Notwithstanding the foregoing, in the event the Company is in receipt on
or before December 31, 1999, of a commitment letter, letter of intent or
agreement to (i) sell substantially all or a part of the assets or equity
securities of the Company in a sale, merger, consolidation or other similar
transaction, which results in the repayment of all of the outstanding
obligations under the Credit Facility, or (ii) refinance the indebtedness under
the Credit Facility (the transactions referred to in clauses (i) and (ii) are
individually referred to as a "Significant Transaction"), the payment date for
the Waiver Fee will be extended until the earlier to occur of the consummation
of a Significant Transaction, which results in the repayment of all outstanding
obligations under the Credit Facility, or March 31, 2000. The Credit Facility is
secured by substantially all of the assets of the Company, including the capital
stock of certain of the Company's subsidiaries and certain real estate.
On April 22, 1999, the Company entered into an amendment to the Credit
Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999
Amendment"). The 1999 Amendment provided for, among other things, the waiver of
certain financial covenant defaults, an amendment to certain financial
covenants, a new undrawn availability covenant relating to scheduled interest
payments on the Senior Subordinated Notes, and other terms and provisions
contained in the Credit Facility, and an extension of the term of the Credit
Facility from December 10, 1999 to May 31, 2000. The 1999 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.
-15-
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This report on Form 10-Q and the Company's report on Form 10-K for the
year ended December 31, 1998 contains forward-looking statements as defined by
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements include, but are not
limited to, statements relating to (i) the Company's ability to continue as a
going concern (ii) the Company's ability to reduce operating expenses and
working capital investment and obtain additional financing to operate the
business, (iii) the expansion of the Company's market share, (iv) the Company's
growth into new markets, (v) the development of new products and product lines
to appeal to the needs of the Company's customers, (vi) the consolidation of the
Graham-Field Express distribution network, (vii) obtaining regulatory and
governmental approvals, (viii) the upgrading of the Company's technological
resources and systems, and (ix) the ability of the Company to implement its Year
2000 remediation plan and address the risk related to Year 2000 compliance.
Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the Company's ability to continue as a going concern, the
effect of economic and market conditions, the impact of the consolidation of
healthcare practitioners, the impact of healthcare reform, the Company's ability
to effectively integrate acquired companies, and realize certain manufacturing,
operational and distribution efficiencies and cost savings, the termination of
the Company's Wheelchair Supply Agreement with P.T. Dharma Polimetal ("P.T.
Dharma"), an Indonesian company, the ability of the Company to maintain its
gross profit margins, the ability to obtain financing to operate the Company's
business, the ability of the Company to implement its Year 2000 remediation plan
and address the risks related to Year 2000 compliance, the ability of the
Company to successfully defend the class actions arising out of the Company's
public announcement on March 23, 1998 of its financial results for the fourth
quarter and year ended December 31, 1997, the failure of the Company to
successfully compete with the Company's competitors that have greater financial
resources, the loss of key management personnel or the inability of the Company
to attract and retain qualified personnel, adverse litigation results, the
acceptance and quality of new software and hardware products which will enable
the Company to expand its business, the acceptance and ability to manage the
Company's operations in foreign markets, possible disruptions in the Company's
computer systems or distribution technology systems, possible increases in
shipping rates or interruptions in shipping service, the level and volatility of
interest rates and currency values, the impact of current or pending legislation
and regulation, as well as the risks described from time to time in the
Company's filings with the Securities and Exchange Commission, which include
this report on Form 10-Q, the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and the Company's Registration Statement on Form S-4
dated as of December 19, 1997.
The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, expressed or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
-16-
<PAGE> 17
Operating Revenues
Operating revenues for the three and six month period ended June 30,
1999 were $73,805,000 and $159,071,000, respectively, representing a decrease of
approximately 24.1% and 18.5%, respectively, from the same period in the prior
year. The decrease is primarily due to the implementation of more stringent
credit policies, intense competition in the healthcare industry, the effect of
the Company's product rationalization programs to eliminate unprofitable product
lines, the negative impact of certain customers experiencing financial
difficulty and general market concerns regarding the future direction of the
Company.
Interest and Other Income
Interest and other income for the three and six month period ended June
30, 1999 was $736,000 and $926,000, respectively, as compared to $520,000, and
$935,000, respectively, for the same periods in the prior year. The net increase
during the second quarter is primarily due to the net gain on the sale of fixed
assets of $450,000 occurring in the quarter, offset by lower interest income
recognized under a loan arrangement with P.T. Dharma and dividends not received
from Irving Tanning in 1999.
Cost of Revenues
Cost of revenues as a percentage of operating revenues was 70.4% and
70.1%, respectively, for the three and six month periods ended June 30, 1999, as
compared to 69.2% and 69.0%, respectively, recorded in the same periods in the
prior year. Gross margin decreased primarily due to intense competition and
pricing pressures within the healthcare industry and lower factory utilization
during 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
operating revenues for the three and six month periods ended June 30, 1999 was
40.4% and 37.7%, respectively, as compared to 31.4% and 30.5%, respectively, in
the same periods in the prior year. The increase in selling, general and
administrative expenses as a percentage of operating revenue is primarily the
result of non-recurring accounting, audit and other professional expenses
associated with the accounting investigation conducted by the Company's Audit
Committee relating to the Company's restatement of its financial results for
1996 and 1997, consulting fees incurred in connection with the initial
implementation of the Company's strategic and operating business plan
(collectively, the "Non-Recurring Expenses"), a decrease in operating revenues,
higher bad debt expense in 1999, and costs related to the services rendered by
Jay Alix & Associates, turnaround managers hired in March 1999.
Excluding the Non-Recurring Expenses, selling, general and
administrative expenses for the three and six month periods ended June 30, 1999
were $28,494,000 and $55,195,000, respectively, as compared to $30,535,000 and
$59,581,000, respectively, in the same periods in the prior year. The reduction
in selling, general and administrative expenses is primarily related to (i)
lower distribution and warehousing costs as a result of cost savings from
certain distribution center closures in the first half of 1999 and lower
variable distribution expenses (principally outbound freight) due to reduced
sales and (ii) lower selling and marketing expenses as a result of lower
personnel costs and reduced commissions due to lower sales.
Class Action Settlement
The Company has reached an agreement in principle to settle the Class
Action, subject to certain contingencies described below. Under the terms of the
agreement in principle, the Class Action would be settled for a payment of $20
million, of which $10 million would be funded by the Company's insurance carrier
and $10 million by the Company. The agreement in principle contemplates that the
Company's $10 million contribution would be paid either from the proceeds of the
sale of the Company or, at the Company's option, from funds otherwise available.
Under the terms of the agreement in principle, in the event the shares of the
common stock of the Company are sold for an amount in excess of $3 per share
pursuant to a definitive sale/merger agreement, the shareholder class would also
be entitled to 25% of the premium in excess of $3 per share upon terms and
conditions to be agreed upon between the parties. The plaintiffs may terminate
the settlement if the Company does not enter into a definitive sale/merger
agreement on or before December 31, 1999, unless the Company has funded its $10
million contribution to the settlement prior to an election to terminate the
settlement by the plaintiffs. The Company recorded a provision of $10 million
during the second quarter of 1999 reflecting the Company's share of the proposed
settlement. The agreement in principle is subject to Board approval, the
execution of definitive documentation and subsequent court approval.
Accordingly, there can be no assurance that the settlement will be
consummated.
-17-
<PAGE> 18
Interest Expense
Interest expense for the three and six month periods ended June 30,
1999 increased to $3,093,000 and $6,333,000, respectively, as compared to
$3,039,000 and $5,807,000, respectively, for the same periods in the prior year.
The increase is primarily due to a higher cost of borrowings under the Credit
Facility, partially offset by a decreased level of borrowings in the three month
period ended June 30, 1999.
Net Loss
Loss before income taxes for the three and six month periods ended June
30, 1999 was $20,310,000 and $27,714,000, respectively, as compared to a loss
before income taxes of $3,077,000 and $3,961,000 for the same periods in the
prior year.
The increase in the loss before income taxes was primarily due to a
decrease in operating revenues, an increase in cost of revenues as a percentage
of sales, an increase in selling, general and administrative expenses, an
increase in interest expense and a $10 million provision recorded for the
proposed settlement of the Class Action.
For the three and six month periods ended June 30, 1999, the Company
did not record an income tax benefit because a full valuation allowance was
recorded against the net deferred tax assets. The Company recorded an income tax
benefit of $800,000 for the second quarter of 1998, which offset a provision
recorded in the first quarter ended March 31, 1999.
The Company's business has not been materially affected by inflation.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended June 30,
1999 was $6,963,000 compared to cash used in operating activities of $28,118,000
in the same period in the prior year. This improvement is primarily due to a
reduction in receivables, inventories and other current assets in 1999 and an
increase in accounts payable and accruals in 1999, offset by a reduction in
earnings before non-cash items in 1999. The reduction in inventories and
receivables is the result of the implementation of strategic initiatives to
reduce inventory and collect past due receivables as well as a lower level of
sales.
The Credit Facility. On August 12, 1999, the Company entered into the
August 1999 Amendment to its Credit Facility, which provides for borrowings
including letters of credit and bankers acceptances. Under the terms of the
August 1999 Amendment, the Company was provided with a Term Loan of $4.5
million, secured by certain real estate and the existing collateral under the
Credit Facility. The Term Loan bears interest at IBJ's prime rate plus 2% and
provides for the repayment of principal at the rate of $250,000 per month
commencing on September 1, 1999, and increasing to $500,000 on January 1, 2000,
-18-
<PAGE> 19
with a balloon payment due upon the maturity date of the Credit Facility. In
addition, the August 1999 Amendment provides for, among other things, a
reduction in the maximum revolving advance amount under the Credit Facility from
$50 million to $35 million, the elimination of certain availability borrowing
base reserves through December 31, 1999, and an amendment to certain financial
covenants. Under the terms of the August 1999 Amendment, the interest rate on
borrowings was increased from IBJ's prime rate (7.75% at June 30, 1999) plus one
percent to IBJ's prime rate plus two percent. After giving effect to the August
1999 Amendment, the Company's availability to borrow funds under the Credit
Facility (including the Term Loan) increased by approximately $6 million. As of
August 11, 1999, after giving effect to the August 1999 Amendment (including the
Term Loan), the Company had unused availability of approximately $10 million. In
connection with the August 1999 Amendment, the Company paid a commitment fee of
$300,000 and a waiver fee of $400,000, which was provided for under the terms of
the 1999 Amendment (as hereinafter defined).
Under the terms of the August 1999 Amendment, the Company is required
to pay an additional Waiver Fee in the amount of $200,000 on or before December
31, 1999, unless the Company either presents an acceptable business plan to the
banks on or before December 31, 1999, or repays in full all outstanding
obligations under the Credit Facility on or before December 31, 1999.
Notwithstanding the foregoing, in the event the Company is in receipt on or
before December 31, 1999, of a commitment letter, letter of intent or agreement
to (i) sell substantially all or a part of the assets or equity securities of
the Company in a sale, merger, consolidation or other similar transaction, which
results in the repayment of all of the outstanding obligations under the Credit
Facility, or (ii) refinance the indebtedness under the Credit Facility (the
transactions referred to in clauses (i) and (ii) are individually referred to as
a "Significant Transaction"), the payment date for the Waiver Fee will be
extended until the earlier to occur of the consummation of a Significant
Transaction, which results in the repayment of all outstanding obligations under
the Credit Facility, or March 31, 2000. The Credit Facility is secured by
substantially all of the assets of the Company, including the capital stock of
certain of the Company's subsidiaries and certain real estate.
On April 22, 1999, the Company entered into an amendment to the Credit
Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999
Amendment"). The 1999 Amendment provided for, among other things, the waiver of
certain financial covenant defaults, an amendment to certain financial
covenants, a new undrawn availability covenant relating to scheduled interest
payments on the Senior Subordinated Notes, and other terms and provisions
contained in the Credit Facility, and an extension of the term of the Credit
Facility from December 10, 1999 to May 31, 2000. The 1999 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.
The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Senior Subordinated Notes, the incurrence of
additional debt, liens, transactions with affiliates and certain consolidations,
mergers and acquisitions and sales of assets. In addition, Graham-Field is
prohibited from declaring or paying any dividend or making any distribution on
any shares of common stock or preferred stock of Graham-Field (other than
dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or applying any of its funds, property or assets
to the purchase, redemption or other retirement of any such shares, or of any
options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field is permitted
to pay cash dividends in any fiscal year in an amount not to exceed the greater
of (i) the amount of dividends due BIL under the terms of the Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends.
-19-
<PAGE> 20
The Senior Subordinated Notes. On August 4, 1997, Graham-Field issued
its $100 million Senior Subordinated Notes (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.
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
-20-
<PAGE> 21
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 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.
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 8
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 product pricing and product
return guidelines; (vi) the initiation of an aggressive program to collect past
due accounts receivable; and (vi) the realignment and consolidation of sale
forces and territories.
Management believes that its initiatives to improve cash flow from
operations along with the Term Loan and Credit Facility will provide sufficient
liquidity to support working capital needs, capital expenditures and regularly
scheduled debt service for the foreseeable future.
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. Graham-Field has developed, and is in the process of
implementing, a Year 2000 ("Y2K") remediation plan, in an attempt to address the
risks related to the Y2K 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 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
-21-
<PAGE> 22
accounts receivable upgrades were completed in 1997. Purchasing and inventory
control functions have been upgraded. The manufacturing system upgrade is in
process, and three of the six manufacturing sites have 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.
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.
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<PAGE> 23
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 1999, the Company did not hold any derivative financial
or commodity instruments. The Company is subject to interest rate risk and
certain foreign currency risk relating to its operations in Mexico and Canada;
however, the Company does not consider its exposure in such areas to be
material. The Company's interest rate risk is related to its Senior Subordinated
Notes, which bear interest at a fixed rate of 9.75%, and borrowings under its
Credit Facility, which bear interest at IBJ's prime rate, as adjusted from time
to time, plus two percent.
Part II. Other Information
Item 1. Legal Proceedings
See Note 9 to the Condensed Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS:
<TABLE>
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C>
10.1 Amendment No. 8 dated as of August 12, 1999,
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 ("IBJ")
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., HC
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 (collectively, the "Graham-Field
Borrowers")
10.2 Letter Agreement dated as of August 12, 1999,
by and between IBJ and the Graham-Field
Borrowers.
10.3 Mortgage and Security Agreement dated as of
August 12, 1999 by Lumex Medical Products,
Inc. to IBJ Whitehall Business Credit
Corporation, as agent.
Reports on Form 8-K:
Not applicable.
</TABLE>
-23-
<PAGE> 24
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAHAM-FIELD HEALTH PRODUCTS, INC.
(Registrant)
Date: August 13, 1999 /s/ John G. McGregor
-----------------------------------------
John G. McGregor
President and Chief Executive Officer
Date: August 13, 1999 /s/ Robert J. Gluck
-----------------------------------------
Robert J. Gluck
Senior Vice President and
Chief Financial Officer
-24-
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C>
10.1 Amendment No. 8 dated as of August 12, 1999,
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 ("IBJ")
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., HC
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 (collectively, the "Graham-Field
Borrowers").
10.2 Letter Agreement dated as of August 12,
1999, by and between IBJ and the
Graham-Field Borrowers.
10.3 Mortgage and Security Agreement dated as of
August 12, 1999 by Lumex Medical Products,
Inc. to IBJ Whitehall Business Credit
Corporation, as agent.
</TABLE>
<PAGE> 1
Exhibit 10.1
AMENDMENT NO. 8
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 8 ("Amendment") is entered into as of August 12, 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, modified and
supplemented (as further amended, supplemented or otherwise modified from time
to time, the "Loan Agreement") pursuant to which Agent and Lenders provide
Borrowers with certain financial accommodations.
