-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ix/tjyiGbbsIDKLIVUMRW37H9+vmnGVba/E7kRXD5plaqu8V2LhYuoPKoLfN8FJG 6FucZ/uZYCverW5xdO+ecA== 0000950123-99-006457.txt : 19990714 0000950123-99-006457.hdr.sgml : 19990714 ACCESSION NUMBER: 0000950123-99-006457 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAHAM FIELD HEALTH PRODUCTS INC CENTRAL INDEX KEY: 0000709136 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 112578230 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: ARS SEC ACT: SEC FILE NUMBER: 001-08801 FILM NUMBER: 99663096 BUSINESS ADDRESS: STREET 1: 400 RABRO DR E CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5165825900 MAIL ADDRESS: STREET 1: 400 RABNO DRIVE EAST CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: PATIENT TECHNOLOGY INC DATE OF NAME CHANGE: 19880811 ARS 1 GRAHAM-FIELD HEALTH PRODUCTS, INC. 1 Graham-Field Logo (Front) 2 Graham-Field Logo (Back) Dear Shareholders, In view of the Company's 1998 performance, your Board has responded by taking decisive steps to stabilize the operations of the Company and ensure that we maximize shareholder value. The Board itself has been reduced in size and is committed to carrying out its duties to the highest standards. We intend to drive the Company forward by providing strong leadership and making timely and effective decisions in the light of thorough analysis. In March 1999, we appointed Jack McGregor as President and CEO. Jack is a principal with Jay Alix and Associates and has twenty-five years of experience as a professional turnaround manager. Jack has recruited some key individuals to Graham-Field to work with a small Jay Alix team on improving operations. As you will see from his letter, Jack has begun by working with Graham-Field's associates to focus on the basics of the business. The Company has made changes to the product mix and sales strategy and has launched initiatives to reduce unnecessary inventory and collect delinquent accounts receivable. A new order-entry system has been successfully installed and a number of manufacturing issues are being addressed. To ensure that we examine every alternative route to maximizing shareholder value, we have engaged Warburg Dillon Read to advise the Company on strategic options. In the meantime, on behalf of the Board, I would like to thank Graham-Field's associates for their continuing efforts and our shareholders for their support over the year. We look forward to delivering better results in 1999. Sincerely yours, /s/ Rupert O.H. Morley -------------------------------------- Rupert O.H. Morley Chairman of the Board 3 Graham-Field Logo (Back) Dear Shareholders, 1998 was a year of challenge and change for Graham-Field. The Company's operating results suffered from the challenge of integrating six acquisitions coupled with multiple management changes and continuing competitiveness in the healthcare market. Restatement of financial results for 1996 and 1997 provided a distraction to management's attention to return the Company to profitability. During the past year, the Company implemented a number of initiatives to reduce operating costs, and these efforts will continue on an accelerated pace throughout 1999. These initiatives include consolidating the operations of six Graham-Field Express distribution facilities to eliminate excess distribution costs, consolidating certain manufacturing facilities which were duplicative, and relocating the corporate offices from Hauppauge, New York to offices available in the Bay Shore, New York facility. In March 1999, the Board made the decision to enlist the help of Jay Alix & Associates, professional turnaround managers, and appointed me as President and Chief Executive Officer to spearhead the implementation of a new strategic plan. My priorities are to improve profitability and maximize shareholder value. I will utilize my twenty-five years of turnaround experience to institute operating controls designed to cut costs, reengineer operating processes, improve sales margins and restructure corporate debt. I will rely heavily on the associates of Graham-Field to get these initiatives implemented on a fast-track basis and from what I have seen in the last few months, they are well up to the task. Let me share with you the major components of our plan and what has been accomplished to date. The Company is implementing a plan to rationalize our product line in order to reduce inventory investment, which exceeded industry average at the end of 1998. During the first four months of this year, inventory levels were reduced by $13 million. An additional $12 million reduction is anticipated by year-end 1999. The plan will provide for the proper mix, as well as the proper level of inventory at each facility to ensure that we can provide superior customer service. Improved inventory management will result in significantly improved cash flow as well as an enhanced return on investment. The failure to integrate the 1997 acquisitions led to a significant increase in our SG&A. For 1998, SG&A as a percentage of operating revenue increased to 37%, as compared to 28% in 1997. Lack of integration also resulted in competing sales forces and duplicative administrative, inventory control and information management functions. These are costs that Graham-Field will aggressively seek to reduce. The first phase of our plan to complete the integration was launched in May. This phase focused on standardization of many sales and administrative functions. The Company adopted a company-wide order-entry system, standardized freight and returned goods policies, and implemented a standardized pricing strategy. The Company will experience reduced transaction costs and a higher level of customer service as a result of these steps. The Company also implemented a uniform credit policy and launched stricter enforcement procedures. The new credit policy will help the Company manage its accounts receivable to acceptable levels. Graham-Field has engaged a leading collection service to address and reduce existing receivable levels. Our objective is 4 to meet or be below the industry average by year-end. Accelerating collections of existing receivables will enhance our cash flow and reduce our borrowing costs. In total, the Company has launched a comprehensive program to maximize shareholder value. The action steps taken -- a new credit policy, pricing schedule, streamlined product line, the consolidation of manufacturing and distribution facilities -- are designed to focus on profitability. My philosophy is to focus on the sale of our core proprietary products, which have historically higher gross profit margins than our distributed product lines. In the short term, I anticipate these programs may result in declining revenue levels; however, they will provide the platform for increasing margins and a better bottom line performance. As I look forward to the remainder of 1999, my efforts will be focused on maximizing shareholder value and achieving improved financial performance. Significant progress has already been made in reducing costs, streamlining the business and establishing Graham-Field as a valuable business partner with its customers and suppliers. Our Consolidation Advantage Program strategy remains the cornerstone of our sales and marketing efforts. This unique program enables our extensive and diverse customer base to reduce their operating costs by consolidating their purchasing procedures, reducing freight costs and eliminating order minimums. In addition, the Company's time-tested brand name products, such as Everest & Jennings and Lumex, continue to maintain the image of quality and professional standards in our very demanding markets. I would like to acknowledge the extraordinary efforts of our associates and management team. They have shown an uncommon level of commitment under extremely challenging conditions. I am convinced that their dedication and loyalty will enable Graham-Field to achieve its turnaround goals and return the Company to a leadership role in the healthcare industry. We all remain dedicated to increasing shareholder value. We know the path to enhance that value is to keep a sharp eye on our business practices, provide unparalleled value and service to our customers and nurture the winning attitude of our associates. Our mandate is clear. Let me close by thanking our shareholders for their continuing support. Sincerely yours, /s/ John G. McGregor -------------------------------------- John G. McGregor President and Chief Executive Officer 2 5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO.: 1-8801 GRAHAM-FIELD HEALTH PRODUCTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-2578230 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 81 SPENCE STREET, BAY SHORE, NEW YORK 11706 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-2200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, PAR VALUE $.025 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NOT APPLICABLE ---------------- (TITLE OF CLASS) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Based on the closing price on May 28, 1999, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $53,488,546. As of the close of business on May 28, 1999, the registrant had 31,501,680 shares of common stock outstanding, of $.025 par value each. DOCUMENTS INCORPORATED BY REFERENCE Not Applicable - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6 GRAHAM-FIELD HEALTH PRODUCTS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 PART I ITEM I. BUSINESS: THE COMPANY Graham-Field Health Products, Inc. ("Graham-Field" or the "Company") is a manufacturer and distributor of healthcare products targeting the home healthcare, medical/surgical, rehabilitation and long-term care markets in North America, Europe, Central and South America, and Asia. The Company markets and distributes a broad range of products under its own brand names and under suppliers' names throughout the world, a significant portion of which is derived from the United States. The Company maintains manufacturing and distribution facilities throughout North America. The Company continuously seeks to expand its product lines by increasing the number of distributorship agreements with suppliers, and forming strategic alliances with other companies. The Company's products are marketed principally to hospital, nursing home, physician, home healthcare and rehabilitation dealers, healthcare product wholesalers and retailers, including drug stores, catalog companies, pharmacies, home-shopping related businesses, and certain governmental agencies. The Company's principal products and product lines include wheelchairs and power wheelchair seating systems, mobility products and bathroom safety products, medical beds and patient room furnishings, blood pressure and diagnostic products, adult incontinence products, specialty seating products, wound care and urologicals, ostomy products, diabetic products, obstetrical supplies, nutritional supplements, therapeutic support systems and respiratory equipment and supplies. By offering a wide range of products from a single source, the Company enables its customers to reduce purchasing costs, including transaction, freight and inventory expenses. The Company's strategic objective is to be a leading provider of medical products to the rapidly growing home healthcare, medical/surgical, rehabilitation and long-term care markets by offering a comprehensive product line, single-source purchasing and technologically advanced, cost-effective delivery systems. The cornerstone of the Company's sales and marketing strategy is the Company's Consolidation Advantage Program ("C.A.P."). Through C.A.P., the Company strives to become the most efficient and reliable low-cost provider of medical products by offering the Company's customers the ability to reduce their operating costs significantly by consolidating the purchase of multiple product lines through a single source. The Company's sales and marketing representatives consult with the Company's customers to identify the cost efficiencies and savings that can be derived from purchasing all of their product needs through the Company. By consolidating the purchase of multiple products through a single source, the Company's customers can significantly reduce their operating costs associated with the purchasing process, including the reduction of delivery expenses, administrative costs and other expenses. The Company believes that its C.A.P. program significantly improves the level of service to its customers by streamlining the purchasing process, decreasing order turnaround time, reducing delivery expenses, and providing inventory on demand. RECENT DEVELOPMENTS Management Changes. On March 24, 1999, the Company's Board of Directors appointed John G. McGregor as President and Chief Executive Officer, and J. Soren Reynertson as Senior Vice President and Chief Financial Officer. Mr. McGregor is a principal and Mr. Reynertson is a senior associate with Jay Alix & Associates ("JA&A"), internationally known experts in corporate turnarounds and financial restructurings. In connection with such appointments, the Company entered into an agreement with JA&A dated as of March 24, 1999, pursuant to which JA&A agreed to provide the Company with the services of Mr. McGregor and Mr. Reynertson and such other personnel as required from time to time. Simultaneously with these appointments, the Company's Board of Directors elected Rupert O.H. Morley, the Operations Director of the Company's largest shareholder, Brierley Investments Limited, as its new Chairman of the Board. 1 7 Hiring of Arthur D. Little. From January 1999 through April 1999, the Company retained the services of Arthur D. Little, an international consulting firm with expertise in manufacturing, distribution, and business strategy in the healthcare industry, to support the initial implementation of the Company's 1999 strategic operating and business plan. The primary goal of the Company's plan is to return the Company to profitability through the implementation of a broad range of initiatives. The Company has identified various priority projects relating to the rationalization of the Company's distribution and manufacturing network; the elimination of duplicate distribution and manufacturing facilities; the realignment and consolidation of the Company's various sales forces; the development of customer focus differentiation strategies, inventory management/product profitability programs, and product rationalization programs; the establishment of new product management and customer service process designs to revitalize the Company's proprietary product lines; the rationalization of the Company's product lines; and the development of working capital reduction programs relating to inventory and accounts receivable. The Company is in the process of implementing the priority projects. Hiring of Warburg Dillon Read, LLC. In April 1999, the Company announced that it had retained the investment banking firm of Warburg Dillon Read, LLC to work with management to review all strategic alternatives for the Company to maximize stockholder value, including, but not limited to, the sale of all or part of the Company. The Company is in the process of analyzing its strategic alternatives with its investment banker. Recent Losses. The Company has incurred significant losses in each of the three years in the period ended December 31, 1998 and in the first quarter of 1999. These losses have arisen as a result of a significant amount of merger, restructuring and other expenses related to acquisitions completed in 1996 and 1997, the failure to integrate effectively these acquisitions and realize the benefits and synergies to be derived therefrom, and the impact of intense competition within the healthcare industry. The losses included significant charges relating to provisions for accounts receivable, inventory and other asset write-offs in 1997 and 1998, a provision to increase the valuation allowance on deferred tax assets in 1998, and certain professional and other advisory fees in the first quarter of 1999, all of which management believes to be substantially non-recurring. Further, the Company and certain of its directors and officers have been named as defendants in at least fifteen putative class action lawsuits which have been consolidated into an amended complaint. As of June 30, 1998, December 31, 1998, and March 31, 1999, the Company was not in compliance with certain financial covenants, and other terms and provisions contained in its Senior Secured Revolving Credit Facility, as amended (the "Credit Facility"), with IBJ Whitehall Business Credit Corp. (formerly known as IBJ Schroder Business Credit Corporation), as agent ("IBJ"). On April 22, 1999, the Company entered into an amendment to the Credit Facility, which was subsequently amended as of May 21 and June 3, 1999 (the "1999 Amendment"), which provided for, among other things, a waiver of these defaults, an amendment to certain financial covenants, a new undrawn availability covenant relating to scheduled interest payments on the Senior Subordinated Notes (as hereinafter defined), and other terms and provisions consistent with the Company's business plan for the remainder of 1999, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. In response to the losses incurred in 1997, 1998 and the first quarter of 1999, management has commenced a program to reduce operating expenses, improve gross margins and reduce the investment in working capital during the remainder of 1999 and take other actions to improve its cash flow. These actions include, but are not limited, to (i) the completion of the activities contemplated by the Company's 1997 restructuring plan; (ii) the initiation of inventory reduction and product rationalization programs; (iii) the tightening of credit policies and payment terms; (iv) the reduction in previously budgeted capital expenditures; (v) the implementation of streamlined product pricing and product return guidelines; (vi) the initiation of an aggressive program to collect past due accounts receivable; and (vii) the realignment and consolidation of sales forces and territories. Notwithstanding the actions described above, the Company currently expects that it will be necessary to obtain approximately $5 to $10 million of additional borrowing availability by August 1999. Management believes that it will be able to obtain the additional borrowing availability by financing certain unencumbered real estate or through a secondary financing; however, it has not yet obtained such financing commitment. 2 8 Management also believes that, if necessary, it could sell certain assets to meet cash requirements, which would require the consent of the lenders under the Credit Facility. Management believes that such objectives are attainable, however, there can be no assurance that the Company will be successful in its efforts to improve its cash flow from operations or that it will be able to obtain such additional borrowing availability on satisfactory terms in a timely manner to provide sufficient cash for operations, capital expenditures and regularly scheduled debt service. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Matters Relating to Accounting Errors and Irregularities. In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found certain accounting errors and irregularities with respect to the Company's financial results. Rogers & Wells LLP retained the accounting firm of Arthur Andersen LLP to assist in conducting the investigation and in providing advice on accounting matters. Based on the results of the investigation, the Company has restated its financial results for 1996 and 1997. The financial information contained herein has been restated to incorporate all relevant information obtained from the investigation. The restated loss before income taxes for the years ended December 31, 1997 and 1996 were $37,009,000 and $11,482,000, respectively, as compared to the originally reported loss before income taxes for the years ended December 31, 1997 and 1996 of $30,228,000, and $8,955,000, respectively. The restated net loss for the years ended December 31, 1997 and 1996 were $26,417,000 and $13,574,000, respectively, as compared to the originally reported net loss for the years ended December 31, 1997 and 1996 of $22,893,000 and $12,609,000, respectively. In addition, the restated operating revenues for the years ended December 31, 1997 and 1996 were $261,672,000 and $142,711,000, respectively, as compared to originally reported operating revenues for the years ended December 31, 1997 and 1996 of $261,981,000 and $143,083,000, respectively. The Company has also restated the financial results for the first, second and third quarters of 1998 to correct for certain improperly recorded transactions. The 1998 adjustments are unrelated to the investigation conducted by the Company's Audit Committee, which was announced in March 1999. INDUSTRY OVERVIEW Graham-Field distributes its medical, surgical and other healthcare products primarily into the home healthcare, medical/surgical, rehabilitation and long-term care markets. Home Healthcare. Graham-Field believes that the home healthcare market is growing rapidly due to the shift in the provision of healthcare away from more expensive acute care settings into lower cost home care settings. The rising cost of healthcare has caused many payors of healthcare expenses to look for ways to contain costs. Healthcare payors have, in many cases, altered their reimbursement patterns to encourage home healthcare whenever appropriate. The over 65 age group represents the vast majority of home healthcare patients and continues to grow. In 1993, the United States Census Bureau estimated that by the year 2000 approximately 35 million people, or 13% of the population in the United States, will be over 65. Graham-Field believes that growth of the home healthcare market will exceed that of institutional care, as many medical professionals and patients prefer home healthcare because it allows greater patient independence, increased patient responsibility and improved responsiveness to treatment due to the enhanced psychological benefits of receiving treatment in comfortable and familiar surroundings. Home healthcare is more cost effective than facility-based care and, in many cases, more desirable to the patient. Medical/Surgical. Graham-Field believes that rapid growth in the medical/surgical distribution industry has resulted primarily from medical/surgical supply and equipment manufacturers increasing the number and volume of products sold through distributors and an overall increase in the volume of medical/surgical supplies being consumed. This overall increase in consumption is due primarily to the aging of the U.S. population and the development of new medical procedures. 3 9 Historically, the medical/surgical supply distribution industry has been highly fragmented. During the past ten years, the overall healthcare market has been characterized by the consolidation of healthcare providers into larger and more sophisticated entities which are seeking to lower total product costs and incremental services from their medical/surgical supply distributors. These trends have led to a significant and ongoing consolidation of the distribution industry and the formation of a small number of industry participants with national capabilities. Rehabilitation Market. The rehabilitation market includes a broad range of medical products provided to individuals in order to minimize physical and cognitive impairments, maximize functional ability and restore lost functional capacity. The focus of rehabilitation medical products is to improve the physical and cognitive impairments resulting from illness or injury, and to restore or improve functional ability so that individuals can return to work and lead independent and fulfilling lives. Typically, rehabilitation medical products are provided by a variety of healthcare professionals including rehabilitation nurses, physical therapists, occupational therapists, speech language pathologists, respiratory therapists, recreation therapists, social workers, psychologists, rehabilitation counselors and others. Graham-Field believes that the demand for rehabilitation medical products will continue to be driven by advances in medical technologies, an aging population and the recognition on the part of the payor community (insurers, self-insured companies, managed care organizations and federal, state and local governments) that appropriately administered rehabilitation medical products can lower overall healthcare costs as well as improve the quality of life. Studies conducted by insurance companies demonstrate the ability of rehabilitation medical products to significantly reduce the cost of future care. Further, reimbursement changes have encouraged the rapid discharge of patients from acute-care hospitals while they remain in need of rehabilitation medical products. Long-Term Care Market. The long-term care market encompasses a broad range of healthcare products provided to the elderly and to other patients with medically complex needs who can be cared for outside of the acute care hospital environment and generally cannot be efficiently and effectively cared for at home. Long-term care facilities offer skilled nursing care, routine rehabilitation therapy and other support services, primarily to elderly patients. Long-term care facilities require ongoing medical and nursing supervision and access to a broad range of medical products. The Company believes that the demand for medical products provided to the long-term care market will increase substantially during the next decade due primarily to demographic trends, advances in medical technology and the impact of cost containment measures by government and private pay sources. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. Graham-Field believes that the major healthcare industry trends impacting the markets it serves are as follows: Consolidation Within the Industry. Continued growth in managed care and capitated plans have pressured independent home medical equipment suppliers to find ways of becoming more cost competitive with national providers. This has also led to consolidations among manufacturers and distributors as smaller companies with limited product lines seek out partners with potential for significant synergies. In addition, certain healthcare product suppliers are consolidating in order to promote better utilization of resources and improve service to customers, thereby maintaining margin and market share. Graham-Field believes healthcare supply companies will be required to use size and economies of scale to their competitive advantage to be successful. In recent years, concern over the rising cost of healthcare has sparked a marked shift toward lower priced products and services in the industry. This shift has resulted in the substitution of simpler and more generic products, as well as price concessions to payors from healthcare providers. As healthcare moves from largely fee-for-service reimbursement to prepaid and capitated payment systems, this trend is expected to intensify. Graham-Field believes that high-volume, full-line providers will have a competitive advantage over those servicing only niche markets. These trends are causing significant consolidation of healthcare providers. 4 10 Increasing Emphasis on Value-Added Services Oriented Towards Total Cost Reduction. Graham-Field believes that the administrative costs associated with purchasing, tracking and carrying inventory and distributing medical products are often greater than the cost of the supplies. As a result, customers are increasingly evaluating distributors not only on the basis of product cost and timely and accurate delivery, but also on their ability to provide value-added services that lower the administrative and other overhead costs associated with medical and surgical supplies. For example, customers increasingly seek distributors that can deliver inventory on a "just-in-time" basis. In addition, certain customers are seeking distributors that can provide programs to assist in inventory management. Shift of Healthcare Delivery to Home Healthcare Markets. Graham-Field believes that the delivery of healthcare is shifting from acute care settings to alternate sites, such as physician offices and extended care facilities, due to cost containment pressures from government and private reimbursement sources. The growth of managed care has resulted in (i) more procedures being performed in outpatient settings, (ii) the length of stay for inpatient procedures continuing to fall and (iii) hospitals sharing financial risk as they take on capitated contracts from managed care entities. These trends have led to a general increase in the level of care required by alternate-site patients as well as the emergence of specialized long-term care facilities, leading to increased demand for home healthcare products. The Company believes that demand for home healthcare and medical and surgical supplies in the alternate-site markets will increase at a faster rate than the overall industry. BUSINESS STRATEGY The Company's strategic objective is to become a leading provider of low-cost, high-quality medical products to the rapidly growing home healthcare, medical/surgical, rehabilitation and long-term care markets by offering a comprehensive product line, single source purchasing and technologically advanced, cost-effective delivery systems. To achieve this objective and to improve its profitability, the Company is pursuing the following strategies: Offer Comprehensive Product Line. The Company markets and distributes a broad range of products under its own brand names and under suppliers' names throughout the world, and believes that it provides one of the most extensive product offerings in each of the markets it serves. Through the breadth of its product offerings and its competitive pricing, the Company strives to be a single source supplier to the home healthcare, medical/surgical, rehabilitation and long-term care markets. As a result of recent acquisitions, the Company has expanded its product line through enhanced manufacturing and out-sourcing capabilities, which furthers the Company's objective to become the most efficient and reliable low-cost provider of medical products. The Company continuously seeks to expand its product lines by increasing the number of distributorship agreements it has with suppliers, and forming strategic alliances with other companies. Focus on Value-Added Services. In order to differentiate itself from its competitors and gain a competitive advantage in the industry, the Company focuses on providing its customers with value-added services. Currently, the Company has the following three programs in place which it believes furthers this objective: Consolidation Advantage Program. The C.A.P. program offers customers the ability to significantly reduce their operating costs by consolidating the purchase of multiple product lines through a single source. C.A.P. significantly improves the level of service to the Company's customers by streamlining the purchasing process, decreasing order turnaround time, reducing delivery expenses, lowering administrative costs, and providing inventory on demand. See "Value Added Services -- Consolidation Advantage Program". Graham-Field Express. The Graham-Field Express Program enables the Company to provide "same-day" and "next-day" service to home healthcare dealers of strategic home healthcare products, including Temco patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements, and other freight intensive and time sensitive products through its satellite Graham-Field Express facilities. The Company intends to moderate the growth of the 5 11 Graham-Field Express Program and may further consolidate the Graham-Field Express distribution network. See "Value-Added Services -- Graham-Field Express". Seamless Distribution Program. The Seamless Distribution Program enables orders to be shipped from the Company's distribution facilities to home healthcare end-users on behalf of the Company's customers. This program enables these customers to realize significant reductions in their operating costs by eliminating the receiving and shipping process and inventory carrying costs, while reducing the product delivery time to end users. See "Value-Added Services -- Seamless Distribution Program". ACQUISITIONS Although Graham-Field has historically pursued acquisitions on an opportunistic basis, the Company does not intend to pursue any acquisitions in the near future. Set forth below is a summary of acquisitions completed in 1996 and 1997:
DATE COMPANY LINE OF BUSINESS - ---- ------- ---------------- September 1996.... V.C. Medical Distributors, Inc. Medical products distributor in Puerto Rico. November 1996..... Everest & Jennings International Manufacturer and distributor of Ltd. wheelchairs and homecare beds. February 1997..... Motion 2000 Inc. and Motion 2000 Independent wholesalers of Quebec Inc. rehabilitation medical products in Canada. March 1997........ Kuschall of America, Inc. Manufacturer of pediatric wheelchairs, high performance adult wheelchairs and other rehabilitation products. June 1997......... LaBac Systems, Inc. Manufacturer of custom power wheelchair seating systems and manual wheelchairs. August 1997....... Medi-Source, Inc. Wholesaler of medical sundry products. August 1997....... Medical Supplies of America, Distributor of home healthcare Inc. products. December 1997..... Fuqua Enterprises, Inc. Manufacturer and distributor of (currently, Lumex/Basic American durable medical products and Holdings, Inc.) furnishings.