<PAGE> 2
Borrowers have requested that Agent and Lenders 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. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the Loan Agreement is amended as
follows:
(a) The following definitions are added to Section 1.2:
"Amendment No. 8" shall mean Amendment No. 8 to Revolving
Credit and Security Agreement dated as of August 10, 1999.
"Amendment No. 8 Effective Date" shall mean the date all of
the conditions set forth in Section 5 of Amendment No. 8 have
been satisfied.
"December 2000 Business Plan" shall have the meaning set forth
in Section 6.18 hereof.
"December 31st, 1999 Waiver Fee" shall have the meaning set
forth in Section 6.19 hereof.
"New Payment Date" shall have the meaning set forth in Section
6.19 hereof.
"Term Loan Collateral" shall mean the mortgages in favor of
Agent for the benefit of IBJ on the real estate and
improvements located at 81 and 100 Spence Street, Bay Shore,
New York.
(b) The following definitions in Section 1.2 are amended as follows:
"Availability Reserve" shall mean (x) from the Amendment No. 8
Effective Date until December 31, 1999, $15,500,000 and (y)
thereafter, $16,500,000.
"Maximum Revolving Advance Amount" shall mean $35,000,000.
2
<PAGE> 3
"Revolving Interest Rate" shall mean an interest rate per
annum equal to the Alternate Base Rate plus two percent
(2.0%).
(c) Section 2.1(a)(y)(iii) of the Loan Agreement is amended in its
entirety to provide as follows:
"(iii) up to the lesser of (A) the product of (a) the
aggregate amount of outstanding trade Letters of Credit times
(b) the Inventory Advance Rate, or (B) $500,000 in the
aggregate at any one time, minus"
(d) Sections 6.6(d), (e) and (f) 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
($9,000,000) at the end of the fiscal quarter ending June 30,
1999 for the immediately preceding fiscal quarter;
(e) Cause Net Cash Flow to be equal to or greater than
($6,900,000) 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
($3,000,000) at the end of the fiscal quarter ending December
31, 1999 for the immediately preceding fiscal quarter;"
(e) New Sections 6.18 and 6.19 are added to the Loan Agreement which
provide as follows:
"6.18. Business Plan. Borrowers shall provide Agent with a new
business plan for the fiscal year ending December 31, 2000
(the "December 2000 Business Plan") on or prior to December
31, 1999. The December 2000 Business Plan shall be reasonably
satisfactory to Agent in all respects.
6.19. December 31st, 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 December 31,
1999 (the "December 31 Payment Date"); Borrowers shall pay
Agent for the ratable benefit of Lenders a waiver fee of
$175,000 (the December 31st, 1999 Waiver Fee"), provided,
however, if Borrowers have submitted the December 31 Business
Plan on or prior to December 31, 1999 and the terms and
conditions of the December 31 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 December 31st, 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,
3
<PAGE> 4
in the event Borrowers are in receipt on or before December
31, 1999 of a letter of intent (which is satisfactory to Agent
in its reasonable discretion), a binding commitment 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 for sufficient cash proceeds to effect 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 "New Significant Transaction"),
the payment date for the December 31st, 1999 Waiver Fee will
be extended until the earlier to occur of (i) the consummation
of a New Significant Transaction which results in the
repayment of all outstanding Obligations, or (ii) March 31,
2000, or (iii) termination or expiration of such letter of
intent, commitment letter or binding commitment (unless prior
to or simultaneously with such termination or expiration of
any such letter of intent, commitment letter or binding
commitment of any transaction under clause (x), Borrowers
enter into definitive agreements with respect to such sale).
For purposes of this Section 6.19 only, the term "Lenders"
shall include only those financial institutions that were
Lenders on the Amendment No. 8 Effective Date."
(f) 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. 8 Effective Date shall be entitled to
share the December 31st, 1999 Waiver Fee), shall become
effective on the date hereof and shall continue in full force
and effect until May 31, 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."
(g) Article XVII is amended in its entirety to provide as follows:
"XVII. Term Loan.
17. Term Loan.
(a) On the Amendment No. 8 Effective Date, Agent will
make a Term Loan to Borrowers in the amount of $4,500,000 (the
"Term Loan") with principal payable on the first day of each
month, commencing with September 1, 1999, in the amount of
$250,000 and increasing to $500,000 per month, commencing
January 1, 2000, with the outstanding principal balance and
interest due due on the last day of the Term. No other Lender
4
<PAGE> 5
shall have any obligation to join the funding of the Term
Loan. Interest on the Term Loan shall be payable in arrears on
the first day of each month with a final payment of interest
due upon the repayment of the Term Loan. Interest on the
outstanding principal balance of the Term Loan shall be
payable at a rate per annum equal to the Alternate Base Rate
plus two percent (2.0%) (the "Term Loan Rate"). Whenever,
subsequent to the date of this Agreement, the Alternate Base
Rate is increased or decreased, such interest rate shall be
similarly changed without notice or demand of any kind by an
amount equal to the amount of such change in the Alternate
Base Rate during the time such change or changes remain in
effect. Upon the occurrence of an Event of Default, and during
the continuation thereof, the Term Loan shall bear interest at
the Term Loan Rate plus two (2%) percent per annum. Only Agent
shall be entitled to earn interest on the Term Loan and such
interest shall only be for Agent's account. The Term Loan
shall be evidenced by a secured promissory note in
substantially the form attached hereto as Exhibit 17.
(b) Subject to the provisions of Section 17(d), but
notwithstanding any of the other provisions of this Agreement
to the contrary, any amounts received by Agent to be applied
to the outstanding Obligations, other than amounts received
from the proceeds of the Term Loan Collateral and amounts
specifically designated to repay the Term Loan, shall be
applied first to the Obligations other than the Term Loan in
such order as Agent in its sole discretion may determine or as
set forth in Sections 2.13 and 11.1 (as applicable) and,
second, to the Term Loan.
(c) "Exhibit 17 to the Loan Agreement is replaced with
Exhibit 17 to this Amendment."
(d) When any Borrower sells or otherwise disposes of any
Equipment, Borrowers shall repay the Term Loan in an amount
equal to the product of 12.5% multiplied by the net proceeds
of such sale (i.e., gross proceeds less the reasonable costs
of such sales or other dispositions), such repayments to be
made promptly but in no event more than one (1) Business Day
following receipt of such net proceeds, and until the date of
payment, such proceeds shall be held in trust for Agent. The
balance of such proceeds shall be applied to the Obligations
in accordance with the terms of this Agreement. The foregoing
shall not be deemed to be implied consent to any such sale
otherwise prohibited by the terms and conditions hereof.
3. 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) an $87,500 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)
5
<PAGE> 6
payment of the June 30th, 1999 Waiver Fee, (v) the Term Loan Collateral and all
other documents set forth on the attached checklist, and (vi) 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.
4. Acknowledgement. The Term Loan, constituting Indebtedness of Borrowers
to Agent, is included within the definition of "Obligations".
5. 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.
6. 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.
(c) The execution, delivery and effectiveness of this Amendment
shall not 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.
6
<PAGE> 7
7. 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.
8. 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.
9. 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.
7
<PAGE> 8
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:/s/ Richard S. Kolodny
________________________________
Name:___________________________
Title: Vice President of each of
the foregoing corporations
ATTEST:
__________________________
Name:
Title:
8
<PAGE> 9
CONSENTED AND AGREED TO:
EVEREST & JENNINGS CANADIAN LIMITED
By: /s/ Richard S. Kolodny
----------------------------
Name:
--------------------------
Title: Vice President
-------------------------
IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as
Lender and as Agent
By: /s/ Bruce Kasper
-------------------------------
Bruce Kasper, Vice President
One State Street
New York, New York 10004
Commitment Percentage: 25.00%
NATIONAL CITY COMMERCIAL FINANCE, INC.
By: /s/ Kathryn Ellero
-------------------------------
Name: Kathryn Ellero
Title:
------------------------------
1965 East Sixth Street, Suite 400
Cleveland, Ohio 44114
Commitment Percentage: 25.00%
PNC BANK, NATIONAL ASSOCIATION
By: /s/ William Gennario
-------------------------------
Name: William Gennario
Title:
------------------------------
Two Tower Center
East Brunswick, New Jersey 08816
Commitment Percentage: 25.00%
9
<PAGE> 10
DEUTSCHE FINANCIAL SERVICES CORPORATION
/s/ David Mintert
By:_______________________________
Name: David Mintert
Title:____________________________
1630 Des Peres Road
Suite 305
P.O. Box 31626
St. Louis, MO 63131
Commitment Percentage: 25.00%
10
<PAGE> 1
Exhibit 10.2
August 12, 1999
IBJ Whitehall Business Credit Corporation, as Agent
One State Street
New York, New York 10004
Gentlemen:
Reference is made to the Revolving Credit and Security Agreement dated as
of December 10, 1996 (as amended, supplemented or modified from time to time the
"Loan Agreement") by and among GRAHAM-FIELD HEALTH PRODUCTS, INC., a corporation
organized under the laws of the State of Delaware, GRAHAM-FIELD, INC., a
corporation organized under the laws of the State of New York, GRAHAM-FIELD
TEMCO, INC., a corporation organized under the laws of the State of New Jersey,
GRAHAM-FIELD DISTRIBUTION, INC., a corporation organized under the laws of the
State of Missouri, GRAHAM-FIELD BANDAGE, INC., a corporation organized under the
laws of the State of Rhode Island, GRAHAM-FIELD EXPRESS (PUERTO RICO), INC., a
corporation organized under the laws of the State of Delaware, EVEREST &
JENNINGS, INC., a corporation organized under the laws of the State of
California, LABAC SYSTEMS, INC., a corporation organized under 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 ("Fuqua"), 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 and IBJ WHITEHALL BUSINESS CREDIT CORPORATION, a
New York banking corporation ("IBJW"), as agent for Lenders (IBJW, in such
capacity, the "Agent"). Capitalized terms not otherwise defined herein shall
have the meanings as provided in the Loan Agreement.
As we have advised you, we are negotiating a settlement of the class action law
suits. Our accountants are requiring we accrue $10,000,000 of a proposed
settlement amount (the "Class Action Amount") as of June, 1999 which will
result in a violation of the Net Cash Flow covenant under Section 6.6(d) of the
Loan Agreement.
<PAGE> 2
By your signature below, kindly indicate that you, as Agent for the
Lenders, agree that for purposes of calculating Net Cash Flow under Section 6.6
of the Loan Agreement, the Class Action Amount shall be excluded. We understand
you require the consent of Required Lenders prior to executing or returning a
copy of this letter agreement.
We hereby confirm to you that if the Class Action Amount is not payable
solely from the net proceeds of the sale of the Borrowers after repaying the
Obligations in full, then any proposed settlement arrangement is subject to the
consent of Lenders.
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 ACQUISITIONS CORP. II
By: /s/ Richard S. Kolodny
-----------------------------------------
Vice President of each
-----------------------------
of the foregoing corporations
AGREED TO THIS
------
DAY OF AUGUST, 1999
IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as Agent
By: /s/ Bruce Kosper
------------------------------------------------
Title:
---------------------------------------------
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<PAGE> 1
Exhibit 10.3
MORTGAGE AND SECURITY AGREEMENT
Dated: August 12, 1999
in the amount of
$4,500,000
LUMEX MEDICAL PRODUCTS, INC.,
a Delaware corporation
having an office at:
81 Spence Street
Bayshore, New York 11706
the Mortgagor,
TO
IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as Agent
having an office at:
One State Street
New York, New York 10004
the Mortgagee
LOCATION OF PREMISES:
Street Address: 81 Spence Street and
100 Spence Street
Borough of: Bayshore
County of: Suffolk
State of: New York
Section: 200
Block: 2
Lots: 58 and 63.001
After recording, please return by mail to:
HAHN & HESSEN LLP
350 Fifth Avenue
New York, New York 10118
Attention: Ralph Miles, Esq.
This instrument was prepared by: Jeffrey Meltzer, Esq.
<PAGE> 2
MORTGAGE AND SECURITY AGREEMENT
THIS MORTGAGE AND SECURITY AGREEMENT, made as of the 12th day of
August, 1999 by LUMEX MEDICAL PRODUCTS, INC., a Delaware corporation having an
office at 81 Spence Street, Bayshore, New York 11706, (the "Mortgagor"), to IBJ
WHITEHALL BUSINESS CREDIT CORPORATION, as Agent, having an office at One State
Street, New York, New York 10004 (the "Mortgagee").
WITNESSETH, that to secure the payment of an indebtedness in the
principal sum of FOUR MILLION FIVE HUNDRED THOUSAND ($4,500,000) DOLLARS lawful
money of the United States of America, to be paid according to a certain bond,
note or obligation made by the Mortgagor, as borrower, to the Mortgagee, bearing
even date herewith and by this reference made a part hereof as said bond, note
or obligation may be hereinafter modified, amended, extended, renewed or
substituted for (the "Note"), which Note is executed in connection with that
certain Revolving Credit and Security Agreement dated as of December 10, 1996
(as the same has been or may be amended, modified, restated of supplemented from
time to time, the "Loan Agreement") and any and all sums, amounts and expenses
paid hereunder or thereunder by the Mortgagee according to the terms hereof and
all other obligations and liabilities of the Mortgagor under this Mortgage, the
Loan Agreement and the Note, together with all interest on the said
indebtedness, obligations, liabilities, sums, amounts and expenses and any and
all other obligations and liabilities now due and owing or which may hereafter
be or become due and owing by the Mortgagor to the Mortgagee hereunder or under
the Loan Agreement or the Note, provided, however, that the maximum principal
sum secured by this Mortgage at execution or which under any contingency may be
secured hereby at any time in the future shall not exceed the principal sum
stated above (all of the aforesaid are hereinafter collectively, the
"Indebtedness"), the Mortgagor, as hereinafter provided, hereby mortgages,
grants, bargains, sells, warrants, conveys, alienates, remises, releases,
assigns, sets over and confirms to the Mortgagee and grants to the Mortgagee a
security interest in:
I. All of the right, title and interest of the Mortgagor in and to
that certain lot, piece or parcel of land (the "Real Property") more
particularly described as on Schedule "A" annexed hereto and made a part hereof;
and
II. All of the right, title and interest of the Mortgagor in and to
the buildings and improvements (hereinafter, collectively, together with all
building equipment, the "Improvements") now or hereafter located on the Real
Property and all of its right, title and interest, if any, in and to: the
streets and roads abutting the Real Property to the center lines thereof, and
strips and gores within or adjoining the Real Property, the air space and right
to use said air space above the Real Property, all rights of ingress and egress
by motor vehicles to parking facilities on or within the Real Property, all
easements now or hereafter affecting the Real Property or the Improvements, all
royalties and all rights appertaining to the use and
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enjoyment of the Real Property or the Improvements, including, without
limitation, alley, drainage, crop, timber, agricultural, horticultural, mineral,
water, oil and gas rights; and
III. Subject to any applicable equipment financing in the ordinary
course of business permitted by the Loan Agreement, all of the right, title and
interest of the Mortgagor in and to all fixtures and articles of personal
property and all appurtenances and additions thereto and substitutions or
replacements thereof, now or hereafter attached to, or contained in, the Real
Property and/or the Improvements or placed on any part thereof, though not
attached thereto, including, but not limited to, all screens, awnings, shades,
blinds, curtains, draperies, carpets, rugs, furniture and furnishings, heating,
lighting, plumbing, ventilating, air conditioning, refrigerating, incinerator
and/or compacting and elevator plants, stoves, ranges, vacuum cleaning systems,
call systems, sprinkler systems and other fire prevention and extinguishing
apparatus and materials, motors, machinery, pipes, appliances, equipment,
fittings and fixtures, and the trade name, good will and books and records
relating to the business operated on the Real Property and/or the Improvements.
Without limiting the foregoing, the Mortgagor hereby grants to the Mortgagee a
security interest in all of its right, title and interest in and to all present
and future "equipment" and "general intangibles" (as said quoted terms are
defined in the Uniform Commercial Code of the State wherein the Real Property
and/or the Improvements are located) and the Mortgagee shall have, in addition
to all rights and remedies provided herein, and in any other agreements,
commitments and undertakings made by the Mortgagor to the Mortgagee, all of the
rights and remedies of a "secured party" under the said Uniform Commercial Code.
To the extent permitted under applicable law, this Mortgage shall be deemed to
be a "security agreement" (as defined in the aforesaid Uniform Commercial Code).
If the lien of this Mortgage is subject to a security interest covering any such
personal property, then all of the right, title and interest of the Mortgagor in
and to any and all such property is hereby assigned to the Mortgagee, together
with the benefits of all deposits and payments now or hereafter made thereon by
the Mortgagor; and
IV. All of the right, title and interest of the Mortgagor in and to
all leases, lettings and licenses of the Real Property, the Improvements and/or
any other property or rights encumbered or conveyed hereby, or any part thereof,
now or hereafter entered into and all right, title and interest of the Mortgagor
thereunder, including, without limitation, cash and securities deposited
thereunder, the right to receive and collect the rents, issues and profits
payable thereunder and the right to enforce, whether by action at law or in
equity or by other means, all provisions, covenants and agreements thereof; and
V. All right, title and interest of the Mortgagor in and to all
unearned premiums, accrued, accruing or to accrue under insurance policies now
or hereafter obtained by the Mortgagor and all proceeds of the conversion,
voluntary or involuntary, of the Real Property, the Improvements and/or any
other property or rights encumbered or conveyed hereby, or any part thereof,
into cash or liquidated claims, including, without limitation, proceeds of
hazard and title insurance and all awards and compensation heretofore and
hereafter made to the present and all subsequent owners of the Real Property,
the Improvements and/or any other property or rights encumbered or conveyed
hereby by any governmental or other lawful authority for the taking by eminent
domain, condemnation or otherwise, of all or any part of the Real Property, the
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<PAGE> 4
Improvements and/or any other property or rights encumbered or conveyed hereby
or any easement therein, including, but not limited to, awards for any change of
grade of streets; and
VI. All right, title and interest of the Mortgagor in and to all
extensions, improvements, betterments, renewals, substitutions and replacements
of and all additions and appurtenances to the Real Property, the Improvements
and/or any other property or rights encumbered or conveyed hereby, hereafter
acquired by or released to the Mortgagor or constructed, assembled or placed by
the Mortgagor on the Real Property, the Improvements and/or any other property
or rights encumbered or conveyed hereby, and all conversions of the security
constituted thereby which, immediately upon such acquisition, release,
construction, assembling, placement or conversion as the case may be, and in
each such case without any further mortgage, conveyance, assignment or other act
by the Mortgagor, shall become subject to the lien of this Mortgage as fully and
completely, and with the same effect, as though now owned by the Mortgagor and
specifically described herein (the Real Property and the Improvements, together
with the fixtures and other property, rights, privileges and interests
encumbered or conveyed hereby hereinafter, collectively, the "Premises").
TO HAVE AND TO HOLD the Premises unto the Mortgagee and its
successors and assigns until the Indebtedness is paid in full.
AND the Mortgagor covenants and agrees with the Mortgagee as
follows:
ARTICLE I
Representations and Warranties of the Mortgagor
The Mortgagor represents and warrants to the Mortgagee as follows:
Section 1.1. Title to the Premises. (i) The right, title and
interest of the Mortgagor constitutes good, marketable and insurable title to
the Premises, subject only to those exceptions to title in respect of the Real
Property and the Improvements set forth in the marked title insurance binder
redated as of the date hereof and insuring the interest of the Mortgagee in, to
and under this Mortgage (the "Title Binder"); (ii) the Mortgagor has full power
and lawful authority to encumber the Premises in the manner and form set forth
hereunder; (iii) the Mortgagor owns all fixtures and articles of personal
property now or hereafter comprising part of the Premises, subject to the rights
of space tenants in and to any such fixtures, personal property or
installations, including any substitutions or replacements thereof free and,
subject to any applicable equipment financing or leasing in the ordinary course
of business permitted by the Loan Agreement, clear of all liens and claims other
than the matters set forth in this Section; (iv) this Mortgage is and will
remain a valid and enforceable first lien on the Premises; and (v) the Mortgagor
will preserve such title, and will forever warrant and defend the validity and
priority of the lien hereof against the claims of all persons and parties
whatsoever.
Section 1.2. Mortgage Authorized. The execution and delivery of this
Mortgage, the Loan Agreement and the Note have been duly authorized by the
directors of the
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<PAGE> 5
Mortgagor and there is no provision in the certificate of incorporation or
by-laws of the Mortgagor, requiring further consent for such action by any other
entity or person. The Mortgagor is duly organized, validly existing and is in
good standing under the laws of the state of its formation, and has (i) all
necessary licenses, authorizations, registrations, permits and/or approvals (the
absence of which will not have a material adverse effect upon the conduct of the
Mortgagor's business at the Premises taken as a whole) and (ii) full power and
authority to own its properties and carry on its business as presently conducted
and the execution and delivery by it of, and performance of its obligations
under, this Mortgage, the Loan Agreement and the Note will not result in the
Mortgagor being in default under any provision of its certificate of
incorporation or by-laws or of any mortgage, lease, credit or other agreement to
which it is a party or which affects it or the Premises, or any part thereof.
Section 1.3. Flood Insurance Status. The Premises are not located in
an area identified by the Secretary of Housing and Urban Development as an area
having special flood hazards pursuant to the terms of the National Flood
Insurance Act of 1968, or the Flood Disaster Protection Act of 1973, as same may
have been amended to date.
Section 1.4. Operation of the Premises. Except for those items the
absence of which shall not have a material adverse effect upon the conduct of
the Mortgagor's business at the Premises taken as a whole, (i) The Mortgagor has
all necessary certificates, licenses, authorizations, registrations, permits
and/or approvals necessary for the operation of the Premises or any part
thereof, including but not limited to, a Permanent Certificate of Occupancy and,
if applicable, a Board of Fire Underwriters Certificate for the Improvements and
all required environmental permits, all of which as of the date of the signing
hereof are in full force and effect and not, to the knowledge of the Mortgagor,
subject to any revocation, amendment, release, suspension, forfeiture or the
like, (ii) the present use and/or occupancy of the Premises and/or Improvements
does not conflict with or violate any such certificate, license, authorization,
registration, permit and/or approval, or any applicable law, ordinance, statute,
rule, order, requirement or regulation and (iii) the Mortgagor has delivered to
the Mortgagee, prior to the signing hereof, duplicate originals or appropriately
certified copies of all such certificates, licenses, authorizations,
registrations, permits and/or approvals.
ARTICLE II
Covenants of the Mortgagor
Section 2.1. Payment of the Indebtedness. The Mortgagor will
punctually pay the Indebtedness in same day funds as provided herein and in the
Loan Agreement and the Note, all in the coin and currency of the United States
of America which is legal tender for the payment of public and private debts.
Section 2.2. Maintenance of the Improvements.
(i) The Mortgagor shall maintain the Improvements in good
repair, ordinary wear and tear excepted, shall comply with the requirements of
any governmental
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<PAGE> 6
authority claiming jurisdiction over the Premises within the lesser of thirty
(30) days after an order (an "Order") containing such requirement has been
issued by any such authority or the time required pursuant to the terms of such
Order (unless such requirement cannot reasonably be complied with within such
thirty (30) day period, in which event the Mortgagor shall have such longer
period as necessary to cause compliance provided, however, that the Mortgagor
shall promptly commence and diligently prosecute to completion such compliance
and provided, further, that such period shall not exceed the time required
pursuant to the terms of such Order or such longer time as may be permitted by
applicable law) and shall permit the Mortgagee to enter upon the Improvements
and inspect the Improvements at all reasonable hours (with reasonable prior
notice provided that no Event of Default has occurred and is continuing). The
Mortgagor shall not, without the prior written consent of the Mortgagee,
threaten, commit, permit or suffer to occur any waste, material structural
alteration, demolition or removal of the Improvements or any part thereof;
provided, however, that fixtures and articles of personal property (which shall
not be deemed to include raw materials, goods for sale, inventory and other
personal property that is bought, sold or stored in the ordinary course of
Mortgagor's trade or business) owned by the Mortgagor may be removed from the
Improvements if the Mortgagor concurrently therewith replaces same with
equivalent items which do not reduce the value of the Premises or the
Improvements, free of any lien, charge or claim superior to the lien and/or
security interest created hereby.
(ii) Nothing in this Section 2.2 shall require the compliance
by the Mortgagor with any Order so long as (a) the failure so to do shall not be
a default or event of default under any mortgage or security agreement affecting
the Premises, any part thereof or interest therein, (b) the failure so to do
shall not result in the voiding, rescission or invalidation of the certificate
of occupancy or any other license, certificate, permit or registration required
for the use or occupancy of the Premises, (c) the failure so to do shall not
prevent, hinder or interfere with the lawful use and occupancy of the entirety
of the Improvements for their present use and occupancy, (d) the failure so to
do shall not void or invalidate any insurance maintained by the Mortgagor in
respect of the Premises, or result in an increase of any premium therefor or a
decrease in any coverage provided thereby, and (e) the Mortgagor in good faith
and at its own expense shall contest the Order or the validity thereof by
appropriate legal proceedings, which proceedings must operate to prevent (1) the
occurrence of any of the events described in the preceding clauses (a) through
(d) of this paragraph (ii), to the extent same are not already prevented, and
(2) the collection or other realization on any sums due or payable as a
consequence of the Order, the sale of any lien arising in respect of the Order,
and/or the sale or forfeiture of the Premises, any part thereof or interest
therein, or the sale of any lien connected therewith; provided that during such
contest the Mortgagor shall, at the option of the Mortgagee, provide security
reasonably satisfactory to the Mortgagee assuring the discharge of the
Mortgagor's obligations hereunder and of any interest, charge, fine, penalty,
fee or expense arising from or incurred or reasonably expected to arise or incur
as a result of such contest; and provided further if at any time compliance with
any obligation imposed upon the Mortgagor by the Order shall become necessary to
prevent (1) the occurrence of any of the events described in clauses (a) through
(d) of this paragraph (ii) or (2) the delivery of a deed conveying the Premises
or any portion thereof or interest therein because of noncompliance, or the sale
of a lien in connection therewith, or (3) the imposition of any penalty, fine,
charge, fee, cost or expense on the Mortgagee, then the Mortgagor shall comply
with the Order in sufficient time to prevent the
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occurrence of any such events, the delivery of such deed or the sale of such
lien, or the imposition of such penalty, fine, charge, fee, cost or expense on
the Mortgagee.
Section 2.3. Insurance; Coverage. The Mortgagor shall keep the
Improvements insured against (i) damage by fire and the other hazards covered by
the standard extended coverage all risk insurance policy, and (ii) damage by
vandalism, malicious mischief, and such other hazards against which the
Mortgagee shall require insurance, and each policy of insurance required
pursuant to this Section 2.3 shall be endorsed to name the Mortgagee as a
mortgagee-loss payee thereunder, as its interest may appear, with loss payable
to the Mortgagee without contribution or assessment, under a New York Standard
Mortgagee Clause. All insurance policies and endorsements required pursuant to
this Section 2.3 shall be fully paid for, nonassessable and contain such
provisions (including, without limitation, inflation guard and replacement cost
endorsements) and expiration dates and shall be in such form and amounts and
issued by such insurance companies as shall be reasonably approved by the
Mortgagee. In addition to the insurance policies above described, the Mortgagor
shall keep and maintain in effect insurance policies in respect of rental loss,
Workmen's Compensation, employees' liability coverage, comprehensive public
liability insurance (including contractual coverage), boiler and machinery, and
such other insurance as the Mortgagee may reasonably require; all in such form,
with such coverage, in such amounts and issued by such insurance companies as
shall be reasonably approved by the Mortgagee. Without limiting the foregoing,
each policy of insurance required hereunder shall provide that such policy may
not be cancelled, expire, or be terminated (whether due to nonpayment of
premiums, surrender by the insured, or other reason) except upon thirty (30)
days' prior written notice to the Mortgagee and that no act or thing done by the
Mortgagor shall invalidate the policy as against the Mortgagee. In addition, the
Mortgagee may require the Mortgagor to carry such other insurance on the
Improvements in such amounts as may from time to time be reasonably required by
institutional lenders, against insurable casualties (including, without
limitation, risks of war and nuclear explosion) which at the time are commonly
insured against in the case of premises similarly situated, due regard being
given to the site and the type of the building, the type of construction, the
stage of construction, location, utilities and occupancy or any replacements or
substitutions therefor. The Mortgagor shall additionally keep the Improvements
insured against loss by flood if the Premises are located in an area identified
by the Secretary of Housing and Urban Development as an area having special
flood hazards and in which the Flood Insurance Act of 1968 and the Flood
Disaster Protection Act of 1973, as the same may have been or may hereafter be
amended or modified (and any successor acts thereto) in an amount at least equal
to the outstanding Indebtedness or the maximum limit of coverage available with
respect to the Improvements under said Act, whichever is less, and in a company
or companies to be reasonably approved by the Mortgagee. In all events and
without a modification of or limitation on the foregoing the Mortgagor will
deliver the policy or policies (or true copies thereof) of all such insurance to
the Mortgagee, which policy or policies shall have endorsed thereon the New York
Standard Mortgagee Clause (provided, however, the Mortgagee shall have thirty
(30) days' notice from the insurer prior to the expiration, cancellation or
termination (for any reason whatsoever) of any policy) in the name of the
Mortgagee, so and in such manner and form that the Mortgagee and its successors
and assigns shall at all times have and hold said policy or policies as
collateral and further security for the payment of the Indebtedness until the
full payment of the Indebtedness. In addition, from time to time, upon the
occurrence of any material change in the use, operation or
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<PAGE> 8
value of the Premises or any part thereof, or in the availability of insurance
in the area in which the Premises are located, the Mortgagor shall promptly
notify the Mortgagee of such change and shall, within five (5) business days
after demand by the Mortgagee, take out such additional amounts and/or such
other kinds of insurance as the Mortgagee may reasonably require. Otherwise, the
Mortgagor shall not take out or permit any separate or additional insurance
which is contributing in the event of loss unless it is endorsed in favor of the
Mortgagee in accordance with the requirements hereof and otherwise satisfactory
to the Mortgagee in all respects. Insurance required hereunder may be carried by
the Mortgagor pursuant to blanket policies, provided that all other requirements
herein set forth are satisfied and that the underlying policy in respect of the
Premises is delivered to the Mortgagee as herein required or a copy thereof and
a certificate from the insurance company evidencing compliance with the above
requirements shall be delivered to Mortgagee. In the event that the Mortgagor
fails to keep the Premises insured in compliance with this Section 2.3, the
Mortgagee may, but shall not be obligated to, obtain insurance and pay the
premiums therefor and the Mortgagor shall, on demand, reimburse the Mortgagee
for the reasonable amount of all sums, advances and expenses incurred in
connection therewith and such sums, advances and expenses shall bear interest at
the Default Rate (as defined in Section 2.13 of this Mortgage) until reimbursed.