V.C. Medical. In September 1996, Graham-Field acquired V.C. Medical Distributors, Inc. ("V.C. Medical"), a wholesale distributor of medical products in Puerto Rico. V.C. Medical currently operates under the name "GF Express (Puerto Rico)," and provides "same-day" and "next-day" service to home healthcare dealers of certain strategic home healthcare products, including patient aids, Everest & Jennings wheelchairs and homecare beds, adult incontinence products and nutritional supplements. Through GF Express (Puerto Rico), Graham-Field has increased its presence in Puerto Rico. Everest & Jennings. In November 1996, Graham-Field acquired Everest & Jennings International Ltd. ("Everest & Jennings"). Through its subsidiaries, Everest & Jennings manufactures a broad line of wheelchairs and distributes homecare beds. Everest & Jennings' principal manufacturing and distribution facilities are located in Earth City, Missouri; Toronto, Canada and Guadalajara, Mexico. Motion 2000 and Motion Quebec. In February 1997, Graham-Field acquired Motion 2000 and its wholly-owned subsidiary, Motion Quebec. Motion 2000 and Motion Quebec (collectively, "Motion 2000") currently operate as a division of Everest & Jennings Canadian Limited, a wholly-owned subsidiary of the Company ("Everest & Jennings Canada"). Motion 2000 distributes a line of rehabilitation products, including walkers, rollators, cushion products and pediatric wheelchair products, and manufactures seating products. The strategic combination of Motion 2000 with the operations of Everest & Jennings Canada, along with Graham-Field's broad product lines, has positioned Graham-Field as one of the leading suppliers of the 6 12 broadest range of products available from a single source in Canada, and as a leading supplier of rehabilitation products, including high performance adult and pediatric wheelchairs, home care wheelchairs, patient aids and other wheelchair products. Kuschall. In March 1997, Everest & Jennings, a wholly-owned subsidiary of the Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of pediatric wheelchairs, high-performance adult wheelchairs and other rehabilitation products. The acquisition of Kuschall has expanded Graham-Field's presence in the rehabilitation and pediatric wheelchair market. The pediatric wheelchair product line of Kuschall has broadened Everest & Jennings' rehabilitation product lines, and provided Graham-Field with the ability to market and distribute its products into Japan, New Zealand and Australia through Kuschall's established distributor relationships. LaBac. In June 1997, Graham-Field acquired LaBac Systems, Inc. ("LaBac"), a manufacturer and distributor of custom power wheelchair seating systems and manual wheelchairs. The acquisition of LaBac has provided Graham-Field with one of the premier custom power wheelchair seating product lines in the healthcare industry, expanded the Everest & Jennings power wheelchair product lines and enhanced the manufacturing and research and development capabilities of Graham-Field. The LaBac products, which have a reputation for excellence and quality, have broadened the Everest & Jennings and Kuschall product lines and provided additional support and expertise to Graham-Field in the rehabilitation market. Medi-Source. In August 1997, Graham-Field acquired Medi-Source, Inc. ("Medi-Source"), a wholesale distributor of medical sundry products to the medical/surgical market. The acquisition of Medi-Source has expanded Graham-Field's presence in the medical/surgical market. Medapex. In August 1997, Graham-Field acquired Medical Supplies of America, Inc. ("Medapex"), a wholesale distributor of home healthcare products. The acquisition of Medapex has provided Graham-Field with additional distribution capabilities in the Southeast region of the United States, and enabled Graham-Field to utilize Medapex's telemarketing operations to provide increased customer service to the combined customer base. Fuqua. In December 1997, Graham-Field acquired Fuqua Enterprises, Inc. (currently, Lumex/Basic American Holdings, Inc.) ("Fuqua"), which consisted of two (2) separate and distinct businesses: a medical products business and leather tanning business. The leather tanning business was subsequently sold by Graham-Field on January 27, 1998. The medical products business of Fuqua, through its subsidiaries, Lumex Medical Products, Inc. ("Lumex"), Basic American Medical Products, Inc. ("Basic American") and Prism Enterprises, Inc. ("Prism"), manufactures and distributes a variety of products, including medical beds, patient room furnishings, bathroom safety products, mobility products, specialty seating products, vacuum pumps, heat and cold packs, and therapeutic support systems. The acquisition of Fuqua has provided Graham-Field with additional manufacturing capabilities, with the well-established medical product brand names of Lumex, Basic American and Prism, and expanded Graham-Field's presence in the long-term, acute care and consumer markets. PRODUCTS Graham-Field markets and distributes a broad range of healthcare products under its own brand names and under suppliers' names. Graham-Field's products are marketed to dealers and other customers, principally hospital, nursing home, physician, home healthcare and rehabilitation dealers, healthcare product wholesalers and retailers, including drug stores, catalog companies, pharmacies, home-shopping related businesses, and certain governmental agencies. Product lines marketed by Graham-Field include wheelchairs and power wheelchair seating systems, mobility products and bathroom safety products, medical beds and patient room furnishings, blood pressure and diagnostic products, adult incontinence products, specialty seating products, wound care and urologicals, ostomy products, diabetic products, obstetrical supplies, nutritional supplements, therapeutic support systems and respiratory equipment and supplies. 7 13 Basic American operates through its divisions, Simmons Health Care, Omni Manufacturing and SSC Medical, which manufacture and distribute medical beds, patient room furnishings, patient aids and mobility products primarily for the long-term and acute care markets. Basic American serves as one-stop shopping for a customer looking to refurbish or newly construct a long-term care patient room. Consistent with the one-stop shopping approach, Basic American maintains several in-house interior designers who provide design services to customers looking to refurbish or construct long-term care facilities. Prism manufactures and distributes therapeutic heat and cold pack products, and obstetrical vacuum pump systems for the acute care, long-term care and consumer markets. Prism also sells heat and cold packs through a "show dealer" network, which includes cart/kiosk retailing programs located in consumer outlets. Graham-Field's principal manufactured and proprietary products include the following:
PRODUCT LINE PRIMARY PRODUCTS - ------------ ---------------- Everest & Jennings....................... Wheelchairs Lumex.................................... Mobility products, bathroom safety products, and specialty seating products Smith & Davis............................ Homecare beds LaBac.................................... Power wheelchair seating systems Omni..................................... Medical beds and furnishings Simmons.................................. Medical beds and furnishings SSC Medical.............................. Medical beds and furnishings Prism.................................... Obstetrical supplies, heat and cold packs Temco.................................... Mobility products, bathroom safety products, and specialty seating products Labtron.................................. Blood pressure and diagnostic products John Bunn................................ Respiratory products
The following is a summary of the Company's revenues from its principal product lines or products:
% OF TOTAL REVENUE -------------------- 1998 1997 1996 ---- ---- ---- Wheelchairs and related positioning products................ 22% 33% 7% Ambulatory and patient aids................................. 12% 8% 5% Incontinence products....................................... 6% 7% 8% Sphygmomanometers........................................... 3% 3% 5% Wound care and ostomy products.............................. 4% 4% 6%
No other product line or product accounted for more than 5% of annual revenues in each of the years during the three year period ended December 31, 1998. During the year ended December 31, 1998, approximately 42% of Graham-Field's revenues were derived from products manufactured by Graham-Field, approximately 26% were derived from imported products (designed and/or manufactured to Graham-Field's specifications by third parties), and approximately 32% were derived from products purchased from domestic sources. VALUE-ADDED SERVICES Consolidation Advantage Program. The C.A.P. program is the cornerstone of Graham-Field's sales and marketing strategy. Through C.A.P., Graham-Field strives to become the most efficient and reliable low-cost provider of medical products. Graham-Field's sales and marketing representatives consult with Graham-Field's customers to identify the purchasing efficiencies and cost savings that can be derived from consolidating their purchases of medical products with Graham-Field. By consolidating the purchase of multiple product lines through a single source, Graham-Field's customers can significantly reduce their operating costs. Graham-Field believes that C.A.P. significantly improves the level of service to Graham-Field 8 14 customers by streamlining the purchasing process, decreasing order turnaround time, reducing delivery expenses, and providing inventory on demand. Graham-Field Express. In 1996, as part of Graham-Field's commitment to providing superior customer service, Graham-Field introduced its Graham-Field Express Program in the Bronx, New York. This program enables Graham-Field to provide "same-day" and "next-day" service to home healthcare dealers of strategic home healthcare products, including Temco and Lumex patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements, and other freight intensive and time sensitive products through its Graham-Field Express satellite facilities. The Graham-Field Express Program differs from Graham-Field's standard distribution model in that the Graham-Field Express Program focuses on "same-day" and "next-day" service to home healthcare dealers of a limited number of strategic home healthcare products. The Company intends to moderate the growth of the Graham-Field Express Program and may further consolidate the Graham-Field Express distribution network. As of March 31, 1999, Graham-Field Express facilities were operating from distribution facilities located in the Bronx, New York; Puerto Rico; Baltimore, Maryland; Cleveland, Ohio; and Boston, Massachusetts. Seamless Distribution Program. Graham-Field has recently developed a seamless distribution program which enables Graham-Field to ship orders directly from its distribution facilities to home healthcare end-users on behalf of Graham-Field's customers. The Seamless Distribution Program enables customers to realize significant reductions in their operating costs by eliminating costs associated with receiving, shipping and inventory management, while reducing the product delivery time to end-users. This program currently operates from the Company's distribution facility located in St. Louis, Missouri. SALES AND MARKETING Graham-Field's sales and marketing strategies are developed on a market-by-market basis through each of its business units -- Home Healthcare/Rehabilitation, Medical/Surgical, Basic American, Prism and International. While Graham-Field's sales and marketing strategies are developed and conducted on a business unit basis, the sale of Graham-Field's products generally overlap all business units. Each of the business units has a dedicated sales force consisting of direct, full-time sales employees and independent sales representatives. The full-time sales employees receive both salary and commission, while the independent sales representatives work solely on commission. The rehabilitation specialists representing the Home Healthcare/Rehabilitation business unit conduct training activities for the benefit of dealers and their personnel, physical and occupational therapists, and other healthcare professionals. The training primarily focuses on the features and benefits of Graham-Field's rehabilitation products, including the products of Everest & Jennings, Kuschall, LaBac, Lumex and other rehabilitation product lines of Graham-Field, and also covers the proper fitting and use of such rehabilitation products. As a result of recent acquisitions, Graham-Field has expanded its telemarketing program to enhance the sales and marketing efforts of its sales forces. Graham-Field employs an extensive telemarketing program, consisting of telemarketing sales personnel located in Atlanta, Georgia and Bay Shore, New York, which targets approximately 8,000 customers nationwide. The international sales group consists of in-house sales employees, as well as representatives located overseas. In order to expand its presence in the European market, Graham-Field entered into a five-year exclusive European distribution agreement in September 1997 for a wide range of its products with Thuasne, a manufacturer and supplier of medical products throughout Europe. The European distribution agreement with Thuasne was converted into a non-exclusive distribution arrangement in January 1999. Graham-Field markets its products using a variety of programs and materials including print advertising, product brochures, an extensive library of product line video tapes, cooperative advertising programs and sales promotions to reinforce Graham-Field's ongoing commitment to satisfy the needs of its customers. A CD-ROM version of Graham-Field's catalog and an Internet interactive website are currently being developed. In 1998, Graham-Field continued the implementation of its new marketing programs, which include several high-visibility marketing programs, including a new strategic advertising campaign, packaging designs, and new logos and catalogs. 9 15 CUSTOMERS Graham-Field's products are marketed principally to hospital, nursing home, physician, home healthcare and rehabilitation dealers, healthcare product wholesalers and retailers, including drug stores, catalog companies, pharmacies, home-shopping related businesses, and certain governmental agencies. No single customer or buying group accounted for more than 10% of Graham-Field's revenues in 1998. Graham-Field has supply arrangements with a number of customers, including Baxter Healthcare Corporation, Allegiance Healthcare Corporation, General Medical (a subsidiary of McKesson), Owens & Minor, The Med Group, Homecare Providers Co-Op, Physician Sales and Services, Sysco Corporation, U.S. Rehab., Henry Schein, Inc, Equipnet, Inc., VGM Associates, Inc., and Binson's Home Healthcare Center. The Home Healthcare/Rehabilitation business unit markets and sells its products to durable medical equipment suppliers, home healthcare equipment suppliers, respiratory supply dealers, specialty retailers and independent pharmacies. Graham-Field believes that it transacts business with substantially all significant home healthcare dealers in the United States. The Home Healthcare/Rehabilitation business unit also markets and sells its products to the consumer market consisting of drug store chains, mass merchandisers, and department stores. Consumers who purchase from such customers of Graham-Field usually do so upon the advice of physicians, hospital discharge planners, nurses or other professionals. The Medical/Surgical business unit markets and sells its products to medical and surgical supply dealers. Graham-Field believes that it sells to substantially all significant medical and surgical supply dealers in the United States. In general, the dealers, wholesalers and retailers to whom Graham-Field markets its products also sell other medical products, some of which compete with Graham-Field's products. Basic American and Prism market and sell their products primarily to the long-term, acute care, and consumer markets. Graham-Field believes that the existing relationships of Basic American and Prism in the long-term, acute care and consumer markets may present growth opportunities for Graham-Field to market and distribute its products into such markets. DISTRIBUTION NETWORK Graham-Field provides same-day and next-day services to its customers through its distribution network. Graham-Field believes that its ability to continue to grow its revenue base depends in part upon its ability to provide its customers with efficient and reliable service. As of March 31, 1999, Graham-Field distributes its products through six (6) primary points of distribution located in St. Louis, Missouri; Bronx, New York; Santa Fe Springs, California; Atlanta, Georgia; Bay Shore, New York; and Toronto, Canada. As of March 31, 1999, secondary points of distribution include four (4) facilities located in Cleveland, Ohio; Baltimore, Maryland; Boston, Massachusetts; and Puerto Rico. Graham-Field also distributes its products from nine (9) manufacturing facilities located in Earth City, Missouri; Central Falls, Rhode Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bay Shore, New York; Fond du Lac, Wisconsin; Lawrenceville, Georgia; and San Antonio, Texas. MANUFACTURING AND PRODUCT SOURCING Principal manufactured and proprietary products (designed and/or manufactured by Graham-Field or manufactured to its specifications by third parties) include EVEREST & JENNINGS(R) wheelchairs, LUMEX(R) bathroom safety products, mobility products and specialty seating systems, AKROS(R) therapeutic support systems, ORTHOBIOTIC(R) specialty seating systems, POSTURE GLIDE(R) specialty seating systems, MITYVAC(R) vacuum pumps, ZAPPAC(R) heating packs, EZ HEAT(R) heating packs, AQUA COOL(R) cooling scarves, SMITH & DAVIS(R) homecare beds, LABTRON(R) stethoscopes and blood pressure instruments, JOHN BUNN(R) respiratory aid products, MEDICOPASTE(R) medicated bandages, rubber elastic bandages, SURVALENT(R) electronic thermometry systems, silver nitrate applicators, examination lamps and sterile packages under the MSP(R) label, GRAFCO(R) medical supplies, including silver nitrate applicators and examination lamps, the TEMCO(R) product line of patient aids, bathroom safety equipment and patient room equipment, Simmons beds, and Aquatherm specialty cushions and mattresses for the treatment and prevention of pressure sores. 10 16 Graham-Field purchases products from a large number of domestic and foreign suppliers. Graham-Field has entered into exclusive and non-exclusive distribution agreements with a number of its domestic and foreign suppliers. Under such agreements, suppliers may designate the markets into which Graham-Field can sell the products and may stipulate minimum annual sales volumes which are to be achieved by Graham-Field. Most of the distribution agreements are cancelable by either party upon one to six months' notice. Except as is described in the following paragraph, Graham-Field does not believe that cancellation of any such agreements would have a material adverse effect on Graham-Field, because comparable products are obtainable from alternative sources upon acceptable terms. Graham-Field is dependent on the maintenance of its wheelchair supply agreement (the "Wheelchair Supply Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"). The term of the Wheelchair Supply Agreement extends until June 30, 2000, and on each June 30 thereafter automatically renews for an additional one year, unless the Company elects not to extend the agreement or the Company fails to order at least 50% of the contractually specified minimums and P.T. Dharma elects to terminate the agreement, or either party terminates the agreement as a result of a material breach of the agreement after notice and the expiration of the applicable cure period. If the Wheelchair Supply Agreement is terminated, there can be no assurance that Graham-Field will be able to enter into a suitable supply agreement with another manufacturer. The termination of this agreement in combination with the failure to secure an alternative source of supply on acceptable terms would result in a material adverse effect on Graham-Field's business and financial condition. In February 1998, the Company advanced $3.5 million to P.T. Dharma (the "P.T. Dharma Advance") in consideration of the grant of a six month option to purchase the wheelchair assets of P.T. Dharma for a price to be determined. In March 1999, the P.T. Dharma Advance was converted into a three (3) year loan agreement (the "P.T. Dharma Loan Agreement"). Under the terms of the P.T. Dharma Loan Agreement, P.T. Dharma is required to repay the P.T. Dharma Advance to Graham-Field over a period of three (3) years, with interest at Graham-Field's borrowing rate, as adjusted from time to time, in monthly installments ranging from $50,000 to $100,000 per month. The P.T. Dharma Loan Agreement is secured by the shares of the capital stock of P.T. Dharma and guaranteed by the principal stockholders of P.T. Dharma. Graham-Field currently purchases a substantial portion of its sphygmomanometers and stethoscopes from a limited number of suppliers in the Far East. In addition, Graham-Field sources component parts for sphygmomanometers and stethoscopes and assembles such products in its facility located in Bay Shore, New York. PATENTS AND TRADEMARKS Graham-Field believes that its business is dependent in part on its ability to establish and maintain patent protection for its proprietary technologies, products and processes, and the preservation of its trade secrets. Graham-Field currently holds a number of United States patents relating to the EVEREST & JENNINGS(R), LUMEX(R), TEMCO(R), and PRISM(R) product lines. Other companies may provide similar products which may not be covered by Graham-Field's issued patents. There can be no assurance that any United States or international patents issued or licensed to Graham-Field will provide any significant competitive advantages to Graham-Field or will not be successfully challenged, invalidated or circumvented or that patents will be issued in respect of patent applications to which Graham-Field currently holds rights. In addition, Graham-Field distributes certain patented products pursuant to licensing arrangements. In the event a licensing arrangement is terminated, Graham-Field may not be able to continue to distribute the patented product. Graham-Field is involved in the ordinary course of business in patent-related lawsuits or other actions, none of which Graham-Field believes is material. However, defense and prosecution of patent claims is costly and time consuming, regardless of an outcome favorable to Graham-Field, and can result in the diversion of substantial financial and managerial resources from Graham-Field's primary business activities. Additionally, adverse outcomes of such claims could have a material adverse effect on Graham-Field's business and financial condition. Graham-Field has registered a significant number of trademarks in the United States, including "GRAHAM-FIELD," "EVEREST & JENNINGS," "LUMEX," "AKROS," "ORTHOBIOTICS," 11 17 "POSTURE GLIDE," "MITYVAC," "ZAPPAC," "EZ HEAT," "AQUA COOL," "SMITH & DAVIS," "JOHN BUNN," "BRISTOLINE," "SURVALENT," "MEDICOPASTE," "HEALTHTEAM," "LABTRON," "GRAFCO," "TEMCO" and "TENDERCLOUD". The registered trademarks are significant to Graham-Field because they provide Graham-Field with name and market recognition for its products and distinguish Graham-Field's proprietary products from its competitors' products. PRODUCT LIABILITY The sale, manufacture and distribution of healthcare products involve an inherent risk of product liability claims and related adverse publicity. Although Graham-Field maintains product liability insurance, there can be no assurance that such coverage will be adequate to protect Graham-Field from liabilities it may incur. Product liability insurance is expensive, and there can be no assurance that Graham-Field will be able to continue to obtain and maintain insurance at acceptable premium rates. Potential losses from liability claims and the effect which product liability litigation may have on the reputation and marketability of Graham-Field's products could have a material adverse effect on Graham-Field's business and financial condition. GOVERNMENTAL REGULATION The healthcare industry is affected by extensive government regulation at the Federal and state levels. In addition, through the Medicare, Medicaid and other programs the Federal and state governments are responsible for the payment of a substantial portion of United States healthcare expenditures. Changes in regulations and healthcare policy occur frequently and may impact the current results of the growth potential for and the profitability of products sold by Graham-Field in each market. Although Graham-Field is not a direct provider under Medicare and Medicaid, many of Graham-Field's customers are providers under these programs and depend upon Medicare and/or Medicaid reimbursement for a portion of their revenue. Changes in Medicare and Medicaid regulations may adversely impact Graham-Field's revenues and collections indirectly by reducing the reimbursement rate received by Graham-Field's customers and consequently placing downward pressure on prices charged for Graham-Field's products. Graham-Field's C.A.P. program is designed in part to enable customers to respond to the reduction in reimbursement rates by consolidating the purchase of multiple product lines through Graham-Field. There can be no assurance, however, that this program will offset any such reduction in reimbursement rates. In certain cases, the ability of the Company's customers to pay for the products supplied by the Company depends upon governmental and private insurer reimbursement policies. Consequently, those policies have an impact on the level of the Company's sales and its ability to collect receivables on a timely basis. Continuing governmental and private third-party payor cost-cutting efforts have led and may continue to lead to significant reductions in the reimbursement levels. Furthermore, governmental reimbursement programs, such as the Medicare and Medicaid programs, are subject to substantial regulation by Federal and state governments, which are continually reviewing and revising the programs and their regulations. There can be no assurance that changes to governmental reimbursement programs will not have a material adverse effect on the Company. The Federal Food, Drug and Cosmetic Act and regulations issued or proposed thereunder provide for regulation by the Food and Drug Administration ("FDA") of the marketing, manufacturing, labeling, packaging and distribution of medical devices and drugs, including Graham-Field's products. Among these regulations are requirements that medical device manufacturers register with the FDA, list devices manufactured by them and file product incident reports, product labeling requirements, and premarket notification filings for certain product classes. Graham-Field is also required to comply with the FDA's "Current Good Manufacturing Practices for Medical Devices" regulations, which set forth requirements for, among other things, Graham-Field's quality system for the manufacturing and distribution operations. The majority of products marketed by Graham-Field constitute Class I products under FDA regulations. Class I products are generally exempt from premarketing testing and other filing requirements with the FDA. The balance of the medical products marketed by Graham-Field are generally classified as Class II products under FDA regulations, which requires a determination that substantially equivalent products are already being legally marketed and could require potentially expensive and time-consuming testing to assure that such 12 18 products meet recognized performance standards for safety and efficacy, which may include clinical testing. Unscheduled FDA inspections of Graham-Field's facilities may occur from time to time to determine compliance with FDA regulations. Graham-Field is in the process of implementing a quality management system to comply with the requirements of ISO9000/EN46000 ("ISO") and the MDD 93/42/EEC ("CE Marking") on a company-wide basis, which will enhance Graham-Field's overall standard quality systems and enable Graham-Field to comply with European regulatory requirements. As of March 15, 1999, Graham-Field had obtained ISO certification for its manufacturing facilities located in Rhode Island and Toronto, Canada, and its distribution facility located in Bay Shore, New York. ISO audits have been conducted at Graham-Field's manufacturing facilities located in Guadalajara, Mexico, Bay Shore, New York and Earth City, Missouri. Graham-Field is awaiting the results of the ISO audits conducted at the manufacturing facilities located in Guadalajara, Mexico, Bay Shore, New York and Earth City, Missouri, however, there can be no assurance that such audits were successfully completed for purposes of obtaining ISO certification. Graham-Field engages the services of an outside consulting firm to monitor the effectiveness of Graham-Field's quality management system to ensure that manufactured and distributed products comply with ISO9000/EN46000, the MDD 93/42/EEC and FDA requirements. The impact of FDA regulation on Graham-Field has increased in recent years as Graham-Field has increased its manufacturing operations. To date, Graham-Field has not experienced any significant difficulty in complying with the requirements imposed by the FDA or other government agencies. Graham-Field believes that the manufacturing and quality control procedures it employs substantially conform to the requirements of the FDA and does not anticipate having to make any material expenditures as a result of these requirements. Graham-Field competes with many other manufacturers and distributors who offer one or more products competitive with Graham-Field's products; however, Graham-Field believes that no single competitor serving Graham-Field's markets offers as broad a product range as Graham-Field. Graham-Field's principal means of competition are the breadth of its product range, quality, price and speed of delivery, and value-added services, including attractive financing programs and delivery and service alternatives. The C.A.P. program enables Graham-Field to compete by offering customers reduced operating costs associated with purchasing by consolidating purchases of multiple products. With respect to Graham-Field's manufactured and proprietary products, Graham-Field's primary competitors include Invacare Corporation and Sunrise Medical Corporation. Competition for the sale of such products is intense and is based on a number of factors, including quality, reliability, price, financing programs, delivery and service. Graham-Field believes that the quality, reputation and technological advances relating to its manufactured and proprietary products are favorable factors in competing with other manufacturers. Graham-Field purchases certain products from its competitors and supplies certain of its products to its competitors. Many of Graham-Field's competitors have substantially greater financial and other resources than Graham-Field. There can be no assurance that Graham-Field will be able to compete effectively in its industry or that competitive pressures will not adversely affect Graham-Field's financial position or results of operations. EMPLOYEES As of December 31, 1998, Graham-Field had 2,023 employees, of which eight (8) were executive officers, 429 were administrative and clerical personnel, 367 were sales, marketing and customer service personnel and 1,219 were manufacturing and warehousing personnel. Graham-Field is a party to four (4) collective bargaining agreements covering Graham-Field's facilities located in Bay Shore, New York; Earth City, Missouri; Toronto, Canada; and Guadalajara, Mexico. The collective bargaining agreements cover approximately 642 employees. The collective bargaining agreements for Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico are scheduled to expire on October 19, 2001, September 13, 1999, July 24, 2003 and December 31, 1999, respectively. 13 19 Graham-Field has never experienced an interruption or curtailment of operations due to labor controversy that had a material adverse effect on Graham-Field's operations. Graham-Field considers its employee relations to be satisfactory. ITEM 2. PROPERTIES: The Company's principal executive offices are located in Bay Shore, New York. As of March 31, 1999, Graham-Field distributes its products through six (6) primary points of distribution located in St. Louis, Missouri; Bronx, New York; Santa Fe Springs, California; Atlanta, Georgia; Bay Shore, New York; and Toronto, Canada. As of March 31, 1999, secondary points of distribution include four (4) facilities located in Cleveland Ohio; Baltimore, Maryland; Boston, Massachusetts; and Puerto Rico. Graham-Field also distributes its products from nine (9) manufacturing facilities located in Earth City, Missouri; Central Falls, Rhode Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bay Shore, New York; Fond du Lac, Wisconsin; Lawrenceville, Georgia; and San Antonio, Texas. The manufacturing facilities located in Toronto, Canada; Guadalajara, Mexico; Bay Shore, New York; Fond du Lac, Wisconsin; and Lawrenceville, Georgia are owned by the Company. The distribution facility located in Bay Shore, New York is owned by the Company. Graham-Field believes that its facilities are in good repair and provide adequate capacity for the near term growth of the Company's business. Owned and leased properties for Graham-Field's principal facilities are summarized in the following table. A. PRINCIPAL MANUFACTURING FACILITIES:
APPROXIMATE OWNED OR LEASE LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE - -------- -------------- --------------- ------------------ 100 Spence Street............................ 170,000 Owned Manufacturing, Bay Shore, NY Distribution 3601 Rider Trail............................. 147,000 7/31/02 Manufacturing, Earth City, MO Distribution 336 Trowbridge Drive......................... 133,000 Owned Manufacturing Fond du Lac, WI 125 South Street............................. 120,000 12/31/04 Manufacturing, Passaic, NJ Distribution(1) 111 Snidercroft Road......................... 118,000 Owned Manufacturing, Concord, Ontario, Canada Distribution, Research & Development 400 Rabro Drive East......................... 105,000 12/31/06 Manufacturing, Hauppauge, NY Distribution(2) 6952 Fair Grounds Parkway.................... 70,000 5/31/02 Manufacturing San Antonio, TX Calle 3 #631................................. 64,839 Owned Manufacturing, Zona Industrial Distribution C.P. 44940 Guadalajara, Jalisco Mexico 362 Industrial Park Drive.................... 50,000 Owned Manufacturing Lawrenceville, GA 5 Clermont Street............................ 42,000 12/31/99 Manufacturing, Johnstown, NY Distribution(3)
14 20
APPROXIMATE OWNED OR LEASE LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE - -------- -------------- --------------- ------------------ 3535 South Kipling Street.................... 30,300 6/25/07 Manufacturing, Lakewood, CO Distribution Calle 26 #2256A.............................. 28,399 12/31/99 Manufacturing, Zona Industrial Distribution Guadalajara, Jalisco Mexico 131 Clay Street.............................. 21,467 12/31/02 Manufacturing, Central Falls, RI Distribution
- --------------- (1) As of June 1998, the Company consolidated the manufacturing and distribution operations located in Passaic, NJ with its manufacturing facility located in Bay Shore, NY. The existing Passaic, NJ lease remains in effect. (2) The Company is in the process of consolidating the manufacturing and distribution operations located in Hauppauge, NY with its distribution facility located in Bay Shore, NY. As of June 1998, the Company's corporate offices in Hauppauge, NY were relocated to the corporate offices located in Bay Shore, NY. The existing Hauppauge, NY lease remains in effect. (3) The Company is in the process of ceasing operations at the manufacturing facility located in Johnstown, NY. The Johnstown, NY lease is scheduled to expire on December 31, 1999. B. PRINCIPAL DISTRIBUTION FACILITIES:
APPROXIMATE OWNED OR LEASE LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE - -------- -------------- --------------- ------------------ 12055 Missouri Bottom Road.............. 144,000 3/31/07 Warehouse, St. Louis County, MO Distribution 81 Spence Street........................ 130,000 Owned Corporate Offices, Bay Shore, NY Warehouse, Distribution 711 Brush Avenue........................ 86,152 4/30/02 Warehouse, Bronx, NY Distribution 11954 East Washington Blvd. ............ 80,000 2/1/02 Warehouse, Santa Fe Springs, CA Distribution 120 Royal Woods Court................... 60,000 9/30/08 Warehouse, Atlanta, GA Distribution 144 East Kingsbridge.................... 48,000 Month-to-Month Warehouse, Mount Vernon, NY Lease Distribution 2935 Bankers Industrial Drive........... 50,000 Owned Showroom, Atlanta, GA Warehouse 11725 Missouri Bottom Road.............. 43,989 3/31/03 Warehouse, Hazelwood, MO Distribution Lot 1.0................................. 35,472 3/14/03 Office, Warehouse, Northboro Road Distribution Southboro, MA 10145 Philipp Parkway................... 30,000 11/14/04 Warehouse, Streetsboro, OH Distribution 135 Fell Court.......................... 30,000 12/21/06 Warehouse, Hauppauge, NY Distribution(1) 8921 Forshee Drive...................... 28,255 (2) Warehouse, Jacksonville, FL Distribution 4880 Hammermill Road.................... 25,000 Owned Warehouse, Tucker, GA Distribution(3)
15 21
APPROXIMATE OWNED OR LEASE LOCATION SQUARE FOOTAGE EXPIRATION DATE PRINCIPAL USE - -------- -------------- --------------- ------------------ Kilometer 29.4.......................... 21,600 10/8/99 Warehouse, Road #1 Distribution Entrando por Ferrero Caguas, PR 7447 New Ridge Road..................... 20,147 4/30/02 Warehouse, Hanover, MD Distribution
- --------------- (1) The Company is in the process of consolidating its warehouse and distribution operations located in Hauppauge, NY with its distribution facility located in Bay Shore, NY. The existing Hauppauge, NY lease remains in effect. (2) As of February 1999, the Company consolidated its warehouse and distribution operations in Jacksonville, FL with its distribution operations located in Atlanta, GA. The Jacksonville, FL lease has been terminated. (3) As of January 1999, the Company consolidated its warehouse and distribution operations located in Tucker, GA with its distribution operations located in Atlanta, GA. In May 1999, the Company executed an agreement to sell the distribution facility located in Tucker, GA. ITEM 3. LEGAL PROCEEDINGS Following the Company's public announcement on March 23, 1998 of its financial results for the fourth quarter and year ended December 31, 1997, the Company and certain of its directors and officers were named as defendants in at least fifteen putative class action lawsuits filed primarily in the United States District Court for the Eastern District of New York on behalf of all purchasers of common stock of the Company (including former Fuqua shareholders who received shares of the Company Common Stock when the Company acquired Fuqua in December 1997) during various periods within the time period May 1997 to March 1998. The class actions were consolidated into an amended consolidated class action complaint as of January 29, 1999, and lead counsel was selected. The amended consolidated class action complaint asserts claims against the Company and the other defendants for violations of Sections 11, 12(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged material misrepresentations and omissions in public filings made with the Securities and Exchange Commission and certain press releases and other public statements made by the Company and certain of its officers relating to the Company's business, results of operations, financial condition and future prospects, as a result of which, it is alleged, the market price of the Company Common Stock was artificially inflated during the putative class periods. The amended consolidated class action complaint focuses on statements made concerning the Company's integration of its various recent acquisitions, as well as statements about the Company's inventories, accounts receivable, expected earnings and sales levels. The plaintiffs seek unspecified compensatory damages and costs (including attorneys and expert fees), expenses and other unspecified relief on behalf of the putative classes. In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found certain accounting errors and irregularities with respect to the Company's financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting firm of Arthur Andersen LLP to assist in conducting the investigation and in providing advice on accounting matters. Based on the results of the investigation, the Company has restated its financial results for 1996 and 1997. While the accounting errors and irregularities are not presently the basis for the pending class actions, counsel to the class plaintiff have informed the Company's counsel that plaintiffs may seek to amend the consolidated complaint to allege claims based on such items. The Company intends to defend the lawsuit vigorously, but the Company is not currently able to evaluate the likelihood of success in this case or the range of potential loss. However, if the foregoing proceeding were determined adversely to the Company, management believes that such a judgment could have a material adverse effect on the Company's financial condition, results of operations and/or cash flows. In addition, the 16 22 staff of the SEC has advised the Company that the SEC may conduct an investigation with respect to the aforementioned accounting errors and irregularities. On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug Administration arrived at the Company's principal headquarters and one other Company location and retrieved several documents pursuant to search warrants. The Company has subsequently been advised by an Assistant United States Attorney for the Southern District of Florida that the Company is a target of an ongoing grand jury investigation involving alleged fraud by one or more of the Company's suppliers relating to the unauthorized diversion of medical products intended for sale outside of the United States into United States markets. The Company has also been advised that similar search warrants were obtained with respect to approximately 14 other participants in the distribution of medical products. The Company is presently investigating these matters. The Company does not know when the grand jury investigation will conclude or what action, if any, may be taken by the government against the Company or any of its employees. Accordingly, the impact of this investigation on the Company cannot yet be assessed. The Company intends to cooperate fully with the government in its investigation. In March 1994, the Suffolk County Authorities initiated an investigation to determine whether regulated substances had been discharged in excess of permitted levels from the Lumex division (the "Lumex Division") located in Bay Shore, New York, which was acquired by Fuqua in April 1996. An environmental consulting firm was engaged by the Lumex Division to conduct a more comprehensive site investigation, develop a remediation work plan and provide a remediation cost estimate. These activities were performed to determine the nature and extent of contaminants present on the site and to evaluate their potential off-site extent. In connection with the acquisition of the Lumex Division, Fuqua assumed by contract the obligations associated with this environmental matter. In late 1996, Fuqua conducted surficial soil remediation at the Bay Shore facilities and reported the results to the Suffolk County Authorities in March 1997. A ground water work plan was submitted concurrently with the soil remediation report. In May 1997, the Suffolk County Authorities stated that they were satisfied with the soil remediation that had been conducted by Fuqua and provided comments on the ground water work plan. In November 1997, the Lumex Division received the results of additional ground water testing that had been performed in August and September 1997. The results revealed significantly lower concentrations of contaminants than were known at the time the "Ground Water Work Plan" was prepared in March 1997. Due to the relatively low levels of contaminants detected, the Lumex Division proposed sampling the groundwater on a quarterly basis for two years to ensure that the groundwater was not significantly affected and deferred implementing the ground water work plan. In January, April, July and October 1998, and in January 1999, additional confirmatory samples were taken and analyzed. These analytic results provide further support that the groundwater is not significantly contaminated. The Company will continue to monitor the quality of the groundwater to confirm that it remains acceptable. If the quality of the groundwater remains acceptable after the two year period expires, the Company will seek to withdraw its groundwater work plan. At December 31, 1998, the Company had reserves for remediation costs and additional investigation costs which will be required. Reserves are established when it is probable that a liability has been incurred and such costs can be reasonably estimated. The Company's estimates of these costs were based upon currently enacted laws and regulations and the professional judgment of independent consultants and counsel. Where available information was sufficient to estimate the amount of liability, that estimate has been used. Where information was only sufficient to establish a range of probable liability and no point within the range is more likely than another, the lower end of the range has been used. The Company has not assumed that any such costs would be recoverable from third parties nor has the Company discounted any of its estimated costs, although a portion of the remediation work plan will be performed over a period of years. The amount of environmental liabilities is difficult to estimate due to such factors as the extent to which remedial actions may be required, laws and regulations change or the actual costs of remediation differ when the final work plan is performed. In April 1996, Fuqua acquired the Lumex Division from Cybex International, Inc. (formerly Lumex, Inc.) for a purchase price of $40.7 million, subject to a final purchase price adjustment in the asset sale agreement. The final purchase price adjustment was disputed and, pursuant to the asset sale agreement was resolved through arbitration. On July 30, 1998, Fuqua received a payment of $2,468,358 (inclusive of interest) 17 23 from Cybex, of which $2,384,606 was recorded as a reduction of the excess of cost over net assets acquired at September 30, 1998. In March 1997, Fuqua gave notice to the seller to preserve Fuqua's indemnification rights as provided under the terms of the asset sale agreement. In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit against the seller and certain former officers stating claims for fraud, breach of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees. Defendants filed an answer and counterclaim on April 7, 1998, denying liability and asserting fifteen defenses. On February 18, 1999, Cybex paid Fuqua $2.6 million in settlement of all of Fuqua's claims. As part of the settlement, Cybex released Fuqua from all liability in connection with Cybex's counterclaim. On August 3, 1998, the Company and another defendant, one of the Company's employees, were served with a lawsuit initiated by JOFRA Enterprises, Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The complaint seeking damages of $25,000,000 alleges that the Company's hiring of a certain officer and employees of JOFRA constituted, among other things, unfair competition and wrongful appropriation of business opportunities. Pursuant to the defendant-employee's employment agreement, the defendant-employee is seeking indemnification with respect to such claims. Discovery is proceeding in the action. The Company considers the plaintiff's allegations to be without merit and intends to defend this lawsuit vigorously. On November 3, 1998, the Company and certain of its directors were named as defendants in a derivative suit commenced in the Court of Chancery of the State of Delaware, New Castle County. The lawsuit seeks to rescind a separation agreement dated as of July 29, 1998 (the "Separation Agreement"), pursuant to which Irwin Selinger, the former Chairman of the Board and Chief Executive Officer, resigned as Chairman of the Board, Chief Executive Officer and President of the Company. The lawsuit also seeks unspecified damages as well as the recovery of all sums paid to Mr. Selinger pursuant to the Separation Agreement. The plaintiff alleges that by approving the terms of the Separation Agreement, the defendants breached their fiduciary duties of loyalty and care to the Company by obligating the Company to pay Mr. Selinger substantially more than his former employment agreement had required. The Company considers the plaintiff's allegations to be without merit, and filed a motion to dismiss the complaint on various grounds in February 1999. The parties are presently in the process of briefing the motion to dismiss. In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a company acquired by Graham-Field in June 1997, asserted certain claims against Graham-Field relating to alleged material misrepresentations and omissions contained in the purchase agreement, certain press releases and other public filings made by the Company with the Securities and Exchange Commission relating to the Company's business, results of operations and financial condition. Under the terms of the purchase agreement pursuant to which Graham-Field acquired LaBac for approximately $9.1 million in common stock of Graham-Field, all claims that are not resolved between the parties are to be submitted to arbitration. The Company intends to defend the claims vigorously, but the Company is not currently able to evaluate the likelihood of success in this case or the range of potential loss. The Company and its subsidiaries are parties to lawsuits and other proceedings, including those relating to product liability and the sale and distribution of its products. Except as discussed above, while the results of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the consolidated financial position or results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not Applicable. 18 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS: (a) The common stock of the Company is traded on the New York Stock Exchange (Symbol: GFI). The following provides the high and low sales prices for the period from January 1, 1997 through May 28, 1999 as reported on the New York Stock Exchange.