The Mortgagor shall deliver copies of all original policies to the Mortgagee
together with the endorsements thereto required hereunder. The proceeds of
insurance paid on account of any damage or destruction to the Premises or any
part thereof shall be paid over to the Mortgagee to be applied as hereinafter
provided. Notwithstanding anything to the contrary contained herein or in any
provision of applicable law, the proceeds of insurance policies coming into the
possession of the Mortgagee shall not be deemed trust funds and the Mortgagee
shall be entitled to dispose of such proceeds as hereinafter provided in Section
2.4.
Section 2.4. Insurance; Proceeds. The Mortgagor shall give the
Mortgagee prompt notice of any loss covered by insurance and the Mortgagee shall
have the right to join the Mortgagor in adjusting any loss in excess of
$150,000. So long as no Event of Default has occurred and is continuing and the
outstanding Advances do not exceed the lesser of the Maximum Revolving Advance
Amount or the Formula Amount, as provided by Section 4.11 of the Loan Agreement,
Mortgagee shall apply all such proceeds towards the restoration of the
Improvements, subject, however, to the provisions of Section 2.6 hereof. In the
event any such insurance proceeds shall be used to reduce the Indebtedness, the
same shall be applied by the Mortgagee, after the deduction therefrom and
repayment to the Mortgagee of any and all costs incurred by the Mortgagee in the
recovery thereof, in any manner it shall designate, including but not limited
to, the application of such proceeds to then unpaid installments of the
principal balance of the Indebtedness in the inverse order of their maturity,
such that the regular payments, if any, under the Note shall not be reduced or
altered in any manner. In the event that the insurance proceeds are applied to
the restoration of the Improvements, then such use of the proceeds shall be
governed as hereinafter provided in Section 2.6.
Section 2.5. Restoration of the Improvements. In the event of damage
or destruction of the Improvements, or any part thereof, as a result of
casualty, condemnation, taking or other cause, the Mortgagor shall give prompt
written notice thereof to the Mortgagee and (except in the event of
impossibility of restoration or repair in the event of condemnation or other
taking), provided that the Mortgagee shall make available to the Mortgagor the
insurance
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proceeds (if any) (or in the event of condemnation or taking, the award (if any)
arising out of such condemnation or taking) recovered by the Mortgagee as herein
provided, the Mortgagor shall promptly commence and diligently continue to
perform the repair, restoration and rebuilding of that portion of the
Improvements so damaged or destroyed (hereinafter, the "Work") so as to restore
the Improvements in full compliance with all legal requirements and so that the
Improvements shall be at least equal in value and general utility as they were
prior to the damage or destruction (or to the extent practicable in the case of
condemnation), and if the Work to be done is structural and if the cost of the
Work, as estimated by the Mortgagee, shall exceed One Hundred Fifty Thousand
($150,000) Dollars (hereinafter, collectively, "Major Work"), the Mortgagor
shall, prior to the commencement of the Major Work, furnish to the Mortgagee for
its approval, not to be unreasonably withheld or delayed: (i) complete plans and
specifications for the Major Work, with satisfactory evidence of the approval
thereof (a) by all governmental authorities whose approval is required, (b) by
all parties to or having an interest in the leases, if any, of any portion of
the Premises whose approval is required, and (c) by an architect reasonably
satisfactory to the Mortgagee (hereinafter, the "Architect") and which shall be
accompanied by the Architect's signed estimate, bearing the Architect's seal, of
the entire cost of completing the Major Work; (ii) certified or photostatic
copies of all permits and approvals required by law in connection with the
commencement of the Work and as and when obtainable, the conduct of the Work;
and (iii) a surety bond and/or guaranty of the payment for and completion of the
Major Work, which bond or guaranty shall be in form and substance reasonably
satisfactory to the Mortgagee and shall be signed by a surety or sureties, or
guarantor or guarantors, as the case may be, who are reasonably acceptable to
the Mortgagee, and in an amount not less than the Architect's estimate of the
entire cost of completing the Work, less the amount of insurance proceeds (or
condemnation award), if any, then held by the Mortgagee for application toward
the cost of the Work.
The Mortgagor shall not commence any of the Major Work until the
Mortgagor shall have complied with the applicable requirements referred to in
this Section, and after commencing the Major Work the Mortgagor shall perform
the Major Work diligently and in good faith substantially in accordance with the
plans and specifications referred to in this Section 2.5, if applicable.
Section 2.6. Restoration; Advances. In the event that the Mortgagee,
is required to make the insurance proceeds available for the restoration of the
Improvements, the insurance proceeds (or, in the case of condemnation or taking,
the award therefor in the event that the Mortgagee is required to apply such
award to repair and restoration) recovered by the Mortgagee on account of damage
or destruction to the Improvements (if any) less the reasonable cost, if any, to
the Mortgagee of such recovery and of paying out such proceeds (including
reasonable attorneys' fees and reasonable costs allocable to inspecting the Work
and the plans and specifications therefor), shall be applied by the Mortgagee to
the payment of the cost of the Work and shall be paid out from time to time to
the Mortgagor and/or, at the Mortgagee's option exercised from time to time,
directly to the contractor, subcontractors, materialmen, laborers, engineers,
architects and other persons rendering services or materials for the Work, as
said Work progresses except as otherwise hereinafter provided, but subject to
the following conditions, any of which the Mortgagee may waive:
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(i) if the Work to be done is Major Work, as determined by the
Mortgagee, the Architect shall be in charge of the Work;
(ii) each request for payment shall be made on seven (7) days'
prior notice to the Mortgagee and shall be accompanied by (a) a certificate of
the managing general partner or chief financial officer of the Mortgagor, as
applicable, specifying the party to whom (and for the account of which) such
payment is to be made and (b) a certificate of the Architect if one be required
under Section 2.5 above, otherwise by a certificate of the managing general
partner or chief financial officer of the Mortgagor, as applicable, stating (a)
that all of the Work completed has been done in substantial compliance with the
approved plans and specifications, if any be required under said Section 2.5,
and in accordance with all provisions of law; (b) the sum requested is justly
required to reimburse the Mortgagor for payments by the Mortgagor to, or is
justly due to, the contractor, subcontractors, materialmen, laborers, engineers,
architects or other persons rendering services or materials for the Work (giving
a brief description of such services and materials), and that when added to all
sums, if any, previously paid out by the Mortgagee does not exceed the value of
the Work done to the date of such certificate, and (c) (unless the Mortgagor
shall have complied with the provisions of paragraph (vii) of this Section) that
the amount of such proceeds remaining in the hands of the Mortgagee, together
with any sums deposited with the Mortgagee pursuant to clause (vii) of this
Section 2.6, will be sufficient on completion of the Work to pay for the same in
full (giving in such reasonable detail as the Mortgagee may require an estimate
of the cost of such completion);
(iii) each request shall be accompanied by waivers of liens,
or if unavailable, lien bonds, reasonably satisfactory to the Mortgagee covering
that part of the Work previously paid for, if any, and by a search prepared by
the title insurance company insuring the lien of this Mortgage or by such other
title company or licensed abstractor reasonably satisfactory to the Mortgagee or
by other evidence reasonably satisfactory to the Mortgagee, that there has not
been filed with respect to the Premises any mechanic's lien or other lien or
instrument for the retention of title in respect of any part of the Work not
discharged of record and that there exist no encumbrances on or affecting the
Premises (or any part thereof) other than encumbrances, if any, existing as of
the date hereof and which have been approved by the Mortgagee;
(iv) no event shall have occurred and be continuing which with
the passage of time or the giving of notice, or both, would constitute an Event
of Default;
(v) the request for any payment after the Work has been
completed shall be accompanied by certified copies of all certificates, permits,
licenses, waivers and/or other documents required by law (or pursuant to any
agreement binding upon the Mortgagor or affecting the Premises or any part
thereof) to render occupancy of the Premises legal;
(vi) the Work can be completed on or before such date as the
Architect or any inspecting engineer engaged by the Mortgagee shall determine;
and
(vii) the Mortgagor, prior to the commencement of the Work,
shall have deposited with the Mortgagee an amount equal to the difference
between the cost of the Work, as
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reasonably estimated by the Architect, and the net insurance proceeds (or
condemnation award, as the case may be) after the deduction therefrom of the
reasonable cost, if any, to the Mortgagee of the recovery and paying out of such
proceeds (including reasonable attorneys' fees and costs allocable to inspecting
the Work and the plans and specifications therefor).
Upon completion of the Work and payment in full therefor, or upon
failure on the part of the Mortgagor promptly to commence or diligently to
continue the Work, or at any time upon request by the Mortgagor, the Mortgagee
may, at its option, apply the amount of any such proceeds then or thereafter in
the hands of the Mortgagee to the payment of the Indebtedness, provided ,
however, that nothing herein contained shall prevent the Mortgagee from applying
at any time the whole or any part of such proceeds to the curing of any Event of
Default.
In the event the Work to be done is not Major Work, as reasonably
determined by the Mortgagee, then the net insurance proceeds held by the
Mortgagee for application thereto shall be paid to the Mortgagor by the
Mortgagee from time to time upon submission to the Mortgagee of bills and/or
invoices showing costs incurred in connection with the Work, subject, however,
to the foregoing provisions of this Section 2.6, except those which are
applicable only if the Work to be done is Major Work, as determined by the
Mortgagee.
Section 2.7. Restoration by the Mortgagee. Provided that the
Mortgagee shall make available to the Mortgagor the insurance proceeds (if any)
recovered by the Mortgagee as herein provided, if within one hundred twenty
(120) days after the occurrence of any damage or destruction to the Improvements
requiring Major Work in order to restore the Improvements, the Mortgagor shall
not have submitted to the Mortgagee and received the Mortgagee's approval of
plans and specifications for the repair, restoration and rebuilding of the
Improvements so damaged or destroyed (approved by the Architect and by all
governmental authorities and other persons or entities, if any, whose approval
is required), or if, after such plans and specifications are approved by all
such governmental authorities and other persons or entities, if any, and the
Mortgagee, the Mortgagor shall fail to commence promptly such repair,
restoration and rebuilding, or if thereafter the Mortgagor fails diligently to
continue such repair, restoration and rebuilding or is delinquent in the payment
to mechanics, materialmen or others of the costs incurred in connection with
such Major Work, or, in the case of any damage or destruction not requiring
Major Work, as reasonably determined by the Mortgagee, in order to restore the
Improvements, if the Mortgagor shall fail to repair, restore and rebuild
promptly the Improvements so damaged or destroyed, then, in addition to all
other rights herein set forth, and after giving the Mortgagor ten (10) days'
written notice of the nonfulfillment of one or more of the foregoing conditions,
the Mortgagee, or any lawfully appointed receiver of the Premises, may at their
respective options, perform or cause to be performed such repair, restoration
and rebuilding, and may take such other steps as they deem advisable to perform
such repair, restoration and rebuilding, and upon twenty-four (24) hours' prior
written notice to the Mortgagor, the Mortgagee may thereafter enter upon the
Improvements to the extent reasonably necessary or appropriate for any of the
foregoing purposes, and the Mortgagor hereby waives, for the Mortgagor and all
others holding under the Mortgagor, any claim against the Mortgagee and such
receiver arising out of anything done by the Mortgagee or such receiver pursuant
hereto, except any claims, loss, cost or expense resulting from their gross (but
not mere) negligence or willful misconduct, and the Mortgagee may, at its
option, apply insurance proceeds (without the
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need by the Mortgagee to fulfill any other requirements of this Mortgage) to
reimburse the Mortgagee, and/or such receiver for all amounts reasonably
expended or incurred by them, respectively, in connection with the performance
of such Work, and any excess costs shall be paid by the Mortgagor to the
Mortgagee upon demand, and such payment of excess costs shall be deemed part of
the Indebtedness and shall be secured by the lien of this Mortgage.
Section 2.8. Maintenance of Existence. The Mortgagor will, so long
as it is owner of the Premises (or any part thereof or interest therein), do all
things necessary to preserve and keep in full force and effect its existence,
franchises, rights and privileges under the laws of the state of its formation
and, subject to the provisions of paragraph (ii) of Section 2.2, will comply
with all regulations, rules, ordinances, statutes, orders and decrees of any
governmental authority or court applicable to the Mortgagor, or to the Premises
or any part thereof except for the failure to comply with such regulations,
rules, ordinances, statutes, orders and/or decrees which shall not have a
material adverse effect upon the conduct of the Mortgagor's business at the
Premises taken as a whole.
Section 2.9. Taxes and Other Charges.
(i) The Mortgagor shall pay and discharge by the last day
payable without penalty or premium all taxes of every kind and nature, water
rates, sewer rents and assessments, levies, permits, inspection and license fees
and all other charges imposed upon or assessed against the Premises or any part
thereof or upon the revenues, rents, issues, income and profits of the Premises
or arising in respect of the occupancy, use or possession thereof unless
Mortgagee is paying same pursuant to Section 2.16 hereof. The Mortgagor shall
exhibit to the Mortgagee within ten (10) days after request and after the same
are required to be paid pursuant to the foregoing sentence, validated receipts
or other evidence satisfactory to the Mortgagee showing the payment of such
taxes, assessments, water rates, sewer rents, levies, fees and other charges
which may be or become a lien on the Premises. Should the Mortgagor default in
the payment of any of the foregoing taxes, assessments, water rates, sewer
rents, levies, fees or other charges, the Mortgagee may, but shall not be
obligated to, pay the same or any part thereof and the Mortgagor shall, on
demand, reimburse the Mortgagee for all amounts so paid and such amounts shall
bear interest at the Default Rate (as defined in Section 2.13 of this Mortgage)
until reimbursed.
(ii) Nothing in this Section 2.9 shall require the payment or
discharge of any obligation imposed upon the Mortgagor by subsection (i) of this
Section 2.9 so long as the Mortgagor shall in good faith and at its own expense
contest the same or the validity thereof by appropriate legal proceedings which
proceedings must operate to prevent the collection thereof or other realization
thereon, the sale of the lien thereof and the sale or forfeiture of the Premises
or any part thereof, to satisfy the same; provided that during such contest the
Mortgagor shall, at the option of the Mortgagee, provide security reasonably
satisfactory to the Mortgagee, assuring the discharge of the Mortgagor's
obligation hereunder and of any additional interest charge, penalty or expense
arising from or incurred as a result of such contest; and provided, further,
that if at any time payment of any obligation imposed upon the Mortgagor by
subsection (i) of this Section 2.9 shall become necessary to prevent the
delivery of a tax deed conveying the Premises or any portion thereof or the sale
of the tax lien therefor because of non-payment, or the
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imposition of any penalty or cost on the Mortgagee, then the Mortgagor shall
pay the same in sufficient time to prevent the delivery of such tax deed or the
sale of such lien, or the imposition of such penalty or cost on the Mortgagee.
(iii) The Mortgagor shall pay when due all (a) premiums for
fire, hazard and other insurance required to be maintained by the Mortgagor on
the Premises pursuant to the terms of Section 2.3 hereof, (b) title insurance
premiums relating to the insurance to be maintained on the Premises in
connection with the Mortgage, and (c) any and all other costs, expenses and
charges expressly required to be paid hereunder, and subject to the provisions
hereof, to be paid for the maintenance and/or protection of, or on account of,
any other collateral delivered, assigned, pledged, mortgaged, transferred or
hypothecated to the Mortgagee as security for the Indebtedness or in connection
with the execution and delivery of this Mortgage.
Section 2.10. Mechanics' and Other Liens.
(i) The Mortgagor shall pay, bond or discharge of record, from
time to time, forthwith, all liens (and all claims and demands of mechanics,
materialmen, laborers or others, which, if unpaid, might result in or permit the
creation of a lien) on or affecting the Premises or any part thereof, or on or
affecting the revenues, rents, issues, income or profits arising therefrom and,
in general, the Mortgagor forthwith shall do, at the cost of the Mortgagor and
without expense to the Mortgagee, everything necessary to fully preserve the
lien of this Mortgage. In the event that the Mortgagor fails in a timely manner
(within five (5) days after written notice to Mortgagor) to make payment in full
of, bond or discharge, such liens the Mortgagee may, but shall not be obligated
to, make payment, bond or discharge such liens, and the Mortgagor shall, on
demand, reimburse the Mortgagee for all sums so expended and such sums shall
bear interest at the Default Rate (as defined in Section 2.13 of this Mortgage)
until reimbursed.
(ii) Nothing in this Section 2.10 shall require the payment or
discharge of any obligation imposed upon the Mortgagor by subsection (i) of this
Section 2.10 so long as the Mortgagor shall bond or discharge any lien on the
Premises arising from such obligation or in good faith and at its own expense
contest the same or the validity thereof by appropriate legal proceedings which
proceedings, unless such liens are already bonded or discharged, must operate to
prevent the collection thereof or other realization thereon, the sale of the
lien thereof and the sale or forfeiture of the Premises or any part thereof, to
satisfy the same; provided that during such contest the Mortgagor shall, unless
such liens are already bonded or discharged, at the option of the Mortgagee,
provide security reasonably satisfactory to the Mortgagee, assuring the
discharge of the Mortgagor's obligation hereunder and of any additional interest
charge, penalty or expense arising from or incurred as a result of such contest;
and provided, further, that if at any time payment of any obligation imposed
upon the Mortgagor by subsection (i) of this Section 2.10 shall become necessary
(a) to prevent the sale or forfeiture of the Premises or any portion thereof
because of non-payment, or (b) to protect the lien of this Mortgage, then the
Mortgagor shall pay the same in sufficient time to prevent the sale or
forfeiture of the Premises or to protect the lien of this Mortgage, as the case
may be.
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Section 2.11. Condemnation Awards. The Mortgagor, immediately upon
obtaining knowledge of the institution of any proceedings for the condemnation
of the Premises or any portion thereof, will notify the Mortgagee of the
pendency of such proceedings. The Mortgagee may participate in any such
proceedings and the Mortgagor from time to time will deliver to the Mortgagee
all instruments reasonably requested by it to permit such participation. All
awards and compensation payable to the Mortgagor as a result of any condemnation
or other taking or purchase in lieu thereof, of the Premises or any part
thereof, are hereby assigned to and shall be paid to the Mortgagee. The
Mortgagor hereby authorizes the Mortgagee to collect and receive such awards and
compensation, to give proper receipts and acquittances therefor and, provided
Mortgagor is not required to make such award proceeds available for restoration,
to apply the same toward the payment of the Indebtedness, notwithstanding the
fact that the Indebtedness may not then be due and payable, or to the
restoration of the Improvements. In the event that any portion of the
condemnation awards or compensation shall be used to reduce the Indebtedness,
same shall be applied by the Mortgagee in any manner it shall designate,
including, but not limited to, the application of such award or compensation to
then unpaid installments of the principal balance of the Indebtedness in the
inverse order of their maturity so that the regular payments under the Note
shall not be reduced or altered in any manner. The Mortgagor, upon request by
the Mortgagee, shall make, execute and deliver any and all instruments
reasonably requested for the purpose of confirming the assignment of the
aforesaid awards and compensation to the Mortgagee free and clear of any liens,
charges or encumbrances of any kind or nature whatsoever. The Mortgagee shall
not be limited to the interest paid on the proceeds of any award or
compensation, but shall be entitled to the payment by the Mortgagor of interest
at the applicable rate provided for herein or in the Note. Notwithstanding the
foregoing, as long as no Event of Default has occurred and is continuing and the
outstanding Advances do not exceed the lesser of the Maximum Revolving Advance
Amount or the Formula Amount, as provided by Section 4.11 of the Loan Agreement,
Mortgagee shall make any such awards and compensation available for the
restoration of the Improvements.
Notwithstanding the voiding of the original sale(s) or leasing(s) of
all or any portion of the Premises, the Mortgagor shall continue to pay the
Indebtedness at the time and in the manner provided for its payment in the Note,
the Loan Agreement and in this Mortgage and the Indebtedness shall not be
reduced until any payment therefor shall have been actually received and applied
by the Mortgagee to the discharge of the Indebtedness. The Mortgagee may apply
any such payment to the discharge of the Indebtedness whether or not then due
and payable in such priority and proportions as the Mortgagee in its discretion
shall deem to be proper. If the Premises are sold, through foreclosure or
otherwise, prior to the receipt by the Mortgagee of such payment, the Mortgagee
shall have the right, whether or not a deficiency judgment on the Note or the
Loan Agreement shall have been sought, recovered or denied, to receive said
payment, or a portion thereof sufficient to pay the Indebtedness, whichever is
less. The Mortgagor, after obtaining the prior written consent of the Mortgagee,
shall file and prosecute its claim or claims for any such payment in good faith
and with due diligence and cause the same to be collected and paid over to the
Mortgagee, and hereby irrevocably authorizes and empowers the Mortgagee, in the
name of the Mortgagor or otherwise, to collect and receipt for any such payment
and to file and prosecute such claim or claims, and although it is hereby
expressly agreed that the same shall not be necessary in any event, the
Mortgagor shall, upon demand of the Mortgagee, make, execute and deliver any and
all assignments and other
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instruments sufficient for the purpose of assigning any such payment to the
Mortgagee, free and clear of any encumbrances of any kind or nature whatsoever.
Section 2.12. Costs of Defending and Upholding the Lien. If any
action or proceeding is commenced to which action or proceeding the Mortgagee is
made a party or in which it becomes necessary to defend or uphold the lien of
this Mortgage, the Mortgagor shall, on demand, reimburse the Mortgagee for all
reasonable expenses (including, without limitation, reasonable attorneys' fees
and disbursements and reasonable appellate attorneys' fees and disbursements)
incurred by the Mortgagee in any such action or proceeding and such expenses
shall bear interest at the Default Rate (as defined in Section 2.13 of this
Mortgage) until reimbursed. In any action or proceeding to foreclose this
Mortgage or to recover or collect the Indebtedness, the provisions of law
relating to the recovering of costs, disbursements and allowances shall prevail
unaffected by this covenant.
Section 2.13. Additional Advances and Disbursements. The Mortgagor
shall pay by the last day payable without premium or penalty all payments and
charges on all liens, encumbrances, ground and other leases and security
interests which affect or may affect or attach or may attach to the Premises, or
any part thereof, and in default thereof, the Mortgagee shall have the right,
but shall not be obligated, to pay, without notice to the Mortgagor, such
payments and charges and the Mortgagor shall, on demand, reimburse the Mortgagee
for amounts so paid. In addition, upon default of the Mortgagor in the
performance of any other terms, covenants, conditions or obligations by it to be
performed hereunder or under any such lien, encumbrance, lease or security
interest, the Mortgagee shall have the right, but shall not be obligated, to
cure such default in the name and on behalf of the Mortgagor. All sums advanced
and reasonable expenses incurred at any time by the Mortgagee pursuant to this
Section 2.13 or as otherwise provided under the terms and provisions of this
Mortgage or under applicable law shall bear interest from the date that such sum
is advanced or expenses incurred, to and including the date of reimbursement,
computed at a fluctuating interest rate per annum at all times equal to four
percent (4%) per annum above then applicable rate of interest set forth in the
Note, as if such rate were then effective interest rate under the Note (the
"Default Rate"). All interest payable hereunder shall be computed on the basis
of a 360-day year over the actual number of days elapsed. Any such amounts
advanced or incurred by the Mortgagee, together with the interest hereon, shall
be payable on demand, and shall, until paid, be secured by this Mortgage as a
lien on the Premises and shall be part of the Indebtedness.
Section 2.14. Costs of Enforcement. The Mortgagor agrees to bear and
pay all reasonable expenses (including, without limitation, reasonable
attorneys' fees and disbursements and reasonable appellate attorneys' fees and
disbursements for legal services of every kind) of or incidental to (i) any
amendment, renewal, modification, consolidation, supplement, restatement or
restructuring of this Mortgage, the Loan Agreement, the Note or any document
entered into in connection with the Indebtedness, or (ii) the enforcement of any
provision hereof, by litigation or otherwise, or the enforcement, compromise of
settlement of this Mortgage, the Loan Agreement, the Note or the Indebtedness,
and for the curing thereof, or (iii) for defending or asserting the rights and
claims of the Mortgagee in respect thereof, by litigation or otherwise. All
rights and remedies of the Mortgagee shall be cumulative and may be exercised
singly or concurrently.
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Section 2.15. Filing Charges, Recording Fees, Taxes, etc. The
Mortgagor shall pay any and all taxes, charges, filing, registration and
recording fees, excises and levies imposed upon the Mortgagee by reason of its
ownership of the Note, the Loan Agreement or this Mortgage or any mortgage
supplemental hereto, any security instrument with respect to any interest of the
Mortgagor in and to any fixture or personal property at the Premises or any
instrument of further assurance, other than income, franchise, succession,
inheritance, business and similar taxes, and shall pay all other taxes, if any,
required to be paid on the debt evidenced by the Note and the Loan Agreement. In
the event the Mortgagor fails to make such payment within ten (10) days after
written notice thereof to the Mortgagor, then the Mortgagee shall have the
right, but shall not be obligated, to pay the amount due, and the Mortgagor
shall, on demand, reimburse the Mortgagee for said amount, together with
interest thereon computed at the Default Rate.
Section 2.16. Tax and Insurance Deposits. If an Event of Default
shall occur and be continuing hereunder or if the Mortgagor shall default in its
obligations set forth in Section 2.9 hereof, then the Mortgagee, at its option,
to be exercised by ten (10) days' written notice to the Mortgagor, may require
that the Mortgagor deposit with the Mortgagee, monthly, one-twelfth (1/l2th) of
the annual charges for insurance premiums and real estate taxes, assessments,
water, sewer and other charges which might become a lien upon the Premises or
any part thereof (all of the foregoing, the "Impositions"), and the Mortgagor
shall, accordingly, make such deposits. In addition, if required by the
Mortgagee, unless Mortgagee is receiving such bills directly, the Mortgagor
shall simultaneously therewith deposit with the Mortgagee a sum of money which
together with the monthly installments aforementioned will be sufficient to make
each of the payments aforementioned at least thirty (30) days prior to the date
such payments are due. Should said charges not be ascertainable at the time any
deposit is required to be made with the Mortgagee, the deposit shall be made on
the basis of an estimate made by the Mortgagee in its sole discretion, and when
the charges are fixed for then current year, the Mortgagor shall deposit any
deficiency with the Mortgagee. All funds so deposited with the Mortgagee shall
be held by it, but not in escrow and, except to the extent required by
applicable law, without interest, and, provided that no Event of Default shall
have occurred, shall be applied in payment of the charges aforementioned when
and as payable, to the extent the Mortgagee shall have such funds on hand.
Should an Event of Default occur and be continuing, the funds deposited with the
Mortgagee, as aforementioned, may be applied in payment of the charges for which
such funds shall have been deposited or to the payment of the Indebtedness or
any other charges affecting the security of the Mortgagee, as the Mortgagee sees
fit, but no such application shall be deemed to have been made by operation of
law or otherwise until actually made by the Mortgagee as herein provided, nor
shall any application be deemed to affect any right or remedy of the Mortgagee
hereunder or under any statute or rule of law. If deposits are being made with
the Mortgagee, the Mortgagor shall furnish the Mortgagee with bills for the
charges for which such deposits are required to be made hereunder and/or such
other documents necessary for the payment of same, at least fifteen (15) days
prior to the date on which the charges first become payable. In the event that
the Mortgagor fails to pay any such amount, the Mortgagee may, but shall not be
obligated to, make payment thereof, and the Mortgagor shall, on demand,
reimburse the Mortgagee for all sums so expended, together with interest thereon
computed at the Default Rate.
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Section 2.17. Late Charges. In the event any payment provided for
herein shall become overdue for a period in excess of fifteen (15) days, a late
charge of four ($.04) cents for each dollar so overdue shall become immediately
due to the Mortgagee for the purpose of defraying the expenses incident to
handling such delinquent payment, and such charge shall be deemed to be part of
the Indebtedness and shall be secured by the lien of this Mortgage. Late charges
shall be payable with the next installment of principal and/or interest due
under the Note.
Section 2.18. Intentionally Omitted.
Section 2.19. Restrictive Covenants and Leasing Requirements.
(i) Without the prior written consent of the Mortgagee, the
Mortgagor shall not: (a) execute or permit to exist any lease or occupancy of
all or substantially all of the Premises except for the actual use and occupancy
of the tenant thereof; provided, however, that the foregoing shall not be
applicable with respect to any subletting permitted under existing leases; (b)
modify, renew or amend any lease or occupancy agreement affecting the Premises
except as to any renewal required thereunder; (c) grant rent concessions, or
discount any rents, or collect any rents for a period of more than one month in
advance; (d) execute any conditional bill of sale, chattel mortgage or other
security instruments covering any furniture, furnishings, fixtures and
equipment, intended to be incorporated in the Premises or the appurtenances
thereto, or covering articles of personal property placed in the Premises or
purchase any of such furniture, furnishings, fixtures and equipment so that
ownership of the same will not vest unconditionally in the Mortgagor, free from
encumbrances on delivery to the Premises, subject to any applicable equipment
financing in the ordinary course of business permitted by the Loan Agreement;
(e) further assign the leases and rents affecting the Premises; (f) sell,
transfer, alienate, grant, convey or assign any interest in the Premises or any
part thereof; (g) further mortgage, encumber, alienate, hypothecate, grant a
security interest in or grant any other interest whatsoever in the Premises or
any part thereof, or interest therein; (h) if the Premises are now or should at
any time in the future be subject to the terms of any rent control or rent
stabilization statute, ordinance, rule or regulation, fail to comply and/or
cause the Premises to comply with the terms and requirements of such statute,
ordinance, rule or regulation, so and in such fashion as to insure that the
Premises shall be subject to the terms and provisions, and receive the benefits,
of said statute, ordinance, rule or regulation.
(ii) The Mortgagor has no right or power, as against the
Mortgagee without its consent, to cancel, abridge or otherwise modify the leases
or subleases of the Premises or any of the terms, provisions or covenants
thereof or to accept prepayments of installments of rent to become due
thereunder and the Mortgagor shall not do so without such consent. This
agreement, insofar as it affects any lease or sublease which is not primarily
for the residential purposes of the owner of the leasehold estate and which, at
the date hereof, has an unexpired term of not less than five (5) years, is made
with reference to Section 291-f of the Real Property Law of the State of New
York. Upon notice and demand, the Mortgagor will, from time to time, execute,
acknowledge and deliver or cause to be executed, acknowledged and delivered to
the Mortgagee, in form satisfactory to the Mortgagee, one or more separate
assignments (confirmatory of the general assignment provided in Section 2.22
hereof) of the lessor's interest in any lease or sublease now or hereafter
affecting the whole or any part of the
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Premises, or one or more agreements pursuant to such Section 291-f, restricting
the Mortgagor's right or power, as against the Mortgagee, without its consent,
to cancel, abridge or otherwise modify, or accept prepayments or installments of
rent to become due under, any lease or sublease hereinafter in existence, which
is of the character described in the second sentence of this Section 2.19(ii).