HIGH LOW SALES SALES PRICE PRICE ----- ----- 1997 First Quarter............................................. 13 3/4 8 1/2 Second Quarter............................................ 13 3/4 8 3/8 Third Quarter............................................. 17 7/8 12 9/16 Fourth Quarter............................................ 18 3/4 14 1998 First Quarter............................................. 19 12/16 7 5/16 Second Quarter............................................ 8 1/16 4 Third Quarter............................................. 6 4/16 2 5/16 Fourth Quarter............................................ 3 13/16 1 13/16 1999 First Quarter............................................. 3 9/16 2 5/16 Second Quarter (through May 28, 1999)..................... 2 8/16 1 10/16
(b) As of the close of business on May 28, 1999, the number of holders of record of common stock of the Company was 1,486. The New York Stock Exchange (the "Exchange") has certain continued listing financial criteria. The Company currently does not meet the Exchange's continued listing criteria and is in discussions with the Exchange concerning its plans to bring the Company in line with such criteria. There can be no assurance that the discussions with the Exchange will be successful, or that the Company will be able to continue to maintain its listing on the Exchange. In the event the Company's common stock is delisted from the Exchange, the Company would seek to list its common stock on another exchange or market, however, there can be no assurance that such efforts would be successful. The delisting of the Company's common stock on the Exchange may result in reduced liquidity for the Company's stockholders, which could have a material adverse effect on the Company's stockholders. Under the terms of the Company's Credit Facility with IBJ, which provides for borrowings, including letters of credit and bankers' acceptances, the Company is prohibited from declaring, paying or making any dividend or distribution on any shares of the common stock or preferred stock of the Company (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or apply any of its funds, property or assets to the purchase, redemption or other retirement of any common or preferred stock, or of any options to purchase or acquire any such shares of common or preferred stock of the Company. Notwithstanding the foregoing restrictions, the Company is permitted to pay cash dividends in any fiscal year in an amount not to exceed the greater of (i) the amount of dividends due to BIL (Far East Holdings) Limited and BIL Securities (Offshore) Ltd. (collectively, "BIL") under the terms of the Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") in any fiscal year, or (ii) 12.5% of net income of the Company on a consolidated basis, provided, that no event of default shall have occurred and be continuing or would exist after giving effect to the payment of the dividends. 19 25 As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was not in compliance with certain financial covenants and other terms and provisions contained in the Credit Facility. On April 22, 1999, the Company entered into an amendment to the Credit Facility, which was subsequently amended as of May 21 and June 3, 1999 (the "1999 Amendment"), which provided for, among other things, the waiver of these defaults, an amendment to certain financial covenants and other terms and provisions contained in the Credit Facility, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In addition, the Company's Indenture dated as of August 4, 1997 (the "Indenture") governing the issuance of its $100 million Senior Subordinated Notes (the "Senior Subordinated Notes") prohibits the Company from declaring or paying any dividend or making any distribution or restricted payment as defined in the Indenture (collectively, the "Restricted Payments") (other than dividends or distributions payable in capital stock of the Company), unless, at the time of such payment (i) no default or event of default shall have occurred and be continuing or would occur as a consequence thereof; (ii) the Company would be able to incur at least $1.00 of additional indebtedness under the fixed charge coverage ratio contained in the Indenture; and (iii) such Restricted Payment, together with the aggregate of all Restricted Payments made by the Company after the date of the Indenture is less than the sum of (a) 50% of the consolidated net income of the Company for the period (taken as one accounting period) beginning on April 1, 1997 to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such consolidated net income for such period is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company from contributions of capital or the issue or sale since the date of the Indenture of capital stock of the Company or of debt securities of the Company that have been converted into capital stock of the Company. The Company anticipates that for the foreseeable future any earnings will be retained for use in its business and accordingly, does not anticipate the payment of cash dividends, other than to BIL in accordance with the terms and provisions of the Series B and Series C Preferred Stock. ITEM 6. SELECTED FINANCIAL DATA: The following selected financial data of the Company should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing herein. The financial data for 1997 and 1996 has been restated. See Note 16 to the consolidated financial statements. All amounts in the table are expressed in thousands, except per share amounts. 20 26 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1998(1) 1997(2) 1996(3) 1995(4) 1994 -------- ------------- ------------- -------- -------- (AS RESTATED) (AS RESTATED) STATEMENT OF OPERATIONS DATA: Net revenues.......................... $380,866 $262,834 $143,270 $112,414 $106,026 (Loss) income before extraordinary item................................ $(48,992) $(26,417) $(12,838) $ 1,047 $ (1,979) Extraordinary item.................... -- -- (736) -- -- -------- -------- -------- -------- -------- Net (loss) income..................... $(48,992) $(26,417) $(13,574) $ 1,047 $ (1,979) ======== ======== ======== ======== ======== PER COMMON SHARE DATA: (Loss) income before extraordinary item................................ $ (1.61) $ (1.33) $ (.82) $ .07 $ (.14) Extraordinary item.................... -- -- (.05) -- -- -------- -------- -------- -------- -------- Net (loss) income..................... $ (1.61) $ (1.33) $ (.87) $ .07 $ (.14) ======== ======== ======== ======== ======== Weighted average number of common and dilutive shares outstanding......... 31,111 20,600 15,557 14,315 13,862 ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT PERIOD END): Total assets.......................... $428,859 $537,337 $204,286 $103,011 $102,454 Working capital....................... 76,376 99,132 14,316 35,061 29,389 Total long-term liabilities, excluding current portion and Senior Subordinated Notes.................. 6,715 7,733 6,535 20,462 22,107 Senior Subordinated Notes............. 100,000 100,000 -- -- -- Stockholders' equity.................. 219,867 265,109 113,450 60,970 56,152
- --------------- (1) 1998 includes a charge of $18,310,000 to write-off the Company's deferred tax asset, a provision for uncollectible accounts receivable of $11,047,000, an allowance of $3,000,000 for the P.T. Dharma Loan Agreement, separation charges of $2,548,000, a charge of $2,389,000 for inventory write-downs, charges of $2,320,000 related principally to other asset write-offs and accrual adjustments, a charge for impairment in excess of cost over net assets acquired of $1,873,000, a charge of $954,000 for stock compensation and reversals of restructuring and merger accruals no longer required of $3,547,000. (2) 1997 includes restructuring charges of $18,151,000, indirect merger charges related to the acquisition of Fuqua of $4,393,000, inventory write-downs of $7,732,000, charges of $5,000,000 to increase allowances for accounts and notes receivable, $3,300,000 associated with the write-off of purchased in-process research and development and a charge of $838,000 for stock compensation. On December 30, 1997, Graham-Field acquired Fuqua in a transaction pursuant to which Graham-Field issued 9,413,689 shares of common stock (excluding shares of common stock of Graham-Field to be issued in connection with Fuqua stock options assumed by Graham-Field) in exchange for the common stock of Fuqua. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of the purchase price over net assets acquired was approximately $121.2 million. In connection with the acquisition of Fuqua, Graham-Field acquired the Leather Operations. It was Graham-Field's intention to dispose of the Leather Operations as soon as reasonably practicable following the consummation of the acquisition of Fuqua. Accordingly, the net assets of the Leather Operations were reflected as "Assets held for sale" in the amount of $61,706,000 on the balance sheet as of December 31, 1997. On January 27, 1998, Graham-Field sold the Leather Operations for $60,167,400 in cash, 5,000 shares of Series A Preferred Stock of the buying entity with a stated value of $4,250,000 (valued at $1,539,000), and the assumption of debt of $2,341,250. On August 17, 1997, Graham-Field acquired substantially all of the assets and certain liabilities of Medi-Source, a privately-owned distributor of medical supplies, for $4,500,000 in cash. Graham-Field also 21 27 entered into a five (5) year non-competition agreement with the previous owner in the aggregate amount of $301,000 payable over the five (5) year period. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of the purchase price over net assets acquired was approximately $3.7 million. On August 28, 1997, Graham-Field acquired all of the issued and outstanding shares of the capital stock of Medapex in a transaction accounted for as a pooling of interests. On June 25, 1997, Graham-Field acquired all of the capital stock of LaBac, in a merger transaction. LaBac manufactures and distributes custom power wheelchair seating systems and manual wheelchairs throughout North America. In connection with the acquisition, LaBac became a wholly-owned subsidiary of Graham-Field, and the selling stockholders of LaBac received in the aggregate 772,557 shares of common stock of Graham-Field valued at $11.77 per share in exchange for all of the issued and outstanding shares of the capital stock of LaBac. Graham-Field also entered into a three year consulting agreement with the selling stockholders and an entity controlled by the selling stockholders, and non-competition agreements with each of the selling stockholders. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over net assets acquired amounted to approximately $7.3 million. On March 7, 1997, Everest & Jennings acquired Kuschall, a manufacturer of pediatric wheelchairs, high-performance adult wheelchairs and other rehabilitation products, for a purchase price of $1,510,000, representing the net book value of Kuschall. The purchase price was paid by the issuance of 116,154 shares of common stock of Graham-Field valued at $13.00 per share. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary of Graham-Field acquired substantially all of the assets and certain liabilities of Motion 2000 Inc. and its wholly-owned subsidiary, Motion 2000 Quebec Inc., for a purchase price equal to Cdn. $2,900,000 (Canadian Dollars) (approximately U.S. $2,150,000). The purchase price was paid by the issuance of 187,733 shares of common stock of Graham-Field valued at U.S.$11.437 per share. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately U.S.$2.5 million. In 1998, the Company recorded a charge of $1,873,000 to reflect an impairment in this asset. (3) In March 1996, Graham-Field sold its Gentle Expressions breast pump product line, and recorded a gain of $360,000. On November 27, 1996, the Company acquired Everest & Jennings pursuant to the terms and provisions of the Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996 and amended as of October 1, 1996, by and among Graham-Field, Everest & Jennings, Everest & Jennings Acquisition Corp., and BIL. The acquisition was accounted for under the purchase method of accounting and, accordingly, the operating results of Everest & Jennings have been included in Graham-Field's consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the estimated fair market value of the net deficiency acquired was approximately $54.2 million. On September 4, 1996, Graham-Field acquired substantially all of the assets of V.C. Medical, a wholesale distributor of medical products in Puerto Rico, for a purchase price consisting of $1,703,829 in cash, and the issuance of 32,787 shares of common stock of Graham-Field, valued at $7.625 per share. In addition, Graham-Field assumed certain liabilities of V.C. Medical in the amount of $296,721. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately $988,000. 22 28 During 1996, Graham-Field recorded charges of $15,146,000 related to the acquisition of Everest & Jennings. The charges included $12,500,000 associated with the write-off of purchased in-process research and development costs and $2,646,000 of merger-related expenses. The extraordinary item is related to the early retirement of the indebtedness underlying the John Hancock Mutual Life Insurance Note and Warrant Agreement dated as of March 12, 1992, as amended (the "John Hancock Indebtedness"), and represents a "make-whole" payment and the write-off of unamortized deferred financing costs associated with this indebtedness. (4) Effective July 1, 1995, Graham-Field acquired substantially all of the assets and liabilities of National Medical Excess Corp. The acquisition was accounted for under the purchase method of accounting and accordingly, the results of operations are included in the consolidated financial statements of Graham-Field subsequent to that date. Net income per common share for 1995, which was the same for basic and diluted, was computed using the weighted average number of common shares (14,278,000 shares) and dilutive common equivalent shares outstanding (37,000 shares) during the period. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements include, but are not limited to, statements relating to (i) the Company's ability to continue as a going concern, (ii) the Company's ability to reduce operating expenses and working capital investment and obtain additional financing to operate the business, (iii) the expansion of the Company's market share, (iv) the Company's growth into new markets, (v) the development of new products and product lines to appeal to the needs of the Company's customers, (vi) the consolidation of the Graham-Field Express distribution network, (vii) obtaining regulatory and governmental approvals, (viii) the upgrading of the Company's technological resources and systems, (ix) the ability of the Company to implement its Year 2000 remediation plan and address the risks related to Year 2000 compliance, and (x) the retention of the Company's earnings for use in the operation and expansion of the Company's business. Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the Company's ability to continue as a going concern, the effect of economic and market conditions, the impact of the consolidation of healthcare practitioners, the impact of healthcare reform, the Company's ability to effectively integrate acquired companies and realize certain manufacturing, operational and distribution efficiencies and cost savings, the termination of the Company's Wheelchair Supply Agreement with P.T. Dharma, the ability of the Company to maintain its gross profit margins, the ability to obtain financing to operate the Company's business, the ability of the Company to implement its Year 2000 remediation plan and address the risks related to Year 2000 compliance, the ability of the Company to successfully defend the class actions arising out of the Company's public announcement on March 23, 1998 of its financial results for the fourth quarter and year ended December 31, 1997, the failure of the Company to successfully compete with the Company's competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, adverse litigation results, the acceptance and quality of new software and hardware products which will enable the Company to expand its business, the acceptance and ability to manage the Company's operations in foreign markets, possible disruptions in the Company's computer systems or distribution technology systems, possible increases in shipping rates or interruptions in shipping service, the level and volatility of interest rates and currency values, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company's filings with the Securities and Exchange Commission, which include the section entitled "Risk Factors" in the Company's Registration Statement on Form S-4 dated as of December 19, 1997. 23 29 The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. RESTATEMENT In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found certain accounting errors and irregularities with respect to the Company's financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting firm of Arthur Andersen LLP to assist in conducting the investigation and in providing advice on accounting matters. Based on the results of the investigation, the Company has restated its financial results for 1996 and 1997. The financial information contained herein has been restated to incorporate all relevant information obtained from the investigation. The restated loss before income taxes for the years ended December 31, 1997 and 1996 were $37,009,000 and $11,482,000, respectively, as compared to the originally reported loss before income taxes for the years ended December 31, 1997 and 1996 of $30,228,000, and $8,955,000, respectively. The restated net loss for the years ended December 31, 1997 and 1996 were $26,417,000 and $13,574,000, respectively, as compared to the originally reported net loss for the years ended December 31, 1997 and 1996 of $22,893,000 and $12,609,000, respectively. In addition, the restated operating revenues for the years ended December 31, 1997 and 1996 were $261,672,000 and $142,711,000, respectively, as compared to originally reported operating revenues for December 31, 1997 and 1996 of $261,981,000 and $143,083,000, respectively. RESULTS OF OPERATIONS On August 28, 1997, the Company acquired all of the issued and outstanding shares of the capital stock of Medapex, which was accounted for as a "pooling of interests." Accordingly, the Company's financial statements for periods prior to the combination have been restated to include the results of Medapex for all periods. Operating Revenues 1998 compared to 1997. Operating revenues were $378,840,000 for the year ended December 31, 1998, representing an increase of 45% from the prior year. The increase in operating revenues was primarily attributable to the acquisition of Fuqua in December 1997, five other acquisitions completed in 1997, the growth of Graham-Field's innovative Graham-Field Express program, and the expansion of the C.A.P. program. On a pro forma basis (as if all acquisitions completed in 1997 were recorded as of January 1, 1997), the Company's revenues increased approximately 1% for the year ended December 31, 1998. Revenues for the year ended December 31, 1998 fell below management's expectations primarily due to intense competition within the healthcare industry and management's focus on the integration of the acquisitions and the merging of diverse manufacturing and distribution facilities, information and technology systems, sales forces and product lines. Management believes that intense competition within the healthcare industry will continue in 1999. In March 1996, Graham-Field Express was introduced to offer "same-day" and "next-day" service to home healthcare dealers of certain strategic home healthcare products, including patient aids, adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional supplements and other freight and time sensitive products. As of December 31, 1998, Graham-Field Express facilities were operating from seven (7) distribution facilities located in the Bronx, New York; Puerto Rico; Dallas, Texas; Baltimore, Maryland, Cleveland, Ohio, Boston, Massachusetts and Louisville, Kentucky, as compared to six (6) Graham-Field Express facilities which were operating as of December 31, 1997. As of 24 30 March 31, 1999, the Company had eliminated Graham-Field Express facilities operating in Louisville, Kentucky and Dallas, Texas. Revenues attributable to Graham-Field Express were approximately $79,051,000 and $50,512,000 for the years ended December 31, 1998 and 1997, respectively. The Company intends to moderate the growth of the Graham-Field Express Program and may further consolidate the Graham-Field Express distribution network. 1997 compared to 1996. Operating revenues were $261,672,000 for the year ended December 31, 1997, or 83% higher than the year ended December 31, 1996. The increase in operating revenues was primarily attributable to Graham-Field's expansion of its C.A.P. program, the introduction of the Graham-Field Express program, the addition of new product lines and the acquisition of Everest & Jennings in November 1996. For the year ended December 31, 1997, revenues attributable to the Graham-Field Express program were approximately $50,512,000. Revenues of Everest & Jennings for the period from the date of acquisition to December 31, 1996 were approximately $3,634,000. The increase in operating revenues was achieved despite the decline in sales to Apria Healthcare Group, Inc. ("Apria") of approximately $5,905,000 for the year ended December 31, 1996 as compared to the prior year. Graham-Field's supply agreement with Apria expired on December 31, 1995. Interest and Other Income 1998 compared to 1997. Interest and other income for the year ended December 31, 1998 was $2,026,000, as compared to $1,162,000 for the prior year. The increase is primarily due to interest earned in the amount of $247,000 on the P.T. Dharma Advance, dividends earned in the amount of $187,500 on preferred stock acquired in connection with the sale of Fuqua's leather operations in January 1998, and net sublease income in the amount of $237,000 attributable to certain Fuqua properties. 1997 compared to 1996. Interest and other income increased from $559,000 in 1996 to $1,162,000 in 1997. The increase is primarily due to interest earned on the unused proceeds from Graham-Field's sale of its Senior Subordinated Notes on August 4, 1997 and interest earned on customer financing programs. Cost of Revenues 1998 compared to 1997. Cost of revenues as a percentage of operating revenues decreased for the year ended December 31, 1998 to 70%, as compared to 74% for the prior year. The Fuqua entities and LaBac contributed higher gross profit margins, offset in a large part by a higher mix of redistributed products, primarily through the Graham-Field Express Program, which historically operates at lower gross profit margins, and by operating inefficiencies incurred during the integration of acquired companies. As part of Graham-Field's strategic initiatives relating to product rationalization, charges of $2,389,000 and $7,732,000 are included in cost of revenues for 1998 and 1997, respectively, for inventory write-downs for certain obsolete and excess inventory. Excluding the charge associated with the inventory write-downs in 1998 and 1997, cost of revenues as a percentage of operating revenues would have been approximately 69% for 1998 and 71% for 1997. Management believes that cost of revenues as a percentage of operating revenues was adversely affected in 1998 due to intense competition and pricing pressures within the healthcare industry, which trend is expected to continue. In addition, the delays associated with the integration of the acquisitions completed in 1997 negatively impacted Graham-Field's ability to realize certain manufacturing and operating efficiencies and cost savings. 1997 compared to 1996. Cost of revenues as a percentage of operating revenues increased for the year ended December 31, 1997 to 74%, as compared to 71% for the prior year. As part of Graham-Field's strategic restructuring initiatives related to product rationalization, a charge of $7,732,000 is included in cost of revenues for 1997 related to inventory write-downs associated with the elimination of certain non-strategic inventory and product lines. Excluding the charge associated with the inventory write-downs, cost of revenues as a percentage of operating revenues for 1997 would have been 71%. Nevertheless, management believes that 25 31 cost of revenues as a percentage of operating revenues was adversely affected in the fourth quarter of 1997 due to intense competition and pricing pressures within the healthcare industry. Selling, General and Administrative Expenses 1998 compared to 1997. Selling, general and administrative expenses as a percentage of operating revenues for the year ended December 31, 1998 increased to 37%, as compared to 28% in the prior year. In the fourth quarter of 1998, a provision for uncollectible accounts and notes receivable of $11,047,000 was recorded to reflect anticipated losses from one customer in financial difficulty and several other customer accounts being placed in collection and a provision of $3,000,000 was recorded related to the P.T. Dharma Loan Agreement. Selling, general and administrative expense in 1998 also includes separation charges of $2,548,000, a charge of $2,320,000 principally for other asset write-offs and accrual adjustments, a charge of $1,873,000 for impairment of excess of cost over net assets and a charge of $954,000 for stock compensation. Excluding these items, selling, general and administrative expenses as a percentage of operating revenues would have been 31% in 1998. The increase in selling, general and administrative expenses was primarily attributable to higher corporate office and administrative overhead; increased amortization related to the acquisitions completed in 1997; the inability of the Company to realize certain cost savings associated with acquisitions completed in 1997 relating to the consolidation of corporate offices, manufacturing and distribution facilities, the streamlining of information and technology systems and the merging of sales forces and product lines; and the contribution of revenue by the Fuqua entities and LaBac at a higher percentage of selling, general and administrative expenses. 1997 compared to 1996. Selling, general and administrative expenses as a percentage of operating revenues for the year ended December 31, 1997 increased to 28%, as compared to 25% in the prior year. In the fourth quarter of 1997, a provision for uncollectible accounts and notes receivable of $5,000,000 was recorded to reflect increased credit risk due to the anticipated impact of changes in state Medicare reimbursement and procurement policies for certain product lines and the extended payment terms being taken by the Company's customers. The changes in such reimbursement patterns resulted in an increased number of days outstanding for receivables. In addition, the Company incurred a charge of $838,000 in 1997 for stock compensation. Excluding the provision for uncollectible accounts receivable and charge for stock compensation, selling, general and administrative expenses as a percentage of operating revenues for 1997 would have been 26%. The increase in selling, general and administrative expenses was primarily due to higher than anticipated integration costs associated with the acquisitions completed in 1997. The delays associated with the integration process also negatively impacted the Company's ability to realize certain anticipated cost savings relating to the consolidation of corporate offices, manufacturing and distribution facilities, the streamlining of information and technology systems and the merging of sales forces and product lines. Interest Expense 1998 compared to 1997. Interest expense for the year ended December 31, 1998 increased to $12,652,000, as compared to $7,260,000 for the prior year. The increase is primarily due to a full year of interest attributable to the Company's sale on August 4, 1997 of its Senior Subordinated Notes, a higher cost of borrowings under the Credit Facility, and an increased level of borrowings under the Credit Facility. 1997 compared to 1996. Interest expense for the year ended December 31, 1997 increased to $7,260,000, as compared to $2,762,000 for the prior year. The increase is primarily due to increased borrowings attributable to Graham-Field's revenue growth, the expansion of the Graham-Field Express program, and the sale of the Senior Subordinated Notes on August 4, 1997. Merger and Restructuring Related Charges 1998 compared to 1997. Merger and restructuring related charges decreased to record a benefit of $3,547,000 during 1998, as compared to a charge in 1997 of $22,544,000. The decrease is primarily due to the reevaluation of certain merger and restructuring related charges originally recorded in 1997 that are no longer needed as of the end of 1998. In 1998, the Company performed a reevaluation of such accruals and considered 26 32 the actual costs incurred to complete the strategic restructuring initiatives and the estimated future costs to complete the initiatives contemplated in the 1997 restructuring plan (the "Restructuring Plan") (see Note 3 to the consolidated financial statements). 1997 compared to 1996. In connection with the acquisition of Fuqua on December 30, 1997, the Company adopted the Restructuring Plan to implement certain strategic restructuring initiatives and recorded restructuring charges of $18,151,000 (the "Restructuring Charges") and indirect merger charges of $4,393,000 (the "Merger Charges"). The Restructuring Plan was initiated to create manufacturing, distribution and operating efficiencies and enhance the Company's position as a low-cost supplier in the healthcare industry. These steps included a broad range of efforts, including the consolidation of the Company's Temco manufacturing operations in New Jersey into Fuqua's Lumex manufacturing facility in New York and relocation of the Company's corporate headquarters to the Lumex facility. In addition, the Company will be closing several other distribution facilities and consolidating operations in an effort to achieve additional cost savings. The Restructuring Charges include exit costs of $15,301,000 related to the elimination of duplicate manufacturing and distribution facilities, severance costs of $650,000 for approximately 100 employees, and asset write-downs of $2,200,000 relating to assets to be sold or abandoned. In addition, the Company recorded a provision for inventory write-downs of $7,732,000 associated with the elimination of certain non-strategic inventory and product lines that is included in costs of revenue. The Merger Charges were related to the Fuqua acquisition and Medapex combination and included the write-off of certain unamortized catalog costs with no future value, certain insurance policies, payment of bonuses related to the acquisitions, and various transaction costs. The Company also incurred $3,300,000 of expenses in 1997 related to the write-off of purchased in-process research and development costs of Fuqua. During the fourth quarter of 1996, Graham-Field recorded charges of $15,146,000 related to the acquisition of Everest & Jennings. The charges included $12,500,000 associated with the write-off of purchased in-process research and development costs and $2,646,000 of merger expenses related to severance payments, the write-off of certain unamortized catalog and software costs with no future value, the accrual of costs to vacate certain of Graham-Field's facilities, and the cost of certain insurance policies. Net Loss or Income 1998 compared to 1997. Loss before income taxes for the year ended December 31, 1998 was $32,585,000, which includes $20,584,000 of unusual items (the "1998 Unusual Items"), as compared to a loss before income taxes of $37,009,000 in 1997, which includes Restructuring Charges, Merger Charges and other charges in the aggregate amount of $39,414,000. The 1998 Unusual Items include a provision for uncollectible accounts and notes receivable of $11,047,000, a provision of $3,000,000 related to the P.T. Dharma Loan Agreement, separation charges of $2,548,000, a charge of $2,389,000 related to the inventory write-down for certain obsolete and excess inventory, charges of $2,320,000 related to other asset write-offs and accrual adjustments, charges for impairment of excess of cost over net assets acquired of $1,873,000, a charge of $954,000 for stock compensation, and the reversal of merger and restructuring related accruals no longer needed of $3,547,000. Excluding the unusual items and restructuring, merger and other charges recorded in 1998 and 1997, the loss before income taxes was $12,001,000 in 1998, as compared to income before income taxes of $2,405,000 in 1997. This decrease in income before income taxes was primarily due to a decrease in cost of revenues as a percentage of operating revenues offset by an increase in selling, general and administrative expenses as a percentage of operating revenues, an increase in amortization expense and an increase in interest expense. Net loss for the year ended December 31, 1998 was $48,992,000, as compared to $26,417,000 for the prior year. An income tax expense of $16,407,000 was recorded in 1998 compared to an income tax benefit of $10,592,000 in 1997. At December 31, 1998, the Company had aggregate federal net operating loss carryforwards of approximately $52,000,000 for income tax purposes, which expire during the period 2010 through 2018. Approximately $24,164,000 of the net operating loss carryforwards were acquired primarily in 27 33 connection with the Everest & Jennings acquisition and are limited to use in any particular year. For financial reporting purposes, due to prior year losses of Everest & Jennings, and SRLY limitations, a full valuation allowance of approximately $12,598,000 was recorded in purchase accounting against the Everest & Jennings net operating losses and deferred tax assets. Subsequent realization of any Everest & Jennings tax benefits will be recorded as a reduction of the excess of cost over net assets acquired. As a result of the continuation operating losses in 1998, the Company increased its deferred tax valuation allowance by $22,996,000, which results in a full valuation allowance against all net deferred tax assets at December 31, 1998. 