The Mortgagor shall pay to the Mortgagee on demand any reasonable expenses
incurred by the Mortgagee in connection with the preparation and recording of
any such assignment or agreement. With respect to any lease referred to in this
Section 2.19(ii) or which at any time is covered by any such agreement or any
such assignment of lessor's interest in such lease, the Mortgagor will (a)
fulfill or perform each and every condition and covenant of the same to be
fulfilled or performed by the lessor thereunder, (b) give prompt notice to the
Mortgagee of any notice of default by the lessor thereunder received by the
Mortgagor together with a complete copy of any such notice, and (c) enforce the
performance or observance of each and every covenant and condition thereof by
the lessee thereunder to be performed or observed.
Section 2.20. Estoppel Certificates. The Mortgagor, within ten (10)
days upon request in person or by mail, shall furnish to the Mortgagee a written
statement, duly acknowledged, setting forth the amount due on this Mortgage, the
terms of payment and the maturity date of the Note and the Loan Agreement, the
date to which interest has been paid, whether any offsets or defenses exist
against the Indebtedness and, if any are alleged to exist, a detailed
description of the nature thereof.
Section 2.21. Trust Funds.
(i) If the Premises or any portion thereof is situated in the
State of New York, then the Mortgagor, in compliance with Section 13 of the Lien
Law of the State of New York, will receive the advances secured by this Mortgage
and will hold the right to receive such advances as a trust fund to be applied
first to the purpose of paying the cost of improvement and will apply the same
first to the payment of the cost of improvement before using any part of the
total of the same for any other purpose. Without limiting the foregoing, if no
portion of the Premises is situated in the State of New York, then, to the
extent, if any, required by applicable law or to preserve the lien, the priority
of the lien and/or the rights of the Mortgagee hereunder, the Mortgagor will
receive the advances secured hereby, and will hold the right to receive such
advances, as a trust fund to be applied first for the purpose of paying the cost
of the improvement and will apply the same first to the payment of the cost of
the improvement before using any part of the total of such advances for any
other purpose. The covenants of subsection (i) of this Section 2.21 are made
subject to, and in compliance with, any trust fund provisions imposed by
applicable law.
Section 2.22. Assignment of Rents. The Mortgagor hereby assigns to
the Mortgagee, as further security for the payment of the Indebtedness, its
interest in the rents, issues and profits of the Premises, together with its
interest in all leases and other documents evidencing such rents, issues and
profits now or hereafter in effect and its interest in any and all deposits held
as security under said leases, and shall, upon demand, deliver to the Mortgagee
an executed counterpart of each lease or other document to which it is a party
and which affects the Premises. Nothing contained in the foregoing sentence
shall be construed to bind the Mortgagee to the performance of any of the
covenants, conditions or provisions contained in any such lease
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or other document or otherwise to impose any obligation on the Mortgagee
(including, without limitation, any liability under the covenant of quiet
enjoyment contained in any lease or in any law of the State of New York in the
event that any tenant shall have been joined as a party defendant in any action
to foreclose this Mortgage and shall have been barred and foreclosed thereby of
all right, title and interest and equity of redemption in the Premises), except
that the Mortgagee shall be accountable for any money actually received pursuant
to such assignment. The Mortgagor hereby further grants to the Mortgagee the
right (i) to enter upon and take possession of the Premises for the purpose of
collecting the said rents, issues and profits, (ii) to dispossess by the usual
summary proceedings (or any other proceedings of the Mortgagee's selection) any
tenant defaulting in the payment thereof to the Mortgagee, (iii) to let the
Premises, or any part thereof, and (iv) to apply said rents, issues and profits,
after payment of all necessary charges and expenses on account of said
Indebtedness. Such assignment and grant shall continue in effect until the
Indebtedness is paid, the execution of this Mortgage constituting and evidencing
the irrevocable consent of the Mortgagor to the entry upon and taking possession
of the Premises by the Mortgagee pursuant to such grant, whether foreclosure has
been instituted or not and without applying for a receiver. Until the occurrence
of an Event of Default, the Mortgagor shall have a revocable license to receive
said rents, issues and profits. The Mortgagor agrees to hold said rents, issues
and profits in trust and to use the same first, in payment of the cost and
expense of the improvement, second, in payment of the Indebtedness to the extent
the same is then due and owing, and third, in such manner as the Mortgagee may
elect. Such license of the Mortgagor to collect and receive said rents, issues
and profits may be revoked by the Mortgagee upon the occurrence and during the
continuance of an Event of Default by giving not less than five (5) days'
written notice of such revocation, served personally upon or sent by registered
mail to the record owner of the Premises. Upon the occurrence and during the
continuance of an Event of Default, the Mortgagor hereby appoints the Mortgagee
as its attorney-in-fact, coupled with an interest, to receive and collect all
rent, additional rent and other sums due under the terms of each lease to which
the Mortgagor is a party and to direct any such tenant, by written notice or
otherwise, to forward such rent, additional rent or other sums by mail or in
person to the Mortgagee.
Section 2.23. Indemnity. The Mortgagor agrees that it shall
indemnify, defend and hold harmless the Mortgagee from and against all loss,
liability, obligation, claim, damage, penalty, cause or action, cost and
expense, including without limitation any assessments, levies, impositions,
judgments, reasonable attorneys' fees and disbursements, cost of appeal bonds
and printing costs, imposed upon or incurred by or asserted against the
Mortgagee by reason of (a) ownership of this Mortgage; (b) any accident, injury
to or death of persons or loss of or damage to property occurring on or about
the Premises; (c) any use, non-use or condition of the Premises; (d) any failure
on the part of the Mortgagor to perform or comply with any of the terms of this
Mortgage; (e) performance of any labor or services or the furnishing of any
materials or other property in respect of the Premises or any part for
maintenance or otherwise; (f) the imposition of any mortgage, real estate or
governmental tax incurred as a result of this Mortgage, the Loan Agreement or
the Note, other than income tax payable by, or other taxes personal to, the
Mortgagee; or (g) any violation or alleged violation by the Mortgagor of any
law. Any amounts payable under this Section 2.23 shall be due and payable on
demand and until paid shall bear interest at the Default Rate. If any action is
brought against the Mortgagee by reason of any of the foregoing occurrences, the
Mortgagor will, upon the Mortgagee's request, defend and
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resist such action, suit or proceeding, at the Mortgagor's sole cost and expense
by counsel approved by the Mortgagee. Notwithstanding the foregoing, this
Indemnity shall not apply to the extent that any of the foregoing arises out of
the gross (not mere) negligence or willful misconduct of Mortgagee.
Section 2.24. Environmental Provisions. For the purposes of this
Section 2.24 the following terms shall have the following meanings: (i) the term
"Environmental Requirements" shall collectively mean the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.
Section 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601
et seq.), the Clean Air Act (42 (U.S.C. Section 7401 et seq.) and the Federal
Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), all as presently
in effect and as the same may hereafter be amended, any regulation pursuant
thereto, or any other present or future law, ordinance, rule, regulation, order
or directive addressing environmental, health or safety issues of or by any
Governmental Authority, (ii) the term "Hazardous Substance" shall have the
definition provided in CERCLA, (iii) the term "Governmental Authority" shall
mean the Federal government, or any state or other political subdivision
thereof, or any agency, court or body of the Federal government, any state or
other political subdivision thereof, exercising executive, legislative,
judicial, regulatory or administrative functions, and (iv) the term "diligent
inquiry" shall mean a level of inquiry at least equal to any environmental site
assessment of the Premises conducted in accordance with the Mortgagee's
environmental policies and procedures. Notwithstanding the foregoing, Hazardous
Substance shall not include office cleaning products, provided such substances
are used in compliance with the Environmental Requirements. The Mortgagor hereby
represents and warrants to the Mortgagee to the best of Mortgagor's actual
knowledge that (a) no Hazardous Substance has been released at the Premises,
except as specifically set forth in the Environmental Site Assessment and
Limited Compliance Evaluation dated May, 1996 prepared for Fuqua Enterprises,
Inc. ("Fuqua") with regard to the premises at 100 Spence Street, Bayshore, New
York, the Phase I and Phase II Environmental Site Assessment dated May, 1996
prepared for Fuqua with regard to the premises at 81 Spence Street, Bayshore,
New York, the Soil Remediation Report dated January, 1997 prepared for Fuqua
with regard to the premises at 100 Spence Street, Bayshore, New York, the Ground
Water Work Plan dated April, 1997 for Fuqua with regard to the premises at 100
Spence Street, Bayshore, New York, and correspondence from Environmental
Resource Management relating to the foregoing dated October 9, 1996, December
19, 1996, November 26, 1997, April 30, 1998, June 3, 1998, September 8, 1998,
November 5, 1998, March 4, 1999 and May 13, 1999 (all of the foregoing being
collectively referred to herein as the "Environmental Report"), (b) no Hazardous
Substance is currently being or has been released in, on, under or about the
Premises in a manner which violates any Environmental Requirement, or which
requires cleanup or corrective action of any kind under any Environmental
Requirement, except as specifically set forth in the Environmental Report, (c)
no releasing, emitting, discharging, leaching, dumping or disposing of any
Hazardous Substance from the Premises onto or into any other property or from
any other property onto or into the Premises is occurring or has occurred, in
violation of any Environmental Requirement, except as specifically set forth in
the Environmental Report, and (d) except as specifically set forth in the
Environmental Report, no notice of violation, lien, complaint, suit, order or
other notice with respect to the environmental condition of the Premises is
outstanding, nor has any such notice
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been issued which has not been fully satisfied and complied with in a timely
fashion so as to bring the Premises into full compliance with all Environmental
Requirements, and will not generate, store, handle, process, dispose of or
otherwise use, and will not permit any tenant or other occupant of the Premises
to generate, sort, handle, process, dispose of or otherwise use, Hazardous
Substances at, in, on, under or about the Premises in a manner that could
reasonably be expected to lead to the imposition on the Mortgagor, the Mortgagee
or the Premises of any liability or lien of any nature whatsoever under any
Environmental Requirement. The Mortgagor shall notify the Mortgagee promptly in
the event of any spill or other release of any Hazardous Substance at, in, on,
under or about the Premises which is required to be reported to a Governmental
Authority under any Environmental Requirement, will promptly forward to the
Mortgagee copies of any notices received by the Mortgagor relating to alleged
material violations of any Environmental Requirement and will promptly pay when
due any fine or assessment against the Mortgagee, the Mortgagor or the Premises
relating to any Environmental Requirement. If at any time it is determined that
the operation or use of the Premises violates any applicable Environmental
Requirement or that there are Hazardous Substances located at, in, on, under or
about the Premises which, under any Environmental Requirement, require cleanup
or corrective action, the Mortgagor shall, within thirty (30) days after receipt
of notice thereof from any Governmental Authority or from the Mortgagee, take,
at its sole cost and expense, such actions as may be necessary to fully comply
in all material respects with all Environmental Requirements, provided, however,
that if such compliance cannot reasonably be completed within such thirty (30)
day period, the Mortgagor shall commence such necessary action within such
thirty (30) day period and shall thereafter diligently and expeditiously proceed
to complete in a timely fashion with all Environmental Requirements. If the
Mortgagor fails to timely take, or to diligently and expeditiously proceed to
complete in a timely fashion, any such action, and does not cure such failure
within thirty (30) days after written notice thereof from Mortgagee, then the
Mortgagee may, in its reasonable discretion, make advances or payments towards
the performance or satisfaction of the same, but shall in no event be under any
obligation to do so. All sums so advanced or paid by the Mortgagee (including,
without limitation, counsel and consultant fees and expenses, investigation and
laboratory fees and expenses, and fines or other penalty payments) and all sums
advanced or paid in connection with any judicial or administrative investigation
or proceeding relating thereto, will immediately, upon demand, become due and
payable from the Mortgagor and shall bear interest at the Default Rate from the
date any such sums are so advanced or paid by the Mortgagee until the date any
such sums are repaid by the Mortgagor to the Mortgagee. The Mortgagor will
execute and deliver, promptly upon request, such instruments as the Mortgagee in
its reasonable discretion may deem useful or necessary to permit the Mortgagee
to take any such action, and such additional notes and mortgages, as the
Mortgagee may require to secure all sums so advanced or paid by the Mortgagee.
If a lien is filed against the Premises by any Governmental Authority resulting
from the need to expend or the actual expending of monies arising from an action
or omission, whether intentional or unintentional, of the Mortgagor or for which
the Mortgagor is responsible, resulting in the releasing, spilling, leaking,
leaching, pumping, emitting, pouring, emptying or dumping of any Hazardous
Substance into the waters or onto land located within or without the state where
the Premises are located, then the Mortgagor will, within thirty (30) days from
the date that the Mortgagor is first given notice that such lien has been placed
against the Premises (or within such shorter period of time as may be specified
by the Mortgagee if such Governmental Authority has commenced steps to cause the
Premises to be sold pursuant to such
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lien) either (a) pay the claim and remove the lien, or (b) furnish a cash
deposit, bond, or such other security with respect thereto as is satisfactory in
all respects to the Mortgagee and is sufficient to effect a complete discharge
of such lien on the Premises or contest same subject to compliance with Sections
2.8 and 2.10 hereof. The Mortgagee may, at its option, if the Mortgagee
reasonably believes that a Hazardous Substance or other environmental condition
violates or threatens to violate any Environmental Requirement, cause an
environmental audit of the Premises or portions thereof to be conducted to
confirm the Mortgagor's compliance with the provisions of this Section, and the
Mortgagor shall cooperate in all reasonable ways with the Mortgagee in
connection with any such audit and shall pay all actual costs and expenses
reasonably incurred in connection therewith. The Mortgagor will defend,
indemnify, and hold harmless the Mortgagee, its employees, agents, officers, and
directors, from and against any and all claims, demands, penalties, causes of
action, fines, liabilities, settlements, damages, costs, or expenses of whatever
kind or nature, known or unknown, foreseen or unforeseen, contingent or
otherwise (including, without limitation, counsel and consultant fees and
expenses, investigation and laboratory fees and expenses, court costs, and
litigation expenses) arising out of, or in any way related to, (i) any breach by
the Mortgagor of any of the provisions of this Section, (ii) the presence,
disposal, spillage, discharge, emission, leakage, release, or threatened release
of any Hazardous Substance which is at, in, on, under, about, from or affecting
the Premises, including, without limitation, any damage or injury resulting from
any such Hazardous Substance to or affecting the Premises or the soil, water,
air, vegetation, buildings, personal property, persons or animals located on the
Premises or on any other property or otherwise, (iii) any personal injury
(including wrongful death) or property damage (real or personal) arising out of
or related to any such Hazardous Substance, (iv) any lawsuit brought or
threatened, settlement reached, or order or directive of or by any Governmental
Authority relating to such Hazardous Substance, or (v) any violation of any
Environmental Requirement or any policy or requirement of the Mortgagee
hereunder. This indemnification shall, notwithstanding any exculpatory provision
or other provision of any nature whatsoever to the contrary set forth in the
Note, the Loan Agreement, this Mortgage or any other document or instrument now
or hereafter executed and delivered in connection with the loan evidenced by the
Note and the Loan Agreement and secured by this Mortgage, constitute the
personal recourse undertakings, obligations and liabilities of the Mortgagor. If
this Mortgage is foreclosed or the Mortgagor tenders a deed or assignment in
lieu of foreclosure, the Mortgagor shall deliver the Premises to the purchaser
at foreclosure or to the Mortgagee, its nominee, or wholly owned subsidiary, as
the case may be, in a condition that complies in all respects with all
Environmental Requirements except as disclosed in the Environmental Report. The
obligations and liabilities of the Mortgagor under this Section shall survive
and continue in full force and effect and shall not be terminated, discharged or
released, irrespective of whether the Indebtedness has been paid in full and
irrespective of any foreclosure of this Mortgage or acceptance by the Mortgagee,
its nominee or wholly owned subsidiary of a deed or assignment in lieu of
foreclosure and irrespective of the discharge, satisfaction, release or
assignment of this Mortgage or of any other fact or circumstance of any nature
whatsoever except that after any foreclosure and transfer of title to the
Premises pursuant thereto or acceptance of a deed or assignment in lieu of
foreclosure Mortgagor's obligations and liabilities shall not include any
obligation or liability arising exclusively from Mortgagee's actions.
Section 2.25. Right of Entry. The Mortgagee and its agents shall
have the right to enter and inspect the Premises at all reasonable times and
upon reasonable prior notice to
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Mortgagor except in the case of an emergency and provided that no Event of
Default has occurred and is continuing; provided that all such entries and
inspections shall be performed at such times and in such a manner as to least
interfere with the operation of the Premises and Mortgagor's business thereat.
Section 2.26. Waiver of Statutory Rights. Notwithstanding anything
herein contained to the contrary, the Mortgagor: (i) hereby irrevocably and
unconditionally waives any and all rights to trial by jury in any action, suit
or counterclaim arising in connection with, out of or otherwise relating to the
Note, the Loan Agreement, this Mortgage or any other document or instrument now
or hereafter executed and delivered in connection therewith or the loan secured
by this Mortgage; and (ii) will not (a) at any time insist upon, or plead, or in
any manner whatever claim or take any benefit or advantage of any stay or
extension or moratorium law, any exemption from execution or sale of the
Premises or any part thereof, wherever enacted, now or at any time hereafter in
force, which may affect the covenants and terms of performance of this Mortgage,
nor (b) claim, take or insist upon any benefit or advantage of any law now or
hereafter in force providing for the valuation or appraisal of the Premises, or
any part thereof, prior to any sale or sales thereof which may be made pursuant
to any provision hereof, or pursuant to the decree, judgment or order of any
court of competent jurisdiction; nor (c) after any such sale or sales, claim or
exercise any right under any statute heretofore or hereafter enacted to redeem
the property so sold or any part thereof; (iii) hereby expressly waives all
benefit or advantage of any such law or laws; and (iv) covenants not to hinder,
delay or impede the execution of any power herein granted or delegated to the
Mortgagee, but to suffer and permit the execution of every power as though no
such law or laws had been made or enacted. The Mortgagor, for itself and all who
may claim under it, waives, to the extent that it lawfully may, all right to
have the Premises (or any part thereof) marshalled upon any foreclosure hereof.
ARTICLE III
Default and Remedies
Section 3.1. Events of Default. The following shall constitute
"Events of Default" under this Mortgage: (a) default by the Mortgagor in the
payment of any amounts required to be paid hereunder or in the payment of any
installment of principal or interest payable under the Note, the Loan Agreement
or any document referred to herein or in any of the foregoing; or (b) default
for thirty (30) days after the giving by the Mortgagee to the Mortgagor of
written notice thereof or default for such lesser time period as may be
specified in this Mortgage with or without notice, as may be specified, in the
due observance or performance of any of the terms, covenants or conditions
contained herein or in the Note relating to other than (1) the payment of money
and (2) the matters hereinafter specified in this Section; provided that if such
default is not susceptible of cure within such thirty (30) day period (or lesser
specified period), the Mortgagor shall have such longer period as is, in the
Mortgagee's sole determination, reasonable to effectuate such cure (provided
that such longer period shall not exceed ninety (90) days) if the Mortgagor
shall commence such cure within such thirty (30) day period (or lesser specified
period) and thereafter diligently continue such cure; or (c) should any
representation or
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warranty made herein prove to be untrue in any material respect at the time when
made; or (d) the further assignment or encumbrance by the Mortgagor of the
leases or rents of the Premises or any part thereof without in each instance the
prior written consent of the Mortgagee; or (e) if the Mortgagor leases all or
part of the Premises without in each instance the prior written consent of the
Mortgagee; or (f) subject to the provisions of paragraph (i) of Section 2.09
hereof permitting the Mortgagor to contest the same, the failure by the
Mortgagor to pay (or cause to be paid), before any fine, penalty, interest or
cost may be added thereto all franchise taxes and charges, and other
governmental charges, general and special, ordinary and extraordinary,
unforeseen as well as foreseen, of any kind and nature whatsoever, including,
but not limited to, assessments for public improvements or benefits which are
assessed, levied, confirmed, imposed or become a lien upon the Premises or any
part thereof or become payable during the term of the Note, the Loan Agreement
or this Mortgage or if the Mortgagor enters into any agreement, either written
or oral, which has the effect of deferring the payment of any taxes or other
charges which are or can be assessed, levied, confirmed, imposed or become a
lien on the Premises or any part thereof or become payable during the term of
the Note, the Loan Agreement or this Mortgage; or (g) the occurrence of a
material adverse change in the financial condition of the Mortgagor; or (h) the
further mortgage, pledge or encumbrance by the Mortgagor of the Premises or any
part thereof or any interest therein without in each instance the prior written
consent of the Mortgagee; or if any mortgage, pledge or encumbrance affecting
the Premises or any part thereof or interest therein (whether prior or
subordinate to the lien of this Mortgage) shall be amended, modified,
refinanced, increased in amount, replaced or substituted for, provided, however,
that nothing herein contained shall be deemed to permit the Mortgagor to create,
grant or suffer to exist any such mortgage, pledge, or encumbrance; or (i) if
upon application by the Mortgagee to two or more fire insurance companies which
are lawfully doing business in the state wherein the Premises are located and
which are issuing policies of fire insurance upon buildings situated within the
area wherein the Premises are situated, said companies shall refuse to issue
such policies; or (j) if, by order of a court of competent jurisdiction, a
receiver, liquidator or trustee of the Mortgagor, or of any of its properties,
shall be appointed and shall not have been discharged within ninety (90) days;
or (k) if a petition in bankruptcy, an insolvency proceeding or a petition for
reorganization shall have been filed against the Mortgagor and the same is not
withdrawn, dismissed, cancelled or terminated within ninety (90) days; or (l) if
the Mortgagor is adjudicated bankrupt or insolvent or a petition for
reorganization is granted (without regard for any grace period provided for
herein); or (m) if there is an attachment or sequestration of any of the
property of the Mortgagor and same is not discharged or bonded within ninety
(90) days; or (n) if the Mortgagor files or consents to the filing of any
petition in bankruptcy or commences or consents to the commencement of any
proceeding under the Federal Bankruptcy Act or any other law, now or hereafter
in effect, relating to the reorganization of the Mortgagor or the arrangement or
readjustment of the debts of the Mortgagor; or (o) if the Mortgagor shall make
an assignment for the benefit of its or their creditors or shall admit in
writing inability to pay its debts generally as they become due or shall consent
to the appointment of a receiver, trustee or liquidator of the Mortgagor or of
all or any part of its property; or (p) if the Mortgagor shall cause or
institute any proceeding for the dissolution or termination of the Mortgagor; or
(q) if the Mortgagor ceases to do business or terminates its business for any
reason whatsoever; or (r) if a default occurs under any mortgage which is prior
or subordinate to the lien of this Mortgage (beyond the applicable notice and
grace period, if any) or the mortgagee under any such prior or subordinate
mortgage commences a foreclosure or other enforcement action in connection with
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said mortgage; or (s) if the Mortgagor defaults (beyond the applicable notice
and grace period, if any) under any other agreement with the Mortgagee; or (t)
if the Premises, or any part thereof or interest therein, is sold, transferred,
assigned, conveyed, granted or alienated without in each instance the prior
written consent of the Mortgagee.
Section 3.2. Remedies
(i) Upon the occurrence of any Event of Default, the Mortgagee
may, in addition to any rights or remedies available to it hereunder, take such
action as it deems advisable to protect and enforce its rights against the
Mortgagor and in and to the Premises, including, but not limited to, the
following actions, each of which may be pursued concurrently or otherwise, at
such time and in such order as the Mortgagee may determine, in its sole
discretion, without impairing or otherwise affecting the other rights and
remedies of the Mortgagee: (1) declare the entire unpaid Indebtedness to be
immediately due and payable; or (2) enter into or upon the Premises, either
personally or by its agents, nominees or attorneys and dispossess the Mortgagor
and its agents and servants therefrom, and thereupon the Mortgagee may (a) use,
operate, manage, control, insure, maintain, repair, restore and otherwise deal
with all and every part of the Premises and conduct the business thereat; (b)
complete any construction on the Premises in such manner and form as the
Mortgagee reasonably deems advisable; (c) make alterations, additions, renewals,
replacements and improvements to or on the Improvements and the balance of the
Premises; (d) exercise all rights and powers of the Mortgagor with respect to
the Premises, whether in the name of the Mortgagor or otherwise, including,
without limitation, the right to make, cancel, enforce or modify leases, obtain
and evict tenants, and sue for, collect and receive all earnings, revenues,
rents, issues, profits and other income of the Premises and every part thereof;
and (e) apply the receipts from the Premises to the payment of the Indebtedness,
after deducting therefrom all expenses (including reasonable attorneys' fees and
disbursements) incurred in connection with the aforesaid operations and all
amounts necessary to pay the taxes, assessments, insurance and other charges in
connection with the Premises, as well as just and reasonable compensation for
the services of the Mortgagee, its counsel, agents and employees; or (3)
institute proceedings for the complete foreclosure of this Mortgage in which
case the Premises may be sold for cash or credit in one or more parcels; or (4)
with or without entry and, to the extent permitted, and pursuant to the
procedures provided by applicable law, institute proceedings for the partial
foreclosure of this Mortgage for the portion of the Indebtedness then due and
payable, subject to the lien of this Mortgage continuing unimpaired and without
loss of priority so as to secure the balance of the Indebtedness not then due;
or (5) institute an action, suit or proceeding in equity for the specific
performance of any covenants, condition or agreement contained herein or in the
Loan Agreement or the Note; or (6) recover judgment on the Loan Agreement or the
Note either before, during or after or in lieu of any proceedings for the
enforcement of this Mortgage; or (7) apply for the appointment of a trustee,
receiver, liquidator or conservator of the Premises, without regard for the
adequacy of the security for the Indebtedness and without regard for the
solvency of the Mortgagor; or (8) pursue such other remedies as the Mortgagee
may have under applicable law.
(ii) The purchase money proceeds or avails of any sale made
under or by virtue of this Article III, together with any other sums which then
may be held by the
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<PAGE> 26
Mortgagee under this Mortgage, whether under the provisions
of this Article III or otherwise, shall be applied as follows:
First: To the payment of the costs and expenses of any such
sale, or the costs and expenses of entering upon, taking
possession of, removal from, holding, operating and managing the
Premises or any part thereof, as the case may be, including
reasonable compensation to the Mortgagee, its agents and counsel,
and of any judicial proceedings wherein the same may be made, and
of all expenses, liabilities and advances made or incurred by the
Mortgagee under this Mortgage, together with interest as provided
herein on all advances made by the Mortgagee and all taxes or
assessments, except any taxes, assessments or other charges
subject to which the Premises shall have been sold.
Second: To the payment of the whole amount then due, owing or
unpaid upon the Note for principal and interest with interest on
the unpaid principal at the rate herein specified from and after
the happening of any Event of Default from the due date of any
such payment of principal until the same is paid.
Third: To the payment of any other sums required to be
paid by the Mortgagor pursuant to any provision of this
Mortgage or of the Loan Agreement or the Note.
Fourth: To the payment of the surplus, if any, to
Mortgagor.
The Mortgagee and any receiver of the Premises or any part thereof shall be
liable to account for only those rents, issues and profits actually received by
it.
(iii) The Mortgagee may adjourn from time to time any sale by
it to be made under or by virtue of this Mortgage by announcement at the time
and place appointed for such sale or for such adjourned sale or sales; and
except as otherwise provided by any applicable provision of law, the Mortgagee,
without further notice or publication, may make such sale at the time and place
to which the same shall be so adjourned.
(iv) Upon the completion of any sale or sales made by the
Mortgagee under or by virtue of this Article III, the Mortgagee, or an officer
of any court empowered to do so, shall execute and deliver to the accepted
purchaser or purchasers a good and sufficient instrument, or good and sufficient
instruments, granting, conveying, assigning and transferring all estate, right,
title and interest in and to the property and rights sold. The Mortgagee is
hereby irrevocably appointed the true and lawful attorney of the Mortgagor
(coupled with an interest), in its name and stead, to make all necessary
conveyances, assignments, transfers and deliveries of the Premises and rights so
sold and for that purpose the Mortgagee may execute all necessary instruments of
conveyance, assignment, transfer and delivery, and may substitute one or more
persons with like power, the Mortgagor hereby ratifying and confirming all that
said attorney or such substitute or substitutes shall lawfully do by virtue
hereof. Nevertheless, the Mortgagor, if so requested by the Mortgagee, shall
ratify and confirm any such sale or sales by executing and delivering to the
Mortgagee or to such purchaser or purchasers all such instruments as may be
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<PAGE> 27
reasonably necessary, in the judgment of the Mortgagee, for the purpose, and as
may be designated in such request. Any such sale or sales made under or by
virtue of this Article III, whether made under the power of sale herein granted
or under or by virtue of judicial proceedings or of a judgment or decree of
foreclosure and sale, shall operate to divest all the estate, right, title,
interest, claim and demand whatsoever, whether at law or in equity, of the
Mortgagor in and to the properties and rights so sold, and shall be a perpetual
bar both at law and in equity against the Mortgagor and against any and all
persons claiming or who may claim the same, or any part thereof from, through or
under the Mortgagor.
(v) In the event of any sale made under or by virtue of this
Article III (whether made by virtue of judicial proceedings or of a judgment or
decree of foreclosure and sale), the entire Indebtedness, if not previously due
and payable, immediately thereupon shall, anything in the Note or in this
Mortgage to the contrary notwithstanding, become due and payable.
(vi) Upon any sale made under or by virtue of this Article III
(whether made by virtue of judicial proceedings or of a judgment or decree of
foreclosure and sale), the Mortgagee may bid for and acquire the Premises or any
part thereof or interest therein and in lieu of paying cash therefor may make
settlement for the purchase price by crediting upon the Indebtedness of the
Mortgagor secured by this Mortgage the net sales price after deducting therefrom
the expenses of the sale and the costs of the action and any other sums which
the Mortgagee is authorized to deduct under this Mortgage.
(vii) No recovery of any judgment by the Mortgagee and no levy
of an execution under any judgment upon the Premises or upon any other property
of the Mortgagor shall affect in any manner or to any extent, the lien of this
Mortgage upon the Premises or any part thereof, or any liens, rights, powers or
remedies of the Mortgagee hereunder, but such liens, rights, powers and remedies
of the Mortgagee shall continue unimpaired as before.
Section 3.3. Intentionally Omitted.
Section 3.4. Possession of the Premises. Upon the occurrence and
during the continuance of any Event of Default hereunder, it is agreed that the
Mortgagor, if it is the occupant of the Premises or any part thereof, shall upon
receipt of written notice from Mortgagee, immediately surrender possession of
the Premises so occupied to the Mortgagee, and if the Mortgagor is permitted to
remain in possession, the possession shall be as a tenant of the Mortgagee and,
on demand, the Mortgagor shall pay to the Mortgagee monthly, in advance, a
reasonable rental for the space so occupied and in default thereof the Mortgagor
may be dispossessed by the usual summary proceedings. The covenants herein
contained may be enforced by a receiver of the Premises or any part thereof.
Nothing in this Section 3.04 shall be deemed to be a waiver of the provisions of
this Mortgage prohibiting the sale or other disposition of the Premises without
the Mortgagee's prior written consent.