1997 compared to 1996. Loss before income taxes for the year ended December 31, 1997 was $37,009,000, as compared to a loss before income taxes and extraordinary item of $11,482,000 for the prior year. The loss before income taxes for 1997 includes Restructuring Charges of $18,151,000, Merger Charges of $4,393,000, a provision for inventory write-downs of $7,732,000, a provision for uncollectible accounts and notes receivable of $5,000,000, a charge of $3,300,000 related to the write-off of purchased in-process research and development costs of Fuqua and charges for stock compensation of $838,000. The loss before income taxes and extraordinary item for 1996 includes certain charges of $15,146,000 relating to the acquisition of Everest & Jennings. Excluding the restructuring, merger and other charges and the write-off of purchased in-process research and development costs in 1996 and 1997, income before income taxes decreased from $3,664,000 in 1996 to $2,405,000 in 1997, primarily due to an increase in interest expense, amortization and selling, general and administrative expenses as a percent of operating revenues. Net loss for the year ended December 31, 1997 was $26,417,000, as compared to $13,574,000 for the prior year. Graham-Field recorded an income tax benefit of $10,592,000 for the year ended December 31, 1997, as compared to income tax expense of $1,356,000 for the prior year. As of December 31, 1997, Graham-Field had net deferred tax assets of $18,619,000, primarily comprised of future tax deductions for restructuring and other accruals and reserves related to the acquisition of Fuqua. A full valuation allowance has been recorded against Everest & Jennings' net deferred tax assets. When realized, the tax benefit for such items will be recorded as a reduction of the Everest & Jennings' goodwill. A valuation allowance on the remaining deferred tax assets was not provided in 1997 because management believed that there would be sufficient earnings in the carryforward period to utilize such deferred tax assets. The net loss in 1996 includes an extraordinary item of $736,000 (net of tax benefit of $383,000) related to the "make-whole" payment and write-off of unamortized deferred financing costs associated with the early retirement of the John Hancock Indebtedness. Graham-Field's business has not been materially affected by inflation. Liquidity and Capital Resources Graham-Field had working capital of $76,376,000 at December 31, 1998, as compared to $99,132,000 at December 31, 1997. Cash used in operating activities for the year ended December 31, 1998 was $20,937,000, as compared to cash used in operating activities of $39,377,000 in the prior year. The principal reasons for the decrease in cash used in operating activities during 1998 were an increase in operating cash flow before changes in operating assets and liabilities and a decrease in the changes in operating assets and liabilities. During 1998, the Company had a lower investment in accounts receivable relative to the investment in 1997 and a decrease in inventory levels (compared to an increase in inventory levels during 1997) which were partially offset by reductions in accounts payable and accrued expenses due principally to 1998 payments on prior year restructuring and merger accruals. In 1998, the Company utilized approximately $4,367,000 in cash related to the Restructuring and Merger Charges recorded in 1997. On December 30, 1997, Graham-Field acquired Fuqua and assumed $62,076,000 of Fuqua indebtedness (the "Fuqua Indebtedness") under Fuqua's revolving credit facility with SunTrust Bank. On January 28, 1998, Graham-Field sold the Leather Operations of Fuqua for $60,167,400 in cash, 5,000 shares of Series A Preferred Stock of the buying entity with a stated value of $4,250,000 (which has been valued at $1,539,000), and the assumption of debt of $2,341,250. The cash proceeds from the sale of the Fuqua leather operations 28 34 were used to repay the indebtedness incurred under the Credit Facility, which was used to retire the Fuqua Indebtedness. The Credit Facility provides for borrowings of up to $50 million (after giving effect to the 1999 Amendment), including letters of credit and bankers acceptances arranged by IBJ, as agent. Under the terms of the Credit Facility, borrowings bear interest at IBJ's prime rate (7.75% at December 31, 1998) plus one percent. As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was not in compliance with certain financial covenants and other terms and provisions contained in the Credit Facility. The 1999 Amendment provides for, among other things, the waiver of these defaults, an amendment to certain financial covenants, a new undrawn availability covenant relating to scheduled interest payments on the Senior Subordinated Notes, and other terms and provisions contained in the Credit Facility, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. The 1999 Amendment reduced the maximum revolving advance amount under the Credit Facility from $80 million to $50 million, and reduced and/or eliminated certain availability and borrowing base reserves. After giving effect to the 1999 Amendment, which includes the reduction and/or elimination of certain availability and borrowing base reserves, the Company's availability to borrow funds under the Credit Facility remains relatively unchanged. As part of the 1999 Amendment, the Company is required to pay a waiver fee (the "Waiver Fee") in the amount of $400,000 on or before June 30, 1999, unless the Company either presents an acceptable business plan to the banks on or before June 30, 1999, or repays in full all outstanding obligations under the Credit Facility on or before June 30, 1999. Notwithstanding the foregoing, in the event the Company is in receipt on or before June 30, 1999 of a commitment letter, letter of intent or agreement to (i) sell substantially all or a part of the assets or equity securities of the Company in a sale, merger, consolidation or other similar transaction, which results in the repayment of all of the outstanding obligations under the Credit Facility, or (ii) refinance the indebtedness under the Credit Facility (the transactions referred to in clauses (i) and (ii) are individually referred to as a "Significant Transaction"), the payment date for the Waiver Fee will be extended until the earlier to occur of the consummation of a Significant Transaction, which results in the repayment of all outstanding obligations under the Credit Facility, or ninety (90) days from June 30, 1999. The Credit Facility is secured by substantially all of the assets of the Company and the pledge of the capital stock of certain of the Company's subsidiaries. At December 31, 1998, the Company had working capital of approximately $76.4 million and unused availability under the Credit Facility of approximately $15.7 million. As of June 1, 1999, after giving effect to the 1999 Amendment (see Note 6 to the Consolidated Financial Statements), the Company had unused availability of approximately $7.2 million. The Company has incurred significant losses in each of the three years in the period ended December 31, 1998 and in the first quarter of 1999. These losses have arisen as a result of a significant amount of merger, restructuring and other expenses related to acquisitions completed in 1996 and 1997, the failure to integrate effectively these acquisitions and realize the benefits and synergies to be derived therefrom, and the impact of intense competition within the healthcare industry. The losses included significant charges relating to provisions for accounts receivable, inventory and other asset write-offs in 1997 and 1998, a provision to increase the valuation allowance on deferred tax assets in 1998, and certain professional and other advisory fees in the first quarter of 1999, all of which management believes to be substantially non-recurring. Further, the Company and certain of its directors and officers have been named as defendants in at least fifteen putative class action lawsuits which have been consolidated into an amended complaint (see Note 15 to the Consolidated Financial Statements). In response to the losses incurred in 1997, 1998 and the first quarter of 1999, management has commenced a program to reduce operating expenses, improve gross margins and reduce the investment in working capital during the remainder of 1999 and take other actions to improve its cash flow. These actions include, but are not limited, to (i) the completion of the activities contemplated by the Company's restructuring plan as further described in Note 3 to the Consolidated Financial Statements; (ii) the initiation of inventory reduction and product rationalization programs; (iii) the tightening of credit policies and payment terms; (iv) the reduction in previously budgeted capital expenditures; (v) the implementation of streamlined 29 35 product pricing and product return guidelines; (vi) the initiation of an aggressive program to collect past due accounts receivable; and (vii) the realignment and consolidation of sales forces and territories. Notwithstanding the actions described above, the Company currently expects that it will be necessary to obtain approximately $5 to $10 million of additional borrowing availability by August 1999. Management believes that it will be able to obtain the additional borrowing availability by financing certain unencumbered real estate or through a secondary financing; however, it has not yet obtained such financing commitment. Management also believes that, if necessary, it could sell certain assets to meet cash requirements, which would require the consent of the lenders under the Credit Facility. Management believes that such objectives are attainable, however, there can be no assurance that the Company will be successful in its efforts to improve its cash flow from operations or that it will be able to obtain such additional borrowing availability on satisfactory terms in a timely manner to provide sufficient cash for operations, capital expenditures and regularly scheduled debt service. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The Credit Facility contains certain customary terms and provisions, including limitations with respect to the repayment or prepayment of principal on subordinated debt, including the Notes, the incurrence of additional debt, liens, transactions with affiliates and certain consolidations, mergers and acquisitions and sales of assets, and restrictions relating to capital expenditures. In addition, Graham-Field is prohibited from declaring or paying any dividend or making any distribution on any shares of common stock or preferred stock of Graham-Field (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or applying any of its funds, property or assets to the purchase, redemption or other retirement of any such shares, or of any options to purchase or acquire any such shares. Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay cash dividends in any fiscal year in an amount not to exceed the greater of (i) the amount of dividends due BIL under the terms of the Graham-Field Series B and Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of Graham-Field on a consolidated basis, provided that no event of default under the Credit Facility shall have occurred and be continuing or would exist after giving effect to the payment of the dividends. The Credit Facility contains certain financial covenants, including a net cash flow covenant and leverage ratio, as well as the requirement that Graham-Field reduce outstanding borrowings with the net cash proceeds of certain asset sales. On August 4, 1997, Graham-Field issued the Senior Subordinated Notes under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). On February 9, 1998, Graham-Field completed its exchange offer to exchange the outstanding Senior Subordinated Notes for an equal amount of the new Senior Subordinated Notes, which have been registered under the Securities Act. The new Senior Subordinated Notes are identical in all material respects to the previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The Senior Subordinated Notes are general unsecured obligations of Graham-Field, subordinated in right of payment to all existing and future senior debt of Graham-Field, including indebtedness under the Credit Facility. The Senior Subordinated Notes are guaranteed (the "Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis by all existing and future restricted subsidiaries of Graham-Field (the "Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in right of payment to all existing and future senior debt of the Guaranteeing Subsidiaries, including any guarantees by the Guaranteeing Subsidiaries of Graham-Field's obligations under the Credit Facility. The Company is a holding company with no assets or operations other than its investments in its subsidiaries. The subsidiary guarantors are wholly-owned subsidiaries of the Company and comprise all of the direct and indirect subsidiaries of the Company. Accordingly, the Company has not presented separate financial statements and other disclosures concerning each subsidiary guarantor because management has determined that such information is not material to investors. 30 36 The net proceeds from the offering of the Senior Subordinated Notes were used to repay $60.3 million of indebtedness under the Credit Facility and $5 million of indebtedness due to BIL. The balance of the proceeds were used for general corporate purposes, including the funding for acquisitions, the opening of additional Graham-Field Express facilities and strategic alliances. Under the terms of the Indenture, the Senior Subordinated Notes are not redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the Senior Subordinated Notes are redeemable, in whole or in part, at the option of Graham-Field, at certain redemption prices plus accrued and unpaid interest to the date of redemption. In addition, prior to August 15, 2000, Graham-Field may, at its option, redeem up to 25% of the aggregate principal amount of Senior Subordinated Notes originally issued with the net proceeds from one or more public offerings of common stock at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest to the date of redemption; provided that at least 75% of the aggregate principal amount of Senior Subordinated Notes originally issued remain outstanding after giving effect to any such redemption. The Indenture contains customary covenants including, but not limited to, covenants relating to limitations on the incurrence of additional indebtedness, the creation of liens, restricted payments, the sales of assets, mergers and consolidations, payment restrictions affecting subsidiaries and transactions with affiliates. In addition, in the event of a change of control of Graham-Field as defined in the Indenture, each holder of the Senior Subordinated Notes will have the right to require Graham-Field to repurchase such holder's Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Graham-Field will be required in certain circumstances to make an offer to purchase Senior Subordinated Notes at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase, with the net cash proceeds of certain asset sales. The Credit Facility, however, prohibits Graham-Field from purchasing the Senior Subordinated Notes without the consent of the lenders thereunder. In addition, the Indenture prohibits the Company from declaring or paying any dividend or making any distribution or restricted payment as defined in the Indenture (collectively, the "Restricted Payments") (other than dividends or distributions payable in capital stock of the Company), unless, at the time of such payment (i) no default or event of default shall have occurred and be continuing or would occur as a consequence thereof; (ii) the Company would be able to incur at least $1.00 of additional indebtedness under the fixed charge coverage ratio contained in the Indenture; and (iii) such Restricted Payment, together with the aggregate of all Restricted Payments made by the Company after the date of the Indenture is less than the sum of (a) 50% of the consolidated net income of the Company for the period (taken as one accounting period) beginning on April 1, 1997 to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such consolidated net income for such period is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company from contributions of capital or the issue or sale since the date of the Indenture of capital stock of the Company or of debt securities of the Company that have been converted into capital stock of the Company. Effective as of May 12, 1999, BIL waived certain events of default under a $4 million note owing by the Company to BIL (the "BIL Note") and exchanged all of its right, title and interest under the BIL Note, in consideration of the issuance of 2,036 fully paid, validly issued, non-assessable shares of the Company's Series D Preferred Stock (the "Series D Preferred Stock"). The shares of Series D Preferred Stock are non-voting, but have substantially the same economic rights as 2,036,000 shares of Common Stock. Based on the closing price of the Common Stock on May 12, 1999, that number of shares would have a market value of $4,072,000, which equals the aggregate of the unpaid principal amount and accrued interest on the BIL Note. Simultaneously with the closing of such transaction, Graham-Field and BIL entered into an agreement dated as of May 12, 1999, which provided Graham-Field with the sole and exclusive option for a period of one year following May 12, 1999, to convene a meeting of its stockholders or take such other corporate action, in accordance with applicable laws and regulatory requirements, as may be required to obtain applicable corporate approval to exchange each share of Series D Preferred Stock for 1,000 shares of Common Stock. 31 37 Year 2000 The following disclosure is intended to be a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. The Company has developed, and is in the process of implementing, a Year 2000 ("Y2K") remediation plan in an attempt to address the risks related to the Y2K compliance of information technology ("IT") systems, non-IT systems and products, and relationships with third parties. The Company has three major IT application environments: distribution, manufacturing and warehouse automation. Management has selected application packages for distribution and manufacturing functions, which the Company believes are Y2K compliant based upon representations from the supplier of such application packages. Management believes, subject to completion of its review of the Y2K compliance of its critical business partners (as discussed below) and completion of product testing, that the current warehouse automation systems should be Y2K compliant. With respect to each of these application environments, the Company is relying on the Y2K compliance representations of suppliers and other third parties whose activities may impact the Company's business operations. The Company will be conducting Y2K compliance testing of these application packages. The distribution package includes the corporate general ledger, accounts payable, accounts receivable, purchasing, inventory control and order entry functions. General ledger, accounts payable and accounts receivable upgrades were completed in 1997. Purchasing and inventory control functions have been upgraded, and order entry is anticipated to be upgraded during the first half of 1999. The manufacturing system upgrade is in process, and one of the five manufacturing sites has been completed. The remaining manufacturing sites are currently in the remediation phase with all remediation and testing scheduled to be completed by the end of the third quarter of 1999. In the event that the Company's IT and non-IT systems are not Y2K compliant in time, the most reasonably likely worst case scenario is that such non-compliance would result in a material adverse effect on the Company's business, financial position, and results of operations in future periods. The Company intends to create a contingency plan during 1999 to address potential Y2K failures of its critical IT and non-IT systems. This contingency plan will include, but not be limited to, identification and mitigation of potentially serious business interruptions, adjustment of inventory levels to meet customer needs and establishment of crisis response processes to address unexpected problems. In developing the contingency plan, the Company will be prioritizing its applications and developing emergency measures to address potential failures of applications that are deemed significant to the Company's business operations. Moreover, the Company's contingency plans will attempt to address Y2K risks in connection with potential Y2K failures experienced by third parties such as suppliers. The Company is in the process of reviewing its relationships with high-priority business partners, including such areas as payroll, electronic banking, EDI links and freight systems, to determine their Y2K compliance status. Although the Company anticipates completing its assessment of the Y2K compliance of its business partners by the middle of 1999, the Company will be relying primarily on the representations of these external parties regarding their readiness for Y2K compliance. The inability of the Company's high-priority business partners to be Y2K compliant could have a material adverse effect on the business, financial position and results of operations of the Company. With respect to non-IT system issues, the Company is in the process of assessing the Y2K compliance of its products to determine if there are any material issues associated with the Y2K problem, including any issues related to embedded technology in these products. Towards that end, the Company is attempting to identify its at-risk products (which include date data processing), prioritize these products, and identify and address pertinent Y2K concerns. The Company is assessing the Y2K compliance representations made by suppliers, and anticipates completing its assessment by the third quarter of 1999. Since the Company's Y2K plan is dependent in part upon these suppliers and other key third parties being Y2K compliant, there can be no assurance that the Company's efforts in this area will be able to prevent a material adverse effect on the Company's business, financial position, and results of operations in future periods should a significant number of suppliers and customers experience business disruptions as a result of their lack of Y2K compliance. 32 38 A Y2K program manager has been assigned to coordinate the computer system upgrades and the Company's Y2K compliance plan. In 1998, the Company expended approximately $150,000 on its Y2K plan, primarily related to the costs of outside consulting and review services. In 1999, the Company expects to expend approximately $250,000 for outside consulting assistance, and $250,000 in the form of capital equipment leases to replace equipment that is determined not to be Y2K compliant. In addition, in 1999, the Company expects to expend $150,000 for an independent Y2K audit, and approximately $350,000 to undertake and complete system testing. The Company's upgrades of IT systems were not accelerated due to Y2K issues, and accordingly, such costs are not included in the costs of the Y2K plan. With respect to non-IT system issues, the Company is unable to estimate its remediation costs since it does not have information available upon which to measure the cost of Y2K compliance in this area. While the total costs to become Y2K compliant in the non-IT system area are not known at this time, management does not believe that such costs will have a material effect on the business, financial position, and results of operations of the Company. The Company's statements regarding its Y2K readiness are forward-looking and, therefore, subject to change as a result of known and unknown factors. The estimates and expected completion dates described above are based on information available at this time and may change as additional information and assessment phase results become available. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: As of December 31, 1998, the Company did not hold any derivative financial or commodity instruments. The Company is subject to interest rate risk and certain foreign currency risk relating to its operations in Mexico and Canada; however, the Company does not consider its exposure in such areas to be material. The Company's interest rate risk is related to its Senior Subordinated Notes, which bear interest at a fixed rate of 9.75%, and borrowings under its Credit Facility, which bear interest at IBJ's prime rate, as adjusted from time to time, plus one percent. 33 39 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FINANCIAL STATEMENTS CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1998 GRAHAM-FIELD HEALTH PRODUCTS, INC. BAY SHORE, NEW YORK 40 FORM 10 - K -- ITEM 8, ITEM 14(a)(1) AND (2)(c) AND (d) GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following consolidated financial statements of Graham-Field Health Products, Inc. and subsidiaries are included in Item 8: Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets -- December 31, 1998 and 1997... F-3 Consolidated Statements of Operations -- Years ended December 31, 1998, 1997 and 1996.......................... F-4 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1998, 1997 and 1996.................... F-5 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996.......................... F-7 Notes to Consolidated Financial Statements -- December 31, 1998...................................................... F-9 The following consolidated financial statement schedule of Graham-Field Health Products, Inc. and subsidiaries is included in Item 14(d): Schedule II -- Valuation and qualifying accounts............
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-1 41 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Graham-Field Health Products, Inc. We have audited the accompanying consolidated balance sheets of Graham-Field Health Products, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Graham-Field Health Products, Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant losses in each of the three fiscal years in the period ended December 31, 1998. In addition, as more fully described in Note 15, the Company has been named as a defendant in at least fifteen putative class action lawsuits that have been consolidated into an amended complaint. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes 1 and 15. The consolidated financial statements and financial statement schedule do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Melville, New York June 3, 1999 F-2 42 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------- 1998 1997 ------------- ---------------- AS RESTATED, SEE NOTE 16 ASSETS Current assets: Cash and cash equivalents................................. $ 3,290,000 $ 4,430,000 Accounts receivable, less allowance for doubtful accounts of $20,107,000 and $14,368,000, respectively........... 90,969,000 87,212,000 Inventories............................................... 63,121,000 74,029,000 Notes receivable and other current assets, less allowance for doubtful notes of $5,373,000 in 1998............... 9,252,000 7,317,000 Recoverable and prepaid income taxes...................... 1,441,000 4,422,000 Deferred tax assets....................................... -- 10,695,000 Asset held for sale....................................... -- 61,706,000 ------------- ------------ TOTAL CURRENT ASSETS.............................. 168,073,000 249,811,000 Property, plant and equipment, net.......................... 40,188,000 35,890,000 Excess of cost over net assets acquired, net of accumulated amortization of $20,664,000 and $11,441,000, respectively.............................................. 207,554,000 230,063,000 Deferred tax assets......................................... -- 7,924,000 Other assets................................................ 13,044,000 13,649,000 ------------- ------------ TOTAL ASSETS...................................... $ 428,859,000 $537,337,000 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Credit facility........................................... $ 27,606,000 $ 65,883,000 Current maturities of long-term debt...................... 1,235,000 2,619,000 Accounts payable.......................................... 28,915,000 33,758,000 Accrued expenses.......................................... 33,941,000 48,419,000 ------------- ------------ TOTAL CURRENT LIABILITIES......................... 91,697,000 150,679,000 Long-term debt and Senior Subordinated Notes................ 106,715,000 107,733,000 Other long-term liabilities................................. 10,580,000 13,816,000 ------------- ------------ TOTAL LIABILITIES................................. 208,992,000 272,228,000 STOCKHOLDERS' EQUITY Series A preferred stock, par value $.01 per share: authorized shares 300,000, none issued.................... -- -- Series B preferred stock, par value $.01 per share: authorized shares 6,100, issued and outstanding 6,100..... 28,200,000 28,200,000 Series C preferred stock, par value $.01 per share: authorized shares 1,000, issued and outstanding 1,000..... 3,400,000 3,400,000 Common stock, par value $.025 per share: authorized shares 60,000,000, issued and outstanding 31,311,104 and 30,574,982, respectively................... 783,000 764,000 Additional paid-in capital.................................. 286,503,000 280,179,000 Accumulated deficit......................................... (97,587,000) (47,530,000) Accumulated other comprehensive income (loss)............... (1,432,000) 96,000 ------------- ------------ TOTAL STOCKHOLDERS' EQUITY........................ 219,867,000 265,109,000 Commitments and contingencies............................... -- -- ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 428,859,000 $537,337,000 ============= ============
See notes to consolidated financial statements. F-3 43 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ AS RESTATED, AS RESTATED, SEE NOTE 16 SEE NOTE 16 Net revenues: Medical equipment and supplies................. $378,840,000 $261,672,000 $142,711,000 Interest and other income...................... 2,026,000 1,162,000 559,000 ------------ ------------ ------------ 380,866,000 262,834,000 143,270,000 ------------ ------------ ------------ Costs and expenses: Cost of revenues............................... 265,360,000 193,127,000 100,998,000 Selling, general and administrative............ 138,986,000 73,612,000 35,846,000 Interest expense............................... 12,652,000 7,260,000 2,762,000 Purchased in-process research and development costs....................................... -- 3,300,000 12,500,000 Merger and restructuring related charges....... (3,547,000) 22,544,000 2,646,000 ------------ ------------ ------------ 413,451,000 299,843,000 154,752,000 ------------ ------------ ------------ Loss before income taxes and extraordinary item........................................... (32,585,000) (37,009,000) (11,482,000) Income taxes (benefit)........................... 16,407,000 (10,592,000) 1,356,000 ------------ ------------ ------------ Loss before extraordinary item................... (48,992,000) (26,417,000) (12,838,000) Extraordinary loss on early retirement of debt (net of tax benefit of $383,000)............... -- -- (736,000) ------------ ------------ ------------ Net loss......................................... (48,992,000) (26,417,000) (13,574,000) Preferred stock dividends........................ 1,065,000 1,065,000 -- ------------ ------------ ------------ Net loss attributable to common stockholders..... $(50,057,000) $(27,482,000) $(13,574,000) ============ ============ ============ Net loss per common share -- basic and diluted: Loss before extraordinary item................... $ (1.61) $ (1.33) $ (.82) Extraordinary loss on early retirement of debt... -- -- (.05) ------------ ------------ ------------ Net loss......................................... $ (1.61) $ (1.33) $ (.87) ============ ============ ============ Weighted average number of common shares outstanding.................................... 31,111,000 20,600,000 15,557,000 ============ ============ ============