Section 3.5. Interest After Default. If any payment due hereunder or
under the Note or Loan Agreement is not paid when due, whether on any stated due
date, any accelerated due date or any other date or at any other time specified
under any of the terms hereof or thereof, then, and in such event, the Mortgagor
shall pay interest on the entire outstanding and unpaid
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<PAGE> 28
principal balance of Indebtedness from and after the date on which such payment
first becomes due at the interest rate provided for in Section 2.13 hereof and
such interest shall be due and payable, on demand, at such rate until such Event
of Default shall have been cured or, if such Event of Default shall not have
been cured, until the entire amount due is paid to the Mortgagee, whether or not
any action shall have been taken or proceeding commenced to recover the same or
to foreclose this Mortgage. All unpaid and accrued interest shall be secured by
this Mortgage as a part of the Indebtedness. Nothing in this Section 3.5 or in
any other provision of this Mortgage shall constitute an extension of the time
of payment of the Indebtedness.
Section 3.6. The Mortgagor's Actions After Default. After the
happening of any Event of Default and immediately upon the commencement of any
action, suit or other legal proceedings by the Mortgagee to obtain judgment for
the Indebtedness, or of any other nature in aid of the enforcement of the Note,
the Loan Agreement or of this Mortgage, the Mortgagor will if required by the
Mortgagee, consent to the appointment of a receiver or receivers of the Premises
and of all the earnings, revenues, rents, issues, profits and income thereof.
Section 3.7. Control by the Mortgagee After Default. Notwithstanding
the appointment of any receiver, liquidator or trustee of the Mortgagor, or of
any of its property, or of the Premises or any part thereof, the Mortgagee shall
be entitled to retain possession and control of all property now and hereafter
covered by this Mortgage.
ARTICLE IV
Miscellaneous
Section 4.1. Credits Waived. The Mortgagor will not claim nor demand
nor be entitled to any credit or credits against the Indebtedness for so much of
the taxes assessed against the Premises or any part thereof, as is equal to the
tax rate applied to the amount due on this Mortgage or any part thereof, and no
deductions shall otherwise be made or claimed from the taxable value of the
Premises or any part thereof by reason of this Mortgage or the Indebtedness
secured hereby.
Section 4.2. No Releases. The Mortgagor agrees, that in the event
the Premises (or any part thereof or interest therein) are sold and the
Mortgagee enters into any agreement with then owner of the Premises extending
the time of payment of the Indebtedness, or otherwise modifying the terms
hereof, the Mortgagor shall continue to be liable to pay the Indebtedness
according to the tenor of any such agreement unless expressly released and
discharged in writing by the Mortgagee.
Section 4.3. Notices. All notices hereunder shall be in writing and
shall be deemed to have been sufficiently given or served for all purposes when
sent by registered mail, return receipt requested, to any party hereto at its
address above stated in the case of the Mortgagee, to the attention of Bruce
Kasper, Vice President, with a copy to Hahn & Hessen LLP, 350 Fifth Avenue, New
York, New York 10118, Attention: Ralph Miles, Esq., and in the
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<PAGE> 29
case of the Mortgagor, to the attention of Richard S. Kolodny, Esq., Senior Vice
President and General Counsel, with a copy to Rogers & Wells LLP, 200 Park
Avenue, New York, New York 10166-0153, Attention: Brad R. Becker, Esq., or at
such other address of which it shall have notified the party giving such notice
in writing as aforesaid.
Section 4.4. Binding Obligations. The provisions and covenants of
this Mortgage shall run with the land, shall be binding upon the Mortgagor and
shall inure to the benefit of the Mortgagee, subsequent holders of this
Mortgage, and the respective successors and assigns of the foregoing. For the
purpose of this Mortgage, the term "the Mortgagor" shall include and refer to
the Mortgagor named herein, any subsequent owners of the Premises (or any part
thereof or interest therein), and their respective heirs, executors, legal
representatives, successors and assigns; the term "Note" shall include and refer
to the Note, the Loan Agreement and any other evidence of the indebtedness
secured by this Mortgage; and the term "the Mortgagee" shall include and refer
to the Mortgagee and any subsequent holder of the Note. If there is more than
one the Mortgagor, all their undertakings hereunder shall be deemed joint and
several.
Section 4.5. Legal Construction. The enforcement of this Mortgage
shall be governed, construed and interpreted by the laws of the State of New
York. If the Premises, or any portion thereof, are situated in the State of New
York, then those clauses and covenants contained herein which are construed by
Section 254 of the Real Property Law of the State of New York shall be construed
as provided in that Section, except as otherwise provided in Section 2.4 hereof.
The additional clauses and covenants contained herein shall afford rights
supplemental to and not exclusive of the rights conferred by the clauses and
covenants construed by such Section 254 and shall not impair, modify, alter or
defeat such rights notwithstanding that such additional clauses and covenants
may relate to the same subject matter or provide for different or additional
rights in the same or similar contingencies as the clauses and covenants
construed by such Section 254. Nothing in this Mortgage, the Note, the Loan
Agreement or in any other agreement between the Mortgagor and the Mortgagee
shall require the Mortgagor to pay, or the Mortgagee to accept, interest in an
amount which would subject the Mortgagee to any penalty or forfeiture under
applicable law. In the event that the payment of any charges, fees or other sums
due hereunder or under the Note, the Loan Agreement or any such other agreement
which are or could be held to be in the nature of interest and which would
subject the Mortgagee to any penalty or forfeiture under applicable law, then
ipso facto the obligations of the Mortgagor to make such payment shall be
reduced to the highest rate authorized under applicable law. Should the
Mortgagee receive any payment which is or would be in excess of the highest rate
authorized under law, such payment shall have been, and shall be deemed to have
been, made in error and shall automatically be applied by the Mortgagee in
reduction of the Indebtedness as and when received.
Section 4.6. Captions. The captions of the Sections of this Mortgage
are for the purpose of convenience only and are not intended to be a part of
this Mortgage and shall not be deemed to modify, explain, enlarge or restrict
any of the provisions hereof.
Section 4.7. Further Assurances. The Mortgagor shall do, execute,
acknowledge and deliver, at the sole cost and expense of the Mortgagor, all and
ever such further
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<PAGE> 30
acts, deeds, conveyances, mortgages, assignments, estoppel certificates, notices
of assignment, transfers and assurances as the Mortgagee may reasonably require
from time to time in order to better assure, convey, grant, assign, transfer and
confirm unto the Mortgagee, the rights now or hereafter intended to be granted
to the Mortgagee under this Mortgage, any other instrument executed in
connection with this Mortgage or any other instrument under which the Mortgagor
may be or may hereafter become bound to convey, mortgage or assign to the
Mortgagee for carrying out the intention of facilitating the performance of the
terms of this Mortgage. The Mortgagor hereby appoints the Mortgagee its
attorney-in-fact to execute, acknowledge and deliver for and in the name of the
Mortgagor any and all of the instruments mentioned in this Section 4.7 and this
power, being coupled with an interest, shall be, irrevocable as long as any part
of the Indebtedness remains unpaid.
Section 4.8. Severability. Any provision of this Mortgage which is
prohibited or unenforceable in any jurisdiction or prohibited or unenforceable
as to any person or entity shall, as to such jurisdiction, person or entity be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction or as to any other
person or entity.
Section 4.9. Absolute and Unconditional Obligation. The Mortgagor
acknowledges that the Mortgagor's obligation to pay the Indebtedness in
accordance with the provisions of the Note, the Loan Agreement and this Mortgage
is and shall at all times continue to be absolute and unconditional in all
respects, and shall at all times be valid and enforceable irrespective of any
other agreements or circumstances of any nature whatsoever which might otherwise
constitute a defense to the Note, the Loan Agreement or this Mortgage or the
obligation of the Mortgagor thereunder to pay the Indebtedness or the
obligations of any other person relating to the Note, the Loan Agreement or this
Mortgage or the obligations of the Mortgagor under the Note, the Loan Agreement
or this Mortgage or otherwise with respect to the loan secured hereby. The
Mortgagor absolutely, unconditionally and irrevocably waives any and all right
to assert any defense, setoff, counterclaim or crossclaim of any nature
whatsoever with respect to the obligation of the Mortgagor to pay the
Indebtedness in accordance with the provisions of the Note, the Loan Agreement
and this Mortgage or the obligations of any other person relating to the Note,
the Loan Agreement or this Mortgage or obligations of the Mortgagor under the
Note, the Loan Agreement or this Mortgage or otherwise with respect to the loan
secured hereby, or in any action or proceeding brought by the Mortgagor to
collect the Indebtedness, or any portion thereof, or to enforce, foreclose and
realize upon the lien and security interest created by this Mortgage or any
other document or instrument securing repayment of the Indebtedness, in whole or
in part.
Section 4.10. General Conditions.
(i) All covenants hereof shall be construed as affording to
the Mortgagee rights additional to and not exclusive of the rights conferred
under the provisions of any other applicable law.
(ii) This Mortgage cannot be altered, amended, modified or
discharged orally and no executory agreement shall be effective to modify or
discharge it in whole or in part,
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<PAGE> 31
unless it is in writing and signed by the party against whom enforcement of the
modification, alteration, amendment or discharge is sought. The Mortgagor
acknowledges that the Note, the Loan Agreement and this Mortgage and the other
documents and instruments executed and delivered in connection therewith
(including the Commitment Letter dated July 19, 1999 between Graham-Field Health
Products, Inc. and Mortgagee, and in particular the provision allowing for
partial refund of the Term Loan Commitment Issuance Fee contained on page 2 of
the Commitment Letter, which provision shall remain in full force and effect) or
otherwise in connection with the loan secured hereby set forth the entire
agreement and understanding of the Mortgagor and the Mortgagee with respect to
the loan secured hereby and that no oral or other agreements, understanding,
representation or warranties exist with respect to the loan secured hereby other
than those set forth in the Note, the Loan Agreement, this Mortgage and such
other executed and delivered documents and instruments.
(iii) No remedy herein conferred upon or reserved to the
Mortgagee is intended to be exclusive of any other remedy or remedies, and each
and every such remedy shall be cumulative, and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law or in equity or
by statute. No delay or omission of the Mortgagee in exercising any right or
power accruing upon any Event of Default shall impair any such right or power,
or shall be construed to be a waiver of any such Event of Default, or any
acquiescence therein. Acceptance of any payment (other than a monetary payment
in cure of a monetary default) after the occurrence of an Event of Default shall
not be deemed a waiver of or a cure of such Event of Default and every power and
remedy given by this Mortgage to the Mortgagee may be exercised from time to
time as often as may be deemed expedient by the Mortgagee. Nothing in this
Mortgage or in the Loan Agreement or the Note shall limit or diminish the
obligation of the Mortgagor to pay the Indebtedness in the manner and at the
time and place therein respectively expressed.
(iv) No waiver by the Mortgagee will be effective unless it is
in writing and then only to the extent specifically stated. Without limiting the
generality of the foregoing, any payment made by the Mortgagee for insurance
premiums, taxes, assessments, water rates, sewer rentals, levies, fees or any
other charges affecting the Premises, shall not constitute a waiver of the
Mortgagor's default in making such payments and shall not obligate the Mortgagee
to make any further payments.
(v) The Mortgagee shall have the right to appear in and defend
any action or proceeding, in the name and on behalf of the Mortgagor which the
Mortgagee, in its discretion, determines may adversely affect the Premises or
this Mortgage. The Mortgagee shall also have the right to institute any action
or proceeding which the Mortgagee, in its discretion, feels should be brought to
protect its interest in the Premises or its rights hereunder. All reasonable
costs and expenses incurred by the Mortgagee in connection with such actions or
proceedings, including, without limitation, reasonable attorneys' fees and
expenses and appellate attorneys' fees and expenses, shall be paid by the
Mortgagor within five (5) days after demand and shall be secured by this
Mortgage.
(vi) In the event of the passage after the date of this
Mortgage of any law of any governmental authority having jurisdiction hereof or
the Premises, deducting from the
30
<PAGE> 32
value of land for the purpose of taxation, affecting any lien thereon or
changing in any way the laws for the taxation of mortgages or debts secured by
mortgages for federal, state or local purposes, or the manner of the collection
of any such taxes, so as to affect this Mortgage, the Mortgagor shall promptly
pay to the Mortgagee, on demand, all taxes, costs and charges for which the
Mortgagee is or may be liable as a result thereof; provided that if said payment
shall be prohibited by law, render the Loan Agreement or the Note usurious or
subject the Mortgagee to any penalty or forfeiture, then and in such event the
Indebtedness shall, at the option of the Mortgagee, be immediately due and
payable.
(vii) The Mortgagor hereby appoints the Mortgagee as its
attorney-in-fact in connection with the personal property and fixtures covered
by this Mortgage, where permitted by law, to file on its behalf any financing
statements or other statements in connection therewith with the appropriate
public office signed by the Mortgagee, as secured party. This power, being
coupled with an interest, shall be irrevocable so long as any part of the
Indebtedness remains unpaid.
(viii) If the Mortgagee purchases the Premises pursuant to a
foreclosure under this Mortgage, or accepts a deed to the Premises in lieu of a
foreclosure, the Mortgagor hereby authorizes the Mortgagee to withhold the
amount of tax, if any, required to be withheld under Section 1445 of the
Internal Revenue Code of 1986, as amended (or any successor provision thereto),
out of any sums payable to the Mortgagor from such foreclosure sale or
assignment in lieu thereof, as the case may be, after payment of all parties
other than the Mortgagor who are entitled to be paid out of any foreclosure or
assignment proceeds, as if the Mortgagor were a foreign person, unless the
Mortgagor certifies its nonforeign status at the time of such foreclosure sale
or assignment, as the case may be, by executing and delivering to the Mortgagee
a certificate satisfactory to the Mortgagee.
Section 4.11. Mortgage Does Not Cover Under Six Dwelling Units. This
Mortgage does NOT cover real property improved or to be improved by one or more
structures containing in the aggregate not more than six (6) residential
dwelling units, each having their own separate cooking facility.
Section 4.12. Loan Agreement Paramount. If and to the extent that
any provisions of this Mortgage conflict or are otherwise inconsistent with any
provisions of the Loan Agreement, the provisions of the Loan Agreement shall
prevail. Any capitalized term used but not defined herein shall have the same
meaning set forth in the Loan Agreement.
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<PAGE> 33
IN WITNESS WHEREOF, this Mortgage has been duly executed by the
Mortgagor as of the date first above written.
LUMEX MEDICAL PRODUCTS, INC.
By: /s/ Richard S. Kolodny
-------------------------
Name:
Title: Vice President
32
<PAGE> 34
STATE OF NEW YORK )
) ss.:
COUNTY OF _______ )
On the ____ day of August in the year 1999 before me, the undersigned,
personally appeared Richard S. Kolodny, personally known to me or proved to me
on the basis of satisfactory evidence to be the individual whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her capacity, and that by his/her signature on the instrument,
the individual, or the person upon behalf of which the individual acted,
executed this instrument.
__________________________________
Signature and Office of
individual taking acknowledgement
33
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AS
INCLUDED IN THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,167
<SECURITIES> 0
<RECEIVABLES> 83,083
<ALLOWANCES> 0
<INVENTORY> 54,299
<CURRENT-ASSETS> 146,612
<PP&E> 40,696
<DEPRECIATION> 0
<TOTAL-ASSETS> 403,135
<CURRENT-LIABILITIES> 93,747
<BONDS> 102,103
0
35,672
<COMMON> 787
<OTHER-SE> 159,857
<TOTAL-LIABILITY-AND-EQUITY> 403,135
<SALES> 159,071
<TOTAL-REVENUES> 159,997
<CGS> 111,460
<TOTAL-COSTS> 111,460
<OTHER-EXPENSES> 59,918
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 6,333
<INCOME-PRETAX> (27,714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,714)
<EPS-BASIC> (.90)
<EPS-DILUTED> (.90)
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