See notes to consolidated financial statements. F-4 44 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES B SERIES C COMMON STOCK ADDITIONAL PREFERRED PREFERRED --------------------- PAID-IN ACCUMULATED TOTAL STOCK STOCK SHARES AMOUNT CAPITAL DEFICIT ------------ ----------- ---------- ---------- -------- ------------ ------------- BALANCE, JANUARY 1, 1996 (see Note 16).................... $ 60,882,000 15,065,286 $377,000 $ 66,891,000 $ (6,386,000) Net loss (as restated, see Note 16).................. (13,574,000) -- -- -- (13,574,000) Other comprehensive income (loss): Translation adjustment...... (12,000) -- -- -- -- ------------ Total comprehensive loss.... (13,586,000) Issuance of common stock on exercise of stock options................... 550,000 153,255 4,000 711,000 -- Issuance of stock in connection with acquisitions.............. 65,809,000 $28,200,000 $3,400,000 4,477,720 112,000 34,097,000 -- Tax benefit from exercise of stock options............. 38,000 -- -- -- -- 38,000 -- Retirement of Treasury Stock..................... -- -- -- (45,517) (1,000) (164,000) -- Dividend accrued on Preferred Stock........... (88,000) -- -- -- -- -- (88,000) Notes receivable from officers for sale of shares.................... (155,000) -- -- -- -- -- -- ------------ ----------- ---------- ---------- -------- ------------ ------------- BALANCE, DECEMBER 31, 1996 (as restated, see Note 16)....................... 113,450,000 28,200,000 3,400,000 19,650,744 492,000 101,573,000 (20,048,000) Net loss (as restated, see Note 16).................. (26,417,000) -- -- -- -- -- (26,417,000) Other comprehensive income (loss): Translation adjustment...... 108,000 -- -- -- -- -- -- ------------ Total comprehensive loss.... (26,309,000) Issuance of common stock on exercise of stock options................... 1,212,000 -- -- 527,975 13,000 2,816,000 -- Compensation component of employee stock options.... 838,000 -- -- -- -- 838,000 -- Issuance of stock in connection with acquisitions.............. 175,944,000 -- -- 10,490,133 262,000 175,682,000 -- Issuance of common stock for accrued dividends......... 364,000 -- -- 41,000 1,000 363,000 -- Tax benefit from exercise of stock options............. 520,000 -- -- -- -- 520,000 -- Retirement of Treasury Stock..................... -- -- -- (134,870) (4,000) (1,613,000) -- Dividend accrued on Preferred Stock........... (1,065,000) -- -- -- -- -- (1,065,000) ACCUMULATED TREASURY STOCK OTHER ---------------------- COMPREHENSIVE NOTES RECEIVABLE SHARES AMOUNT INCOME (LOSS) FROM SALE OF SHARES -------- ----------- ------------- ------------------- BALANCE, JANUARY 1, 1996 (see Note 16).................... Net loss (as restated, see Note 16).................. Other comprehensive income (loss): Translation adjustment...... $ (12,000) Total comprehensive loss.... Issuance of common stock on exercise of stock options................... (45,517) $ (165,000) -- Issuance of stock in connection with acquisitions.............. -- -- -- Tax benefit from exercise of stock options............. -- -- -- Retirement of Treasury Stock..................... 45,517 165,000 -- Dividend accrued on Preferred Stock........... -- -- -- Notes receivable from officers for sale of shares.................... -- -- -- $(155,000) -------- ----------- ----------- --------- BALANCE, DECEMBER 31, 1996 (as restated, see Note 16)....................... -- -- (12,000) (155,000) Net loss (as restated, see Note 16).................. -- -- -- -- Other comprehensive income (loss): Translation adjustment...... -- -- 108,000 -- Total comprehensive loss.... Issuance of common stock on exercise of stock options................... (134,870) (1,617,000) -- -- Compensation component of employee stock options.... -- -- -- -- Issuance of stock in connection with acquisitions.............. -- -- -- -- Issuance of common stock for accrued dividends......... -- -- -- -- Tax benefit from exercise of stock options............. -- -- -- -- Retirement of Treasury Stock..................... 134,870 1,617,000 -- -- Dividend accrued on Preferred Stock........... -- -- -- --
F-5 45
GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED) SERIES B SERIES C COMMON STOCK ADDITIONAL PREFERRED PREFERRED --------------------- PAID-IN ACCUMULATED TOTAL STOCK STOCK AMOUNT CAPITAL DEFICIT ------------ ----------- ---------- SHARES -------- ------------ ------------- ---------- Notes receivable from officers.................. 155,000 -- -- -- -- -- -- BALANCE, DECEMBER 31, 1997 (as restated, see Note 16)....................... 265,109,000 28,200,000 3,400,000 30,574,982 764,000 280,179,000 (47,530,000) Net loss.................... (48,992,000) -- -- -- -- -- (48,992,000) Other comprehensive income (loss): Translation adjustment...... (544,000) -- -- -- -- -- -- Minimum pension liability... (984,000) -- -- -- -- -- -- ------------ Total comprehensive loss.... (50,520,000) Issuance of common stock on exercise of stock options................... 4,689,000 -- -- 645,353 16,000 5,276,000 -- Compensation component of employee stock options.... 954,000 -- -- -- -- 954,000 -- Issuance of common stock for accrued dividends......... 700,000 -- -- 129,654 4,000 696,000 -- Retirement of Treasury Stock..................... -- -- -- (38,885) (1,000) (602,000) -- Dividend accrued on Preferred Stock........... (1,065,000) -- -- -- -- -- (1,065,000) ------------ ----------- ---------- ---------- -------- ------------ ------------- BALANCE, DECEMBER 31, 1998.... $219,867,000 $28,200,000 $3,400,000 31,311,104 $783,000 $286,503,000 $ (97,587,000) ============ =========== ========== ========== ======== ============ ============= GRAHAM-FIELD HEALTH PRODUCTS, CONSOLIDATED STATEMENTS OF STO ACCUMULATED TREASURY STOCK OTHER ---------------------- COMPREHENSIVE NOTES RECEIVABLE AMOUNT INCOME (LOSS) FROM SALE OF SHARES SHARES ----------- ------------- ------------------- -------- Notes receivable from officers.................. -- -- -- 155,000 BALANCE, DECEMBER 31, 1997 (as restated, see Note 16)....................... -- -- 96,000 -- Net loss.................... -- -- -- -- Other comprehensive income (loss): Translation adjustment...... -- -- (544,000) -- Minimum pension liability... -- -- (984,000) -- Total comprehensive loss.... Issuance of common stock on exercise of stock options................... (38,885) (603,000) -- -- Compensation component of employee stock options.... -- -- -- -- Issuance of common stock for accrued dividends......... -- -- -- -- Retirement of Treasury Stock..................... 38,885 603,000 -- -- Dividend accrued on Preferred Stock........... -- -- -- -- -------- ----------- ----------- --------- BALANCE, DECEMBER 31, 1998.... -- $ -- $(1,432,000) $ -- ======== =========== =========== =========
See notes to consolidated financial statements. F-6 46 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ AS RESTATED, AS RESTATED, SEE NOTE 16 SEE NOTE 16 OPERATING ACTIVITIES Net loss........................................ $(48,992,000) $ (26,417,000) $(13,574,000) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization................. 14,413,000 6,493,000 3,559,000 Deferred income taxes......................... 16,610,000 (14,134,000) 577,000 Provisions for losses on accounts receivable................................. 11,904,000 6,292,000 1,176,000 Provision for losses on notes receivable...... 4,500,000 Gain on sale of product line.................. -- -- (360,000) Gain on sale of marketable securities......... -- (41,000) -- Loss on disposal of property, plant and equipment.................................. 197,000 121,000 -- Purchased in-process research and development cost....................................... -- 3,300,000 12,500,000 Non-cash amounts included in merger and restructuring related charges.............. (3,547,000) 20,018,000 1,051,000 Non-cash compensation component of employee stock options.............................. 954,000 838,000 -- Non-cash amounts included in extraordinary loss....................................... -- -- 476,000 Non-cash separation charges................... 2,387,000 -- -- Non-cash asset impairment..................... 1,873,000 -- -- Other......................................... 1,592,000 -- -- Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable........................ (14,073,000) (27,528,000) (10,957,000) Inventories................................ 10,942,000 (5,585,000) (3,951,000) Other current assets and recoverable and prepaid income taxes..................... 1,363,000 (3,382,000) (1,362,000) Accounts and acceptances payable and accrued expenses......................... (21,060,000) 648,000 14,206,000 ------------ ------------- ------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.................................... (20,937,000) (39,377,000) 3,341,000 Proceeds from sale of marketable securities..... -- 104,198,000 -- Proceeds from sale of asset held for sale....... 60,167,000 -- -- Purchase of marketable securities............... -- (104,157,000) -- Purchase of property, plant and equipment....... (10,768,000) (6,555,000) (1,085,000) Acquisitions, net of cash acquired.............. (555,000) (10,093,000) (4,371,000) Decrease in excess of cost over net assets acquired...................................... 6,144,000 -- -- Proceeds from the sale of property, plant, and equipment..................................... 17,000 240,000 -- Proceeds from sale of product line.............. -- -- 500,000 Proceeds from sale of assets under leveraged lease......................................... -- -- 487,000 Notes receivable from officers.................. -- -- (155,000) Net decrease (increase) in other assets......... 480,000 (4,321,000) (41,000) ------------ ------------- ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................................... $ 55,485,000 $ (20,688,000) $ (4,665,000)
F-7 47 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ AS RESTATED, AS RESTATED, SEE NOTE 16 SEE NOTE 16 FINANCING ACTIVITIES Proceeds from issuance of Senior Subordinated Notes......................................... $ -- $ 100,000,000 $ -- Net (payments) borrowing under credit facility...................................... (38,277,000) 51,898,000 11,885,000 Proceeds from long-term debt.................... 54,000 1,253,000 4,000,000 Principal payments on long-term debt............ (2,086,000) (66,177,000) (24,151,000) Payments on acceptances payable, net............ -- (19,800,000) -- Proceeds on exercise of stock options........... 4,621,000 1,212,000 550,000 Payment of preferred stock dividends............ -- (435,000) -- Proceeds from issuance of preferred stock in connection with an acquisition................ -- -- 10,000,000 Payments of note issue costs.................... -- (4,642,000) -- ------------ ------------- ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................................... (35,688,000) 63,309,000 2,284,000 ------------ ------------- ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................... (1,140,000) 3,244,000 960,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................................... 4,430,000 1,186,000 226,000 ------------ ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 3,290,000 $ 4,430,000 $ 1,186,000 ============ ============= ============ SUPPLEMENTARY CASH FLOW INFORMATION: Interest paid................................. $ 12,811,000 $ 3,130,000 $ 2,975,000 ============ ============= ============ Income taxes paid (net of refunds)............ $ (7,627,000) $ 4,094,000 $ 187,000 ============ ============= ============
See notes to consolidated financial statements. F-8 48 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: Graham-Field Health Products, Inc. ("Graham-Field" or the "Company") is a manufacturer and distributor of healthcare products targeting the home healthcare, medical/surgical, rehabilitation and long-term care markets in North America, Europe, Central and South America, and Asia. The Company markets and distributes a broad range of products under its own brand names and under suppliers' names throughout the world. The Company maintains manufacturing and distribution facilities throughout North America. The Company's products are marketed principally to hospital, nursing home, physician, home healthcare and rehabilitation dealers, healthcare product wholesalers and retailers, including drug stores, catalog companies, pharmacies, home-shopping related businesses, and certain governmental agencies. The Company operates in one reportable segment -- healthcare products. The Company's principal products and product lines include wheelchairs and power wheelchair seating systems, mobility products and bathroom safety products, medical beds and patient room furnishings, blood pressure and diagnostic products, adult incontinence products, specialty seating products, wound care and urologicals, ostomy products, diabetic products, obstetrical supplies, nutritional supplements, therapeutic support systems and respiratory equipment and supplies. By offering a wide range of products from a single source, the Company enables its customers to reduce purchasing costs, including transaction, freight and inventory expenses. The following is a summary of the Company's revenues from its principal product lines or products:
% OF TOTAL REVENUE -------------------- 1998 1997 1996 ---- ---- ---- Wheelchairs and related positioning products................ 22% 33% 7% Ambulatory and patient aids................................. 12% 8% 5% Incontinence products....................................... 6% 7% 8% Sphygmomanometers........................................... 3% 3% 5% Wound care and ostomy products.............................. 4% 4% 6%
No other product line or product accounted for more than 5% of annual revenues for each year. The Company's business operations are primarily conducted in North America. The following is a summary of revenues attributable to customers located in the United States and foreign countries:
1998 1997 1996 ------------ ------------ ------------ United States............................ $350,497,000 $237,227,000 $135,947,000 Foreign.................................. 28,343,000 24,445,000 6,764,000 ------------ ------------ ------------ $378,840,000 $261,672,000 $142,711,000 ============ ============ ============
At December 31, 1998, 1997 and 1996, the Company had long-lived assets (property, plant and equipment and excess of cost over net assets acquired) located in foreign countries (Mexico and Canada) of approximately $5.0 million, $6.5 million and $2.3 million, respectively. The balance of the Company's long- lived assets are located in the United States. Liquidity, Financial Results and Basis of Presentation: At December 31, 1998, the Company had working capital of approximately $76.4 million and unused availability of approximately $15.7 million under its Senior Secured Revolving Credit Facility, as amended (the "Credit Facility"), with IBJ Whitehall Business Credit Corp. (formerly known as IBJ Schroder Business Credit Corp.), as agent (IBJ). As of June 1, 1999, after giving effect to the 1999 Amendment (see Note 6), the Company had unused availability of approximately $7.2 million. The Company has incurred significant losses in each of the three years in the F-9 49 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) period ended December 31, 1998 and in the first quarter of 1999. These losses have arisen as a result of a significant amount of merger, restructuring and other expenses related to acquisitions completed in 1996 and 1997, the failure to integrate effectively these acquisitions and realize the benefits and synergies to be derived therefrom, and the impact of intense competition within the healthcare industry. The losses included significant charges relating to provisions for accounts receivable, inventory and other asset write-offs in 1997 and 1998, a provision to increase the valuation allowance on deferred tax assets in 1998, and certain professional and other advisory fees in the first quarter of 1999, all of which management believes to be substantially non-recurring. Further, the Company and certain of its directors and officers have been named as defendants in at least fifteen putative class action lawsuits which have been consolidated into an amended complaint (see Note 15). As further described in Note 6, the Company was not in compliance with certain financial covenants, and other terms and provisions contained in the Credit Facility at June 30, 1998, December 31, 1998 and March 31, 1999. On April 22, 1999 (and as subsequently amended as of May 21 and June 3, 1999), the Company entered into an amendment to the Credit Facility, which provided for, among other things, a waiver of these defaults, an amendment to certain financial covenants, a new undrawn availability covenant relating to scheduled interest payments on the Senior Subordinated Notes, and other terms and provisions consistent with the Company's business plan for the remainder of 1999, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. In response to the losses incurred in 1997, 1998 and the first quarter of 1999, management has commenced a program to reduce operating expenses, improve gross margins and reduce the investment in working capital during the remainder of 1999 and take other actions to improve its cash flow. These actions include, but are not limited, to (i) the completion of the activities contemplated by the Company's restructuring plan as further described in Note 3; (ii) the initiation of inventory reduction and product rationalization programs; (iii) the tightening of credit policies and payment terms; (iv) the reduction in previously budgeted capital expenditures; (v) the implementation of streamlined product pricing and product return guidelines; (vi) the initiation of an aggressive program to collect past due accounts receivable; and (vii) the realignment and consolidation of sales forces and territories. Notwithstanding the actions described above, the Company currently expects that it will be necessary to obtain approximately $5 to $10 million of additional borrowing availability by August 1999. Management believes that it will be able to obtain the additional borrowing availability by financing certain unencumbered real estate or through a secondary financing; however, it has not yet obtained such financing commitment. Management also believes that, if necessary, it could sell certain assets to meet cash requirements which would require the consent of the lenders under the Credit Facility. Management believes that such objectives are attainable, however, there can be no assurance that the Company will be successful in its efforts to improve its cash flow from operations or that it will be able to obtain such additional borrowing availability on satisfactory terms in a timely manner to provide sufficient cash for operations, capital expenditures and regularly scheduled debt service. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly-owned. All material intercompany accounts and transactions have been eliminated in consolidation. Restatement: In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of outside counsel, had found certain accounting errors and irregularities with respect to the Company's financial results. Based on the results of the investigation, the Company has restated its previously issued Consolidated Financial Statements for 1996 and 1997. The Company has also F-10 50 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) restated the financial results for the first, second and third quarters of 1998 to correct for certain accounting errors. The 1998 adjustments are unrelated to the investigation conducted by the Company's Audit Committee, which was announced in March 1999. (See Notes 16 and 17.) Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventories: Inventories are valued at the lower of cost or market. Cost is determined principally on the standard cost method for manufactured goods and on the average cost method for other inventories, each of which approximates actual cost on the first-in, first-out method. Property, Plant and Equipment: Property, plant and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the lesser of the estimated useful lives of the related assets or, where appropriate, the lease term. Long-Lived Assets: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard establishes the accounting for the impairment of long-lived assets, certain identifiable intangibles and the excess of cost over net assets acquired, related to those assets to be held and used in operations, whereby impairment losses are required to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets and certain identifiable intangibles that are expected to be disposed of. The adoption of SFAS No. 121 did not have a material effect on the results of operations or financial condition of the Company. Excess of cost over net assets acquired is amortized on a straight-line basis over 30 to 40 years. The carrying value of such costs are reviewed by management as to whether the facts and circumstances indicate that an impairment may have occurred. If this review indicates that such costs or a portion thereof will not be recoverable, as determined based on the undiscounted cash flows of the entities acquired, over the remaining amortization period, the carrying value of these costs will be measured by comparing the fair value of the group of assets acquired to the carrying value. If fair values are unavailable, the carrying value will be measured by comparing the carrying values to the discounted cash flows. Based upon present operations and strategic plans, management believes that no impairment of the excess of cost over net assets acquired has occurred other than as described in Note 2. Revenue Recognition Policy: The Company recognizes revenue when products are shipped with appropriate provisions for uncollectible accounts and credits for returns. Income Taxes: The Company and its subsidiaries file a consolidated Federal income tax return. The Company uses the liability method in accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Earnings Per Common Share Information: Basic and diluted net loss per common share was computed using the weighted average number of common shares outstanding and by assuming the accrual of a dividend of 1.5% on the Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") in the aggregate amount F-11 51 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of $1,065,000 in 1998 and 1997. Conversion of the preferred stock and common equivalent shares was not assumed since the result would have been antidilutive. Employee Stock Options: SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value method of accounting for the issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," but are required to disclose in the financial statement footnotes, pro forma net (loss) income and per share amounts as if the new method of accounting was applied for all grants made beginning with 1995. The Company has elected to continue to account for stock issued to employees in accordance with APB No. 25. The Company has a stock option program which is more fully described in Note 11. Under the Company's stock option program, options are granted with an exercise price equal to the market price of the underlying common stock of the Company on the date of grant. Concentration of Credit Risk: The Company is a manufacturer and distributor of healthcare products targeting the home healthcare, medical/surgical, rehabilitation and long-term care markets in North America, Europe, Central and South America, and Asia. The Company's products are marketed principally to hospital, nursing home, physician, home healthcare and rehabilitation dealers, healthcare product wholesalers and retailers, including drug stores, catalog companies, pharmacies, home shopping related businesses, and certain governmental agencies. Third party reimbursement through private or governmental insurance programs and managed care programs have increasingly impacted the Company's customers, which affects a portion of the Company's business. The Company performs periodic credit evaluations of its customers' financial condition and in certain instances requires collateral. Receivables generally are due within 30 to 120 days, except for notes receivable which have a stated term. In the fourth quarter of 1997, a provision for uncollectible accounts and notes receivable of $5 million (which provision is included in selling, general and administrative expenses) was recorded to reflect increased credit risk due to the anticipated impact of changes in state medicare reimbursement and procurement policies for certain product lines and the extended payment terms being taken by the Company's customers. The changes in such reimbursement patterns resulted in an increased number of days outstanding for receivables. In 1998, the Company continued to experience deterioration in its days outstanding for receivables. In the fourth quarter of 1998, the Company recorded an additional provision of $11 million for accounts and notes receivable (which provision is included in selling, general and administrative expenses) to reflect anticipated losses from one customer in financial difficulty and several other customer accounts placed in collection. Concentration of Sources of Supply: The business of Everest & Jennings International Ltd. ("Everest & Jennings"), a wholly-owned subsidiary of the Company, is heavily dependent on its maintenance of a key supply contract. Everest & Jennings obtains the majority of its commodity wheelchairs and wheelchair components pursuant to an exclusive supply agreement (the "Wheelchair Supply Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"), an Indonesian manufacturer. The term of this agreement extends until June 30, 2000, and on each June 30 thereafter automatically renews for an additional year unless Everest & Jennings elects not to extend the agreement or Everest & Jennings fails to order at least 50% of the contractually specified minimums and P.T. Dharma elects to terminate the agreement or either party terminates the agreement as a result of a material breach of the agreement after notice and the expiration of the applicable cure period. If the Wheelchair Supply Agreement is terminated, there can be no assurance that Everest & Jennings will be able to enter into a suitable wheelchair supply agreement with another manufacturer. The failure by Everest & Jennings to secure an alternate source of supply would result in a material adverse effect on Graham-Field's business and financial condition. In February 1998, the Company advanced $3.5 million to P.T. Dharma (the "P.T. Dharma Advance") in consideration of the grant of a six F-12 52 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) month option to purchase the wheelchair assets of P.T. Dharma for a price to be determined. In March 1999, the P.T. Dharma Advance was converted into a three year loan arrangement (the "P.T. Dharma Loan Agreement"). Under the terms of the P.T. Dharma Loan Agreement, P.T. Dharma is required to repay the P.T. Dharma Advance to Graham-Field over a period of three years, with interest at Graham-Field's borrowing rate, as adjusted from time to time, in monthly installments ranging from $50,000 to $100,000 per month. The P.T. Dharma Loan Agreement is secured by the shares of the capital stock of P.T. Dharma and guaranteed by the principal stockholders of P.T. Dharma. In the fourth quarter of 1998, the Company recorded a $3,000,000 provision (included in selling, general and administrative expenses) against the advance as a result of adverse political conditions in Indonesia and a deterioration in the financial condition of P.T. Dharma. Foreign Currency Translation: The financial statements of the Company's foreign subsidiaries are translated into U.S. dollars in accordance with the provisions of SFAS No. 52, "Foreign Currency Translation." The assets and liabilities of subsidiaries, other than the Company's Mexican subsidiary, are translated at year-end exchange rates. Revenues and expenses are translated at the average exchange rate for each year. The resulting translation adjustments for each year are recorded as a separate component of stockholders' equity. For 1997 and 1998, Mexico is considered a highly inflationary economy and, accordingly, inventories and property plant and equipment for the Company's Mexican subsidiary are translated at historical rates, while other assets and liabilities are translated at year-end rates. All foreign currency transaction gains and losses are included in the determination of income and are not significant. Research and Development: Research and development costs are expensed as incurred. The amount of such costs for 1998 and 1997 was $1,003,000 and $392,000, respectively. Research and development costs for 1996 were not material. See Note 2 for a discussion of purchased in-process research and development expensed in connection with certain acquisitions. New Accounting Pronouncements: In March 1998, Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" was issued. SOP 98-1 requires certain costs associated with developing or obtaining software for internal use to be expensed as incurred until certain capitalization criteria are met. The Company will adopt SOP 98-1 prospectively beginning January 1, 1999. Based on the Company's current information systems plans, which include completing its Year 2000 remediation program and completing the upgrade of its order entry and manufacturing system, adoption of this statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires the recognition of all derivatives in the consolidated balance sheet as either assets or liabilities measured at fair value. The Company currently does not use derivative instruments and therefore, adoption of this statement is not expected to impact the Company. 2. ACQUISITIONS OF BUSINESSES On December 30, 1997, the Company acquired Fuqua Enterprises, Inc. (currently, Lumex/Basic American Holdings, Inc.) ("Fuqua") pursuant to an Agreement and Plan of Merger (the "Fuqua Merger Agreement"), dated as of September 5, 1997 and amended as of September 29, 1997, by and among Fuqua, GFHP Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company ("Sub"), and the Company. Under the terms of the Fuqua Merger Agreement, Sub was merged with and into Fuqua with Fuqua continuing as the surviving corporation wholly-owned by the Company (the "Fuqua Merger"). In the Fuqua Merger, each share of Fuqua's common stock, par value $2.50 per share (the "Fuqua Common Stock"), other than shares of Fuqua Common Stock canceled pursuant to the Fuqua Merger Agreement, was converted into the right to receive 2.1 shares of common stock, par value $.025 per share, of the Company (the F-13 53 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) "Company Common Stock"). There were 4,482,709 shares of Fuqua Common Stock outstanding on December 30, 1997, which converted into 9,413,689 shares of the Company Common Stock. In accordance with the terms of the Fuqua Merger Agreement, each Fuqua stock option was assumed by Graham-Field and was converted into the right to purchase shares of the Company Common Stock. As of the effective date of the Fuqua Merger, there were Fuqua stock options outstanding representing the right to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of shares of the Company Common Stock to be issued, after giving effect to the exercise price of the Fuqua stock options as adjusted for the exchange ratio of 2.1 is approximately 885,150 shares of the Company Common Stock. For purposes of calculating the purchase price, the Company Common Stock was valued at $16.69 per share, which represents the average closing market price of the Company Common Stock for the period three business days immediately prior to and three business days immediately after the announcement on September 8, 1997 of the execution of the Fuqua Merger Agreement. The acquisition of Fuqua has been accounted for under the purchase method of accounting and, accordingly, the operating results of Fuqua have been included in the Company's consolidated financial statements from the date of acquisition. Fuqua contributed approximately $2,100,000 of revenue for the year ended December 31, 1997. The Company allocated $3,300,000 of the purchase price to purchased in-process research and development projects which have not reached technological feasibility and have no probable alternative future uses and accordingly, expensed such purchased in-process and research and development projects in 1997. At the December 31, 1997 acquisition date, the Company recorded a preliminary estimate of the excess of the aggregate purchase price over the estimated fair market value of the net assets acquired of approximately $134.9 million, and during 1998 reduced such amount by $13.7 million following the receipt of all information necessary to complete the purchase price allocation. The excess of cost over the estimated fair value of net assets acquired is being amortized on a straight line basis over 30 years. In connection with the Fuqua Merger, the Company acquired the leather operations of Fuqua ("Leather Operations"). It was the Company's intention to dispose of this Leather Operations as soon as reasonably practicable following the consummation of the Fuqua Merger. Accordingly, the net assets of the Leather Operations have been reflected as "Assets held for sale" in the accompanying consolidated balance sheet as of December 31, 1997. The net asset value of the Leather Operations includes the value of the proceeds that were realized from the sale of the Leather Operations. The Company did not record any earnings or losses for the Leather Operations for the period December 30, 1997 to January 27, 1998 (date of disposal). On January 27, 1998, Fuqua, a wholly-owned subsidiary of the Company, disposed of the Leather Operations (the "Leather Sale Transaction") through the sale of all of the capital stock of Irving Tanning Company ("ITC"), Hancock Ellsworth Tanners, Inc., Kroy Tanning Company, Incorporated and Seagrave Leather Corporation (collectively, the "Leather Companies"), to the management of ITC pursuant to a (i) Stock Purchase Agreement dated as of January 27, 1998, by and among IT Acquisition Corporation ("ITAC"), the Company and Fuqua, and (ii) Stock Purchase Agreement dated as of January 27, 1998, by and among HEKS Corporation, the Company and Fuqua. The aggregate selling price for the Leather Companies consisted of (i) $60,167,400 in cash, (ii) an aggregate of 5,000 shares of Series A Preferred Stock of ITAC with a stated value of $4,250,000 (which has been valued at $1,539,000), and (iii) the assumption of debt of $2,341,250. In addition, as the holder of the ITAC Preferred Stock, the Company is entitled to appoint one director to the Board of Directors of ITAC. On August 28, 1997, the Company acquired all of the issued and outstanding shares of the capital stock of Medical Supplies of America, Inc., a Florida corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization (the "Reorganization Agreement") dated August 28, 1997, by and among the Company, S.E. (Gene) Davis and Vicki Ray (collectively the "Medapex Selling Stockholders"). In accordance with the terms of the Reorganization Agreement, Medapex became a wholly-owned subsidiary of the Company and the Medapex Selling Stockholders received in the aggregate 960,000 shares of Company F-14 54 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Common Stock in exchange for all of the issued and outstanding shares of the capital stock of Medapex. Pursuant to a Real Estate Sales Agreement dated as of August 28, 1997 (the "Real Estate Sales Agreement"), by and between the Company and BBD&M, a Georgia Limited Partnership and an affiliate of Medapex, the Company acquired Medapex's principal corporate headquarters and distribution facility in Atlanta, Georgia for a purchase price consisting of (i) $622,335 payable (x) by the issuance of 23,156 shares of the Company Common Stock and (y) in cash in the amount of $311,167, and (ii) the assumption of debt in the amount of $477,664. Each of the Medapex Selling Stockholders entered into a two-year employment agreement and non-competition agreement with the Company. The Medapex transaction was accounted for as a pooling of interests and the Company's historical financial statements have been restated to reflect this transaction. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below.
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- Net revenues: Graham-Field........................................ $108,713,000 $126,873,000 Medapex............................................. 10,006,000 16,397,000 ------------ ------------ Combined............................................ $118,719,000 $143,270,000 ============ ============ Extraordinary loss, net: Graham-Field........................................ $ -- $ (736,000) Medapex............................................. -- -- ------------ ------------ Combined............................................ $ -- $ (736,000) ============ ============ Net income (loss): Graham-Field........................................ $ 1,474,000 $(13,916,000) Medapex............................................. 196,000 342,000 ------------ ------------ Combined............................................ $ 1,670,000 $(13,574,000) ============ ============
On August 17, 1997, the Company acquired substantially all of the assets and certain liabilities of Medi-Source, Inc. ("Medi-Source"), a privately-owned distributor of medical supplies, for $4,500,000 in cash. The Company also entered into a five year non-competition agreement with the previous owner in the aggregate amount of $301,000 payable over the five year period. The acquisition was accounted for as a purchase, and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of the purchase price over net assets acquired was approximately $3.7 million. On June 25, 1997, the Company acquired all of the capital stock of LaBac Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among the Company, LaBac Acquisition Corp., a wholly-owned subsidiary of the Company, LaBac, Gregory A. Peek and Michael L. Peek (collectively, the "LaBac Selling Stockholders"). In connection with the acquisition, LaBac became a wholly-owned subsidiary of the Company, and the LaBac Selling Stockholders received in the aggregate 772,557 shares of Company Common Stock valued at $11.77 per share in exchange for all of the issued and outstanding shares of the capital stock of LaBac. The Company also entered into a three year consulting agreement with the LaBac Selling Stockholders and an entity controlled by the LaBac Selling Stockholders, and non-competition agreements with each of the LaBac Selling Stockholders. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over net assets acquired amounted to approximately $7.3 million. F-15 55 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of pediatric wheelchairs, high-performance adult wheelchairs and other rehabilitation products, for a purchase price of $1.51 million representing the net book value of Kuschall. The purchase price was paid by the issuance of 116,154 shares of Company Common Stock valued at $13.00 per share, of which 23,230 shares were delivered into escrow. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. On February 28, 1997, Everest & Jennings Canadian Limited ("Everest & Jennings Canada"), a wholly-owned subsidiary of the Company, acquired substantially all of the assets and certain liabilities of Motion 2000 Inc. and its wholly-owned subsidiary, Motion 2000 Quebec Inc., for a purchase price equal to Cdn. $2.9 million (Canadian Dollars) (approximately $2.15 million). The purchase price was paid by the issuance of 187,733 shares of the Company Common Stock valued at $11.437 per share. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately $2.5 million. In the fourth quarter of 1998, the Company recorded a charge of $1,873,000 to reflect an impairment in this asset as a result of the loss of exclusive rights to the principal product line of Motion 2000, Inc. (which charge is included in selling, general and administrative expenses). On November 27, 1996, the Company acquired Everest & Jennings pursuant to the terms and provisions of the Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996 and amended as of October 1, 1996 (the "Everest & Jennings Merger Agreement"), by and among the Company, Everest & Jennings, Everest & Jennings Acquisition Corp., a wholly-owned subsidiary of the Company ("E&J Sub"), and BIL (Far East Holdings) Limited, a Hong Kong corporation and the majority stockholder of Everest & Jennings ("BIL"). Under the terms of the Everest & Jennings Merger Agreement, E&J Sub was merged with and into Everest & Jennings with Everest & Jennings continuing as the surviving corporation wholly-owned by the Company (the "Everest & Jennings Merger"). In the Everest & Jennings Merger, each share of Everest & Jennings' common stock, par value $.10 per share (the "Everest & Jennings Common Stock"), other than shares of Everest & Jennings Common Stock cancelled pursuant to the Everest & Jennings Merger Agreement, was converted into the right to receive .35 shares of the Company Common Stock. The Company Common Stock was valued at $7.64 per share, which represents the average closing market price of the Company Common Stock for the period three business days immediately prior to and three business days immediately after the announcement of the execution of the Everest & Jennings Merger Agreement. There were 7,207,689 shares of Everest & Jennings Common Stock outstanding on November 27, 1996, which converted into 2,522,691 shares of the Company Common Stock. In addition, in connection with, and at the effective time of the Everest & Jennings Merger: (i) BIL was issued 1,922,242 shares of the Company Common Stock in consideration of the repayment of indebtedness owing by Everest & Jennings in the amount of $24,989,151 to Hong Kong and Shanghai Banking Corporation Limited, which indebtedness (the "HSBC Indebtedness") was guaranteed by BIL. The proceeds of such stock purchase were contributed by the Company to Everest & Jennings immediately following the Everest & Jennings Merger and used to discharge the HSBC Indebtedness. The Company Common Stock was valued at $7.64 per share, which represents the average closing market price of the Company Common Stock for the period three business days immediately prior to and three business days immediately after the announcement of the execution of the Everest & Jennings Merger Agreement. (ii) The Company issued $61 million stated value of the Series B Preferred Stock to BIL in exchange for certain indebtedness of Everest & Jennings owing to BIL and shares of Everest & Jennings preferred stock owned by BIL. The Series B Preferred Stock is entitled to a dividend of 1.5% per F-16 56 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) annum payable quarterly, votes on an as-converted basis as a single class with the Company Common Stock and the Series C Preferred Stock, is not subject to redemption and is convertible into shares of the Company Common Stock (x) at the option of the holder thereof, at a conversion price of $20 per share (or, in the case of certain dividend payment defaults, at a conversion price of $15.50 per share), (y) at the option of the Company, at a conversion price equal to current trading prices (subject to a minimum conversion price of $15.50 and a maximum conversion price of $20 per share) and (z) automatically on the fifth anniversary of the date of issuance at a conversion price of $15.50 per share. Such conversion prices are subject to customary antidilution adjustments. Based on an independent valuation, the fair value ascribed to the Series B Preferred Stock was $28,200,000. (iii) BIL was issued $10 million stated value of the Series C Preferred Stock, the proceeds of which are available to the Company for general corporate purposes. The Series C Preferred Stock is entitled to a dividend of 1.5% per annum payable quarterly, votes on an as-converted basis as a single class with the Company Common Stock and the Series B Preferred Stock, is subject to redemption as a whole at the option of the Company on the fifth anniversary of the date of issuance at stated value and, if not so redeemed, will be convertible into shares of the Company Common Stock automatically on the fifth anniversary of the date of issuance at a conversion price of $20 per share, subject to customary antidilution adjustments. The fair value ascribed to the Series C Preferred Stock was $3,400,000. (iv) Certain indebtedness in the amount of $4 million owing by the Company to BIL was exchanged for an equal amount of unsecured subordinated indebtedness of the Company maturing on April 1, 2001 and bearing interest at the effective rate of 7.7% per annum (the "BIL Note"). Effective as of May 12, 1999, BIL exchanged all of its right, title and interest under the BIL Note, in consideration of the issuance of 2,036 fully-paid, validly issued, non-assessable shares of the Company's non-voting Series D Preferred Stock (the "Series D Preferred Stock), par value .01 per share, with an aggregate stated value equal to $4,072,000, representing the aggregate of the unpaid principal amount and accrued interest on the BIL Note (See Note 18). The acquisition of Everest & Jennings has been accounted for under the purchase method of accounting and, accordingly, the operating results of Everest & Jennings have been included in the Company's consolidated financial statements from the date of acquisition. The Company allocated $12,500,000 of the purchase price to purchased in-process research and development projects which have not reached technological feasibility and have no probable alternative future uses and accordingly, the Company expensed the purchased in-process and research development projects at the date of acquisition. As a result of the acquisition, the Company incurred $2,646,000 of merger related expenses, principally for severance payments, the write-off of certain unamortized catalog and software costs with no future value, the accrual of costs to vacate certain of the Company's facilities, and certain insurance policies. At December 31, 1996, the Company recorded a preliminary estimate of the excess of the aggregate purchase price over the fair market value of the net deficiency acquired of $59.0 million, and during 1997 reduced such amount by $4.8 million following the receipt of all information necessary to complete the purchase price allocation. The excess of aggregate purchase price over the fair market value of the net deficiency acquired is being amortized on a straight line basis over 30 years. From the date of acquisition, Everest & Jennings contributed approximately $3,634,000 of revenue for the year ended December 31, 1996. On September 4, 1996, the Company acquired substantially all of the assets of V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of medical products in Puerto Rico, for a purchase price consisting of $1,704,000 in cash, and the issuance of 32,787 shares of the Company Common Stock valued at $7.625 per share representing the closing market price of the Company Common Stock on the last trading day immediately prior to the closing. In addition, the Company assumed certain liabilities of V.C. Medical in the amount of $297,000. The shares of the Company Common Stock were delivered into escrow, and have been F-17 57 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) held in escrow, subject to the resolution of a claim for indemnification asserted by the Company. The acquisition was accounted for as a purchase and accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net assets acquired amounted to approximately $988,000. The following summary presents unaudited pro forma consolidated results of operations for the years ended December 31, 1997 and 1996 as if the acquisitions described above occurred at the beginning of 1996. This information gives effect to the adjustment of interest expense, income tax provisions, and to the assumed amortization of fair value adjustments, including the excess of cost over net assets acquired. Both the 1997 and 1996 pro forma information includes the write-off of certain purchased in-process research and development costs of $3,300,000 in 1997 and $15,800,000 in 1996 and merger and restructuring related charges of $35,276,000 in 1997 and $37,922,000 in 1996 associated with the strategic restructuring initiatives. The pro forma net loss per common share has been calculated by assuming the payment of a dividend of 1.5% on both the Series B Preferred Stock and Series C Preferred Stock in the aggregate amount of $1,065,000 for each of the years ended December 31, 1997 and 1996. Conversion of the preferred stock was not assumed since the result would have been antidilutive.
PRO FORMA ---------------------------- 1997 1996 ------------ ------------ Net revenues............................................ $373,879,000 $330,387,000 ============ ============ Loss before extraordinary item.......................... $(36,154,000) $(59,734,000) ============ ============ Net loss................................................ $(36,154,000) $(60,470,000) ============ ============ Common per share data -- basic and diluted: Loss before extraordinary item.......................... $ (1.22) $ (2.02) ============ ============ Net loss per common share -- basic and diluted.......... $ (1.22) $ (2.04) ============ ============ Weighted average number of common shares outstanding.... 30,525,000 30,105,000 ============ ============
On March 4, 1996, the Company sold its Gentle Expressions(R) breast pump product line for $1,000,000 of which $500,000 was paid in cash with the balance paid by the delivery of a secured subordinated promissory note in the aggregate principal amount of $500,000, payable over 48 months with interest at the prime rate plus one percent. The Company recorded a gain of $360,000 in 1996, which is included in other revenue in the accompanying condensed consolidated statements of operations. As of March 31, 1999, the Company had received approximately $200,000 of payments under the note, and has commenced an action to recover the remaining balance of the note and interest thereon. As of December 31, 1998, the Company has recorded a reserve of $160,000 against this note. 3. ACQUISITION INTEGRATION AND RESTRUCTURING PLAN In connection with the acquisition of Fuqua on December 30, 1997, the Company adopted a plan to implement certain strategic restructuring initiatives (the "Restructuring Plan") and recorded $18,151,000 of restructuring charges (the "Restructuring Charges") and $4,393,000 of indirect merger charges (the "Merger Charges"). In addition, the Company recorded a provision for inventory write-downs of $7,732,000 in 1997 associated with the elimination of certain non-strategic inventory and product lines (which costs are included in costs of revenue). The Restructuring Plan was initiated to create manufacturing, distribution and operating efficiencies and enhance the Company's position as a low-cost supplier in the healthcare industry. The Restructuring Plan included a broad range of efforts, including the consolidation of the Company's Temco manufacturing operations in New Jersey into Fuqua's Lumex manufacturing facility in New York, the relocation of the Company's corporate headquarters to the Lumex facility and the closure and/or consolidation of certain other distribution facilities and operations. F-18 58 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Restructuring Charges included exit costs of $15,301,000 related to the elimination of duplicate manufacturing and distribution facilities, severance costs of $650,000 for approximately 100 employees and asset write-downs of $2,200,000 relating to assets to be sold or abandoned. The Merger Charges related to the Fuqua acquisition and Medapex combination with respect to the write-off of certain unamortized catalog costs with no future value, certain insurance policies, payment of bonuses related to the acquisitions, and various transaction costs. The Company also incurred $3,300,000 of expenses in 1997 related to the write-off of purchased in-process research and development costs of Fuqua. As of March 31, 1999, the Company had completed the majority of the initiatives contemplated in the Restructuring Plan, including the consolidation of the Temco operations into the Lumex manufacturing facility, the relocation of the corporate headquarters to the Lumex facility and the closure of certain distribution centers. The Company expects to complete the closure of the other distribution center contemplated in the Restructuring Plan by June 30, 1999. The Company has performed a reevaluation of the required restructuring accrual after considering the actual costs incurred to complete the initiatives carried out to date and the estimated future costs to complete the remaining initiatives contemplated in the Restructuring Plan. In this connection, the Company identified certain restructuring accruals that are no longer required and, accordingly, the Consolidated Statement of Operations includes a benefit of $3,123,000 recorded in the fourth quarter of 1998 to reduce the Restructuring Plan accruals. In connection with the Company's product rationalization program initiated in the fourth quarter of 1998 and the closure of certain distribution facilities in connection with the Company's restructuring initiatives, the Company recorded additional provisions for inventory of $2,389,000 (which provision is included in cost of revenues). The following summarizes the activity in the restructuring accrual for the years ended December 31, 1997 and 1998:
MERGER AND RESTRUCTURING WRITE OFFS ACCRUAL NET ACCRUAL CHARGES AND CASH BALANCE CASH REDUCTION BALANCE RECORDED IN PAYMENTS IN DECEMBER 31, PAYMENTS IN RECORDED DECEMBER 31, 1997 1997 1997 1998 IN 1998 1998 ------------- ----------- ------------ ----------- ----------- ------------ Facility exit costs...... $17,501,000 $(1,294,000) $16,207,000 $(1,799,000) $(2,510,000) $11,898,000 Severance................ 650,000 -- 650,000 (323,000) (183,000) 144,000 Merger related........... $ 4,393,000 (1,598,000) 2,795,000 (2,245,000) (430,000) 120,000 ----------- ----------- ----------- ----------- ----------- ----------- $22,544,000 $(2,892,000) $19,652,000 $(4,367,000) $(3,123,000) $12,162,000 =========== =========== =========== =========== =========== ===========
During the fourth quarter of 1996, the Company recorded charges of $15,146,000 related to the acquisition of Everest & Jennings. The charges included $12,500,000 related to the write-off of purchased in-process research and development costs and $2,646,000 for other merger related charges (see Note 2). In 1998, the Company identified certain Everest & Jennings merger related accruals which had been charged to operations in 1996 that are no longer required as of the end of 1998 and, accordingly, the Consolidated Statement of Operations includes a benefit of $424,000 recorded in the fourth quarter of 1998 to reduce such accrual. F-19 59 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVENTORIES Inventories consist of the following:
DECEMBER 31 -------------------------- 1998 1997 ----------- ----------- Raw materials............................................. $10,739,000 $16,553,000 Work-in-process........................................... 5,412,000 6,735,000 Finished goods............................................ 46,970,000 50,741,000 ----------- ----------- $63,121,000 $74,029,000 =========== ===========
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31 -------------------------- 1998 1997 ----------- ----------- Land and buildings..................................... $18,366,000 $16,766,000 Equipment.............................................. 33,909,000 27,796,000 Furniture and fixtures................................. 3,219,000 2,301,000 Leasehold improvements................................. 3,865,000 3,170,000 Construction in progress............................... 1,923,000 1,693,000 ----------- ----------- 61,282,000 51,726,000 Accumulated depreciation and amortization.............. (21,094,000) (15,836,000) ----------- ----------- $40,188,000 $35,890,000 =========== ===========
The Company recorded depreciation and amortization expense on the assets included in property, plant and equipment of $5,297,000, $2,395,000 (excluding amounts recorded in the Restructuring Charge), and $1,778,000, for the years ended December 31, 1998, 1997 and 1996, respectively. 6. NOTES AND ACCEPTANCES PAYABLE The Company is a party to a senior secured revolving credit facility, as amended (the "Credit Facility"), which provides for borrowings of up to $50 million (after giving effect to the 1999 Amendment (as defined below)), including letters of credit and bankers' acceptances, arranged by IBJ Whitehall Business Credit Corp. ("IBJ"), as agent. Under the terms of the Credit Facility, borrowings bear interest at IBJ's prime rate (7.75% at December 31, 1998), plus one percent. As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was not in compliance with certain financial covenants, and other terms and provisions contained in the Credit Facility. On April 22, 1999, the Company entered into an amendment, which was subsequently amended as of May 21 and June 3, 1999 (the "1999 Amendment"), which provided for, among other things, the waiver of these defaults, an amendment to certain financial covenants, a new undrawn availability covenant relating to scheduled interest payments on the Senior Subordinated Notes, and other terms and provisions contained in the Credit Facility, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. The 1999 Amendment reduced the maximum revolving advance amount under the Credit Facility from $80 million to $50 million, and reduced and/or eliminated certain availability and borrowing base reserves. After giving effect to the 1999 Amendment, which includes the reduction and/or elimination of certain availability and borrowing base reserves, the Company's availability to borrow funds under the Credit Facility remains relatively unchanged. As part of the 1999 Amendment, the Company is required to pay a waiver fee (the "Waiver Fee") in the amount of $400,000 on or before June 30, 1999, unless the Company either presents an acceptable business plan to the banks on or before June 30, 1999, or repays in full all outstanding obligations under the Credit Facility on or before June 30, 1999. Notwithstanding the foregoing, in the event the Company is in receipt on or before June 30, 1999 of a commitment letter, letter of intent or agreement to F-20 60 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (i) sell substantially all or a part of the assets or equity securities of the Company in a sale, merger, consolidation or other similar transaction, which results in the repayment of all of the outstanding obligations under the Credit Facility, or (ii) refinance the indebtedness under the Credit Facility (the transactions referred to in clauses (i) and (ii) are individually referred to as a "Significant Transaction"), the payment date for the Waiver Fee will be extended until the earlier to occur of the consummation of a Significant Transaction, which results in the repayment of all outstanding obligations under the Credit Facility, or ninety (90) days from June 30, 1999. The Credit Facility is secured by substantially all of the assets of the Company and the pledge of the capital stock of certain of the Company's subsidiaries. As of June 1, 1999, after giving effect to the 1999 Amendment, the Company had availability to borrow up to approximately $32.1 million under the Credit Facility, of which approximately $24.9 million was utilized. The Credit Facility contains certain customary terms and provisions, including limitations with respect to the repayment or prepayment of principal on subordinated debt, including the Notes, the incurrence of additional debt, liens, transactions with affiliates and certain consolidations, mergers and acquisitions and sales of assets, and restrictions relating to capital expenditures. In addition, Graham-Field is prohibited from declaring or paying any dividend or making any distribution on any shares of common stock or preferred stock of Graham-Field (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or applying any of its funds, property or assets to the purchase, redemption or other retirement of any such shares, or of any options to purchase or acquire any such shares. Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay cash dividends in any fiscal year in an amount not to exceed the greater of (i) the amount of dividends due BIL under the terms of the Graham-Field Series B and Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of Graham-Field on a consolidated basis, provided that no event of default under the Credit Facility shall have occurred and be continuing or would exist after giving effect to the payment of the dividends. The Credit Facility contains certain financial covenants, including a net cash flow covenant and leverage ratio, as well as the requirement that Graham-Field reduce outstanding borrowings with the net cash proceeds of certain asset sales. The Credit Facility contains certain customary terms and provisions, including limitations with respect to the prepayment of principal on subordinated debt, including the Company's 9.75% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"), the incurrence of additional debt, liens, transactions with affiliates, and certain consolidations, mergers and acquisitions, and sales of assets, dividends and other distributions (other than the payment of dividends to BIL in accordance with the terms of the Series B and Series C Preferred Stock). In addition, the Credit Facility contains certain financial covenants, including a net cash flow covenant and leverage ratio, and requires specified levels of earnings before interest and taxes, as well as the requirement that the Company reduce outstanding borrowings with the net cash proceeds of certain asset sales. At December 31, 1998, the Company had aggregate direct borrowings under the Credit Facility of $27,606,000. The weighted average interest rate on borrowings in 1998 was 8.9%. Open letters of credit at December 31, 1998 were $1,347,000 relating to trade credit and $1,558,000 for other requirements. At December 31, 1997, the Company had aggregate direct borrowings under the Credit Facility of $65,883,000. On January 27, 1998, the Company used the proceeds from the sale of the Leather Operations of $60,167,000 to repay outstanding borrowings under the Credit Facility. The weighted average interest rate on borrowings in 1997 was 8.5%. Open letters of credit at December 31, 1997 were $2,261,000 relating to trade credit and $1,759,000 for other requirements. F-21 61 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------ 1998 1997 ---------- ------------ BIL Note(a)................................................. $4,000,000 $4,000,000 Notes payable to International Business Machines Corp. ("IBM")(b)................................................ 35,000 490,000 Capital lease obligations(c)................................ 290,000 759,000 Term loan(d)................................................ 1,416,000 1,535,000 Other(e).................................................... 2,209,000 3,568,000 ---------- ---------- 7,950,000 10,352,000 Less current maturities................................ 1,235,000 2,619,000 ---------- ---------- $6,715,000 $7,733,000 ========== ==========
- --------------- (a) On July 18, 1996, an affiliate of BIL provided the Company with a loan in the amount of $4,000,000, at an effective interest rate of 8.8%. The loan was used to fund the acquisition of V.C. Medical and for general corporate purposes. In connection with the acquisition of Everest & Jennings, the indebtedness owing by the Company to BIL was exchanged for the BIL Note. Under the terms of the BIL Note, the principal amount matures on April 1, 2001 and bears interest at the effective rate of 7.7% per annum and the Company has the right to reduce the principal amount of the BIL Note in the event punitive damages are awarded against the Company or any of its subsidiaries which relate to any existing product liability claims of Everest & Jennings and/or its subsidiaries involving a death prior to September 3, 1996. Effective as of May 12, 1999, BIL waived certain events of default under the BIL Note and exchanged all of its right, title and interest under the BIL Note, in consideration of the issuance of 2,036 shares of the Series D Preferred Stock (See Note 18). (b) In connection with the development of the Company's St. Louis Distribution Center, the Company entered into an agreement with IBM to provide the computer hardware and software, and all necessary warehousing machinery and equipment including installation thereof. This project was primarily financed through IBM by the issuance of the Company's unsecured notes which corresponded to various components of the project. The unsecured notes mature through October 2000, with interest rates ranging from 7.68% to 11.53%. (c) At December 31, 1998, the Company is obligated under certain lease agreements for equipment which have been accounted for as capital leases. Future minimum payments in the aggregate are as follows:
YEAR ENDED DECEMBER 31 AMOUNT - ---------------------- -------- 1999............................................... $153,000 2000............................................... 115,000 2001............................................... 66,000 2002............................................... 15,000 -------- Total.............................................. 349,000 Less amounts representing interest................. (59,000) -------- Present value of future minimum lease payments..... $290,000 ========
(d) In connection with the Fuqua Merger, the Company assumed a term loan, which is payable in monthly installments of $9,900, bearing interest at LIBOR + .55% through January 2001, with a final payment due at that time. (e) Other long-term debt consists primarily of a mortgage payable for the Company's Canadian subsidiary in the amount of $490,000 due in monthly installments of $20,400 through November 1999, with a final F-22 62 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payment of approximately $265,000 due in November 1999, and bearing interest at 1.25% above prime. As of December 31, 1998, the interest rate was 6.75%. In connection with the acquisition of Medapex's principal corporate headquarters, the Company assumed debt collateralized by the principal headquarters and requiring the payment of interest at 72% of the current prime rate. As of December 31, 1998, the outstanding balance was $428,000, and the interest rate was 6.12%. In connection with the acquisitions of LaBac and Medi-Source, the Company entered into non-competition agreements with certain former shareholders of such companies. The non-competition agreements have a remaining balance due of $919,000 as of December 31, 1998. In addition, the Company assumed certain debt obligations of other acquired companies. The scheduled maturities of the long-term debt obligations, excluding the present value of minimum payments on capital lease obligations are as follows:
YEAR ENDED DECEMBER 31 AMOUNT - ---------------------- ---------- 1999.............................................. $1,123,000 2000.............................................. 438,000 2001.............................................. 5,484,000 2002.............................................. 239,000 2003.............................................. 202,000 Thereafter........................................ 174,000 ---------- $7,660,000 ==========
8. SENIOR SUBORDINATED NOTES On August 4, 1997, the Company issued its $100 million Senior Subordinated Notes due 2007 under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). On February 9, 1998, the Company completed its exchange offer to exchange the outstanding Senior Subordinated Notes for an equal amount of new Senior Subordinated Notes which have been registered under the Securities Act. The new Senior Subordinated Notes are identical in all material respects to the previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt of the Company, including indebtedness under the Credit Facility arranged by IBJ Whitehall, as agent. The Senior Subordinated Notes are guaranteed (the "Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis by all existing and future restricted subsidiaries of the Company (the "Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in right of payment to all existing and future senior debt of the Guaranteeing Subsidiaries including any guarantees by the Guaranteeing Subsidiaries of the Company's obligations under the Credit Facility. The Company is a holding company with no assets or operations other than its investments in its subsidiaries. The subsidiary guarantors are wholly-owned subsidiaries of the Company and comprise all of the direct and indirect subsidiaries of the Company. Accordingly, the Company has not presented separate financial statements and other disclosures concerning each subsidiary guarantor because management has determined that such information is not material to investors. The net proceeds from the offering of the Senior Subordinated Notes were used to repay $60.3 million of indebtedness under the Credit Facility and $5 million of indebtedness due to BIL. The balance of the proceeds were used for general corporate purposes, including the funding for acquisitions and the opening of an additional Graham-Field Express facility. Beginning on August 15, 2002, the Senior Subordinated Notes are redeemable, in whole or in part, at the option of the Company, at certain redemption prices plus accrued and unpaid interest to the date of redemption. In addition, prior to August 15, 2000, the Company may, at its option, redeem up to 25% of the F-23 63 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) aggregate principal amount of Senior Subordinated Notes originally issued with the net proceeds from one or more public offerings of Company Common Stock at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest to the date of redemption; provided that at least 75% of the aggregate principal amount of Notes originally issued remain outstanding after giving effect to any such redemption. The indenture ("Indenture") governing the Senior Subordinated Notes contains customary covenants including, but not limited to, covenants relating to limitations on the incurrence of additional indebtedness, the creation of liens, restricted payments, the sales of assets, mergers and consolidations, payment restrictions affecting subsidiaries, and transactions with affiliates. In addition, in the event of a change of control of the Company as defined in the Indenture, each holder of the Senior Subordinated Notes will have the right to require the Company to repurchase such holder's Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, the Company will be required in certain circumstances to make an offer to purchase Senior Subordinated Notes at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase, with the net cash proceeds of certain assets sales. The Credit Facility prohibits the Company from purchasing the Senior Subordinated Notes without the consent of the lenders. In addition, the Indenture prohibits the Company from declaring or paying any dividend or making any distribution or restricted payment as defined in the Indenture (collectively, the "Restricted Payments") (other than dividends or distributions payable in capital stock of the Company), unless, at the time of such payment (i) no default or event of default shall have occurred and be continuing or would occur as a consequence thereof; (ii) the Company would be able to incur at least $1.00 of additional indebtedness under the fixed charge coverage ratio contained in the Indenture; and (iii) such Restricted Payment, together with the aggregate of all Restricted Payments made by the Company after the date of the Indenture is less than the sum of (a) 50% of the consolidated net income of the Company for the period (taken as one accounting period) beginning on April 1, 1997 to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such consolidated net income for such period is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company from contributions of capital or the issue or sale since the date of the Indenture of capital stock of the Company or of debt securities of the Company that have been converted into capital stock of the Company. 9. SEPARATION CHARGES On July 29, 1998, Irwin Selinger resigned as Chairman of the Board, Chief Executive Officer and President of the Company, and entered into a Separation Agreement (the "Separation Agreement") with the Company. The Separation Agreement provides for (i) the continuation of Mr. Selinger's (a) base salary of $550,000 through July 31, 1999, (b) healthcare and insurance benefits through July 8, 2001, and (c) automobile lease payments and associated automobile expenses through July 8, 2001, (ii) the forgiveness of the outstanding principal amount of $2.2 million and accrued interest under a loan made to Mr. Selinger in the original principal amount of $2.5 million in 1997, in consideration of Mr. Selinger's repayment of $500,000 on June 30, 1999, (iii) a three year non-competition agreement, (iv) the continuation of Mr. Selinger's split dollar life insurance policy in accordance with the terms of Mr. Selinger's divorce judgment, (v) a non-disparagement agreement, (vi) mutual releases, and (vii) the continuation of the Company's indemnification provisions for Mr. Selinger. The Company has recorded a charge of $2,548,000 in 1998, to reflect the financial effects of the Separation Agreement (which charge is included in selling, general and administrative expenses). 10. EXTRAORDINARY ITEM In December 1996, the Company repaid $20,000,000 of indebtedness under the John Hancock Note and Warrant Agreement with proceeds from the Credit Facility. In connection with the early retirement of the F-24 64 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) John Hancock indebtedness, the Company incurred charges relating to the "make-whole" payment and the write-off of all unamortized financing costs associated with the John Hancock Note and Warrant Agreement. The charges amounted to $736,000 (net of a tax benefit of $383,000), and are reported as an extraordinary item in 1996 in the accompanying consolidated statements of operations. 11. STOCKHOLDERS' EQUITY Rights Agreement On August 12, 1996, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of the Company Common Stock. The dividend was paid on September 17, 1996 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, of the Company (the "Series A Preferred Stock") at a price of $35.00 per one one-hundredth of a share of Series A Preferred Stock (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of September 3, 1996 (the "Rights Agreement") between the Company and American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons have acquired (an "Acquiring Person") beneficial ownership of 20% or more of the outstanding shares of capital stock of the Company entitled generally to vote in the election of directors ("Voting Shares") or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Company Common Stock certificates outstanding as of the Record Date, by such certificate with a copy of the Summary of Rights which is attached to the Rights Agreement (the "Summary of Rights"). Notwithstanding the foregoing, BIL will not be an Acquiring Person by virtue of its ownership of any Voting Shares acquired in connection with the Company's acquisition of Everest & Jennings or in accordance with the Amended and Restated Stockholder Agreement dated as of September 3, 1996, as amended (the "BIL Stockholder Agreement"), by and between the Company and BIL (the "BIL Voting Shares"), but BIL will become an Acquiring Person if it acquires any Voting Shares other than BIL Voting Shares or shares distributed generally to the holders of any series or class of capital stock of the Company. "BIL Voting Shares" is defined in the Rights Agreement as (i) any Voting Shares owned by BIL which were acquired by BIL in connection with the Company's acquisition of Everest & Jennings or in accordance with the BIL Stockholder Agreement, and (ii) any shares of the Company Common Stock issued by the Company to BIL upon conversion of or as a dividend on the shares referred to in clause (i) above. The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the Company Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Company Common Stock certificates issued after the Record Date upon transfer or new issuance of the Company Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for the Company Common Stock outstanding as of the Record Date, even without such notation or a copy of the Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Company Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Company Common Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. F-25 65 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Rights are not exercisable until the Distribution Date. The Rights will expire on September 3, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. The Purchase Price payable, and the number of shares of Series A Preferred Stock or other securities issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock (ii) upon the grant to holders of Series A Preferred Stock of certain rights or warrants to subscribe for or purchase Series A Preferred Stock at a price, or a securities convertible into Series A Preferred Stock with a conversion price, less than the then-current market price of Series A Preferred Stock or (iii) upon the distribution to holders of Series A Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in shares of Series A Preferred Stock) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one-hundredths of a share of Series A Preferred Stock issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Company Common Stock or a stock dividend on the Company Common Stock payable in shares of the Company Common Stock, subdivisions, consolidations or combinations of the Company Common Stock occurring, in any such case, prior to the Distribution Date. Shares of Series A Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Preferred Stock will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of the Company Common Stock. In the event of liquidation of the Company, the holders of the Series A Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per share of the Company Common Stock. Each share of Series A Preferred Stock will have 100 votes, voting together with the Company Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of the Company Common Stock are exchanged, each share of Series A Preferred Stock will be entitled to receive 100 times the amount received per share of the Company Common Stock. These rights are protected by customary antidilution provisions. Because of the nature of the Series A Preferred Stock's dividend, liquidation and voting rights, the value of the one one-hundredth interest in a share of Series A Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of the Company Common Stock. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earnings power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the Purchase Price. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, the Rights Agreement provides that proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive (subject to adjustment) upon exercise that number of shares of the Company Common Stock having a market value of two times the Purchase Price. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of the Company Common Stock the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group, which will have become void), in whole or in part, at an exchange ratio of one share of the Company Common Stock, or one one-hundredth of a share of Series A F-26 66 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Preferred Stock (or of a share of a class or series of Company Preferred Stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). The Rights Agreement provides that none of the directors or officers of Company shall be deemed to beneficially own any Voting Shares owned by any other director or officer solely by virtue of such persons acting in their capacities as such, including in connection with the formulation and publication of the recommendation of the position of the Board of Directors of the Company, and actions taken in furtherance thereof, with respect to an acquisition proposal relating to Company or a tender or exchange offer for the Company Common Stock. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Series A Preferred Stock will be issued (other than fractions which are integral multiples of one one-hundredth of a share of Series A Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts) and in lieu thereof, any adjustment in cash will be made based on the market price of the Series A Preferred Stock on the last trading day prior to the date of exercise. At any time prior to a person or group becoming an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time on such basis with such conditions as the Board of Directors of the Company in its sole discretion may establish. Immediately upon any redemption of the rights in accordance with this paragraph, the right to exercise the Rights will terminate and the only right of the holder of the Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to (a) lower certain thresholds described above to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Voting Shares then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%, (b) fix a Final Expiration Date later than September 3, 2006, (c) reduce the Redemption Price or (d) increase the Purchase Price, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights (other than the Acquiring Person and its affiliates and associates). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. As long as the Rights are attached to the Company Common Stock, the Company will issue one Right with each new share of the Company Common Stock so that all such shares will have Rights attached. The Board of Directors of the Company has reserved 300,000 shares of Series A Preferred Stock for issuance upon exercise of the Rights. Stock Transactions On December 30, 1997, the Company acquired Fuqua (see Note 2), in consideration of the issuance of 9,413,689 shares of the Company Common Stock (excluding shares of Company Common Stock to be issued in connection with Fuqua stock options assumed by the Company). On June 25, 1997, the Company acquired the capital stock of LaBac (see Note 2), in consideration of the issuance of 772,557 shares of the Company Common Stock. On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the Company, acquired Kuschall (see Note 2), in consideration of the issuance of 116,154 shares of the Company Common Stock. F-27 67 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary of the Company, acquired Motion 2000, Inc. and Motion 2000 Quebec, Inc. (see Note 2), in consideration of the issuance of the 187,733 shares of the Company Common Stock. On November 27, 1996, in connection with the acquisition of Everest & Jennings (see Note 2), the Company issued an aggregate of 4,444,933 shares of the Company Common Stock, and $61 million stated value of Series B Preferred Stock and $10 million stated value of Series C Preferred Stock to BIL. The Series B Preferred Stock is entitled to a dividend of 1.5% per annum payable quarterly (in cash or in shares of the Company's common stock at the option of the Company), votes on an as-converted basis as a single class with the Company Common Stock of the Company and the Series C Preferred Stock, is not subject to redemption and is convertible into shares of the Company Common Stock (x) at the option of the holder thereof, at a conversion price of $20 per share (or, in the case of certain dividend payment defaults, at a conversion price of $15.50 per share), (y) at the option of the Company, at a conversion price equal to current trading prices (subject to a minimum conversion price of $15.50 and a maximum conversion price of $20 per share) and (z) automatically on the fifth anniversary of the date of issuance at a conversion price of $15.50 per share. Such conversion prices are subject to customary antidilution adjustments. The Series C Preferred Stock is entitled to a dividend of 1.5% per annum payable quarterly (in cash or in shares of the Company's common stock at the option of the Company), with shares of the Company's common stock, votes on an as-converted basis as a single class with the Company Common Stock and the Series B Preferred Stock, is subject to redemption as a whole at the option of the Company on the fifth anniversary of the date of issuance at stated value and, if not so redeemed, will be convertible into shares of the Company Common Stock automatically on the fifth anniversary of the date of issuance at a conversion price of $20 per share, subject to customary antidilution adjustments. On November 27, 1996, the Company amended its certificate of incorporation to provide for, among other things, an increase in the number of authorized shares of common stock from 40,000,000 to 60,000,000 shares. On September 4, 1996, the Company acquired substantially all of the assets of V.C. Medical, in consideration of $1,703,829 in cash and the issuance of 32,787 shares of the Company Common Stock. In connection with the John Hancock Note and Warrant Agreement, the Company issued warrants to John Hancock to purchase 345,336 shares of the Company Common Stock at exercise prices ranging from $5.17 to $5.42. The warrants expire in February 2000. Stock Options Under the Company's stock option program (the "Incentive Program"), the Company is authorized to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock grants and restored options. Incentive stock options may be granted at not less than 100% of the fair market value of the Company Common Stock at the date of grant. Stock options outstanding under the Incentive Program generally vest and are exercisable at a rate of 50% per annum. Incentive and non-qualified stock options expire five years from the date of grant. Effective as of December 21, 1995, non-employee directors' were automatically granted directors' options to purchase 10,000 shares of the Company Common Stock on January 2nd of each year at an exercise price equal to the fair market value of the Company Common Stock at the date of grant. Under the terms of the Incentive Program, directors' options were granted on January 2, 1998 to each of the Company's non-employee directors to purchase 10,000 shares of the Company Common Stock. In general, directors' options are exercisable one-third each year for three years, and have a term of ten years. Effective as of February 1998, the Incentive Program was amended to eliminate the automatic grant feature for directors' options and provide that directors' options shall be granted upon terms and conditions approved by the Company's Stock Option and Compensation Committee. On January 2, 1999, the Company's Stock Option and Compensation Committee granted each of the non-employee directors a directors' option to F-28 68 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purchase 25,000 shares of the Common Stock at an option price equal to the fair market value of the Common Stock on the date of grant. In 1996, the plan was amended to increase the maximum number of shares available from 2,100,000 to 3,000,000. On December 30, 1997, the plan was further amended to increase the maximum number of shares available from 3,000,000 to 4,500,000. During 1998, 1997 and 1996, officers of the Company surrendered 38,885, 134,870 and 45,517 shares, respectively, of the Company Common Stock with a fair market value of $603,000, $1,617,000 and $165,000, respectively, in satisfaction of the exercise price of stock options to purchase 120,331, 306,669 and 50,000 shares, respectively, of the Company Common Stock. In connection with the surrender of shares and exercise of stock options in 1998 and 1997, the Company recorded (as a component of selling, general and administrative expenses) stock compensation charges of $954,000 and $838,000, respectively, for shares held less than six months prior to the date of surrender. The shares received in satisfaction of the exercise price of stock options were recorded as treasury stock and were retired on a quarterly basis as authorized by the Board of Directors. Accordingly, all such shares have been restored as authorized and unissued shares of the Company Common Stock. In April 1998, the Company repriced 700,000 stock options with a weighted average exercise price of $14.55 per share that were granted to certain of the Company's senior executives during the first quarter of 1998 to new exercise prices of $7.50 and $7.6875, which were the fair market values of the Company's common stock at the date of the option repricing. In accordance with SFAS No. 123, pro forma information regarding net loss and loss per common share has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 4.64% for 1998, 6.375% for 1997 and 6.5% for 1996; no dividend yields on the Common Stock, weighted average volatility factors of the expected market price of the Company's Common Stock of .84, .46 and .41; and a weighted average expected life of the option of approximately 3 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options due to changes in subjective input assumptions which may materially affect the fair value estimate, and because the Company's employee stock options have characteristics significantly different from those of traded options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
1998 1997 1996 ------------ ------------ ------------ Pro forma net loss attributable to common stockholders........................... $(54,089,000) $(29,037,000) $(14,063,000) ============ ============ ============ Pro forma net loss per share -- basic and diluted:............................... $ (1.74) $ (1.41) $ (.90) ============ ============ ============
F-29 69 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information with respect to options during the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- Options outstanding -- beginning of year............................. 2,474,082 $8.44 1,643,175 $5.77 912,645 $5.49 Options granted: Incentive options................ 412,442 6.00 240,483 12.25 699,121 6.45 Directors' options............... 40,000 16.31 90,000 9.33 90,000 3.25 Non-qualified options............ 1,069,193 5.35 185,453 11.96 91,764 6.02 Options outside plan............. 110,000 3.46 -- -- -- -- Fuqua stock options................ -- -- 885,150 9.69 -- -- Options exercised.................. (645,353) 8.12 (527,975) 5.36 (103,255) 3.83 Options cancelled and expired...... (459,144) 8.45 (42,204) 8.38 (47,100) 4.87 ---------- ---------- ---------- Options outstanding -- end of year............................. 3,001,220 $7.03 2,474,082 $8.44 1,643,175 $5.77 ========== ========== ========== Options exercisable at end of year............................. 1,203,343 $8.25 1,594,142 $7.91 582,244 $5.45 ========== ========== ========== Weighted average fair value of options granted during the year............................. $ 2.63 $ 4.22 $ 2.10 ========== ========== ==========
In accordance with the terms of the Fuqua Merger Agreement, each Fuqua stock option was assumed by Graham-Field and was converted into the right to purchase shares of the Company Common Stock. As of the effective date of the Fuqua Merger, there were Fuqua stock options outstanding representing the right to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of shares of the Company Common Stock to be issued, after giving effect to the exercise price of the Fuqua stock options, has been adjusted for the exchange ratio of 2.1, in accordance with the terms of the Fuqua Merger Agreement. F-30 70 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Exercise prices for stock options outstanding and for options exercisable as of December 31, 1998 were as follows:
NUMBER OF NUMBER OF OPTIONS RANGE OF OPTIONS EXERCISABLE EXERCISE PRICES - --------- ----------- --------------- 685,000 10,000 $ 2.00 - $ 2.99 280,766 115,766 3.00 - 3.99 26,050 26,050 4.00 - 4.99 15,500 15,500 5.00 - 5.99 32,500 22,500 6.00 - 6.99 1,005,251 299,001 7.00 - 7.99 150,974 92,371 8.00 - 8.99 471,350 471,350 9.00 - 9.99 15,000 7,500 10.00 - 10.99 55,677 42,838 11.00 - 11.99 137,500 68,750 12.00 - 12.99 10,000 3,333 13.00 - 13.99 19,500 9,750 14.00 - 14.99 56,152 8,634 15.00 - 15.99 40,000 10,000 16.00 - 16.99 - --------- --------- 3,001,220 1,203,343 ========= =========
The weighted average remaining contractual life of the above-described stock options is approximately 4.5 years. Shares of common stock reserved for future issuance as of December 31, 1998 are as follows:
NUMBER OF SHARES --------- Stock options............................................. 3,555,565 Warrants issued to John Hancock........................... 345,336 Series B Preferred Stock.................................. 3,935,483 Series C Preferred Stock.................................. 500,000 --------- 8,336,384 =========
The exercise of non-qualified stock options and disqualifying dispositions of incentive stock options resulted in Federal and state income tax benefits to the Company equal to the difference between the market price at the date of exercise or sale of stock and the exercise price of the option. Accordingly, during 1997 and 1996, approximately $520,000, and $38,000, respectively, was credited to additional paid-in capital. No such tax benefits were credited to additional paid-in capital during 1998 as the Company has not realized such tax benefits due to continuing net operating losses. F-31 71 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. INCOME TAXES Significant components of the provision (benefit) for income taxes are as follows:
1998 1997 1996 ----------- ------------ ---------- Current: Federal................................... $(1,005,000) $ -- $ -- State and local........................... 153,000 -- -- Foreign................................... 236,000 1,073,000 9,000 ----------- ------------ ---------- (616,000) 1,073,000 9,000 Deferred.................................... 17,023,000 (11,665,000) 1,347,000 ----------- ------------ ---------- $16,407,000 $(10,592,000) $1,356,000 =========== ============ ==========
Pre-tax (loss) income consists of the amounts earned in the United States versus Foreign locations as follows:
1998 1997 1996 ------------ ------------ ------------ United States............................ $(29,605,000) $(38,995,000) $(11,537,000) Foreign.................................. (2,980,000) 1,986,000 55,000 ------------ ------------ ------------ Total.................................... $(32,585,000) $(37,009,000) $(11,482,000) ============ ============ ============
The following is a reconciliation of income tax computed at the Federal statutory rate to the provision for taxes:
1998 1997 1996 ----------------------- ----------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------------ ------- ------------ ------- ----------- ------- Tax expense (benefit) computed at statutory rate...... $(11,079,000) (34%) $(12,583,000) (34%) $(3,904,000) (34%) Expenses not deductible for income tax purposes: Amortization of excess of cost over net assets acquired..... 2,825,000 9% 950,000 2% 276,000 2% In-process R&D costs............... -- -- 1,122,000 3% 4,352,000 38% Other................. 1,514,000 4% 369,000 1% 77,000 1% Write-off of merger and restructuring charges............. -- -- 1,835,000 5% -- -- State tax expense (benefit), net of Federal benefit..... (903,000) (3%) (1,885,000) (5%) 155,000 1% Foreign............... 1,054,000 3% -- -- -- -- Valuation allowance on deferred tax assets.............. 22,996,000 71% (400,000) (1%) 400,000 4% ------------ --- ------------ --- ----------- --- $ 16,407,000 50% $(10,592,000) (29%) $ 1,356,000 12% ============ === ============ === =========== ===
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F-32 72 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows:
1998 1997 ----------- ----------- Deferred Tax Assets: Net operating loss carryforwards............... $20,597,000 $11,934,000 Tax credits.................................... 857,000 562,000 Accounts receivable allowances................. 10,171,000 4,412,000 Inventory related.............................. 5,809,000 5,387,000 Deferred rent.................................. 78,000 349,000 Merger and restructuring related charges....... 4,986,000 8,061,000 Other reserves and accrued items............... 3,445,000 3,942,000 ----------- ----------- 45,943,000 34,647,000 Valuation allowance for deferred assets........ (35,114,000) (12,118,000) ----------- ----------- Total deferred tax assets.............. 10,829,000 22,529,000 ----------- ----------- Deferred Tax Liabilities: Tax in excess of book depreciation............. 5,106,000 2,148,000 Prepaid expenses............................... 4,322,000 940,000 Amortization of intangibles.................... 1,745,000 822,000 ----------- ----------- Total deferred tax liabilities......... 11,173,000 3,910,000 ----------- ----------- Net deferred tax assets/(liabilities)................. $ (344,000) $18,619,000 =========== ===========
At December 31, 1998, the Company had aggregate federal net operating loss carryforwards of approximately $52,000,000 for income tax purposes, which expire between 2010 and 2018. Approximately $24,164,000 of the net operating loss carryforwards were acquired primarily in connection with the Everest & Jennings acquisition and are limited to use in any particular year. At December 31, 1998, the Company also had alternative minimum tax credits of $857,000 that have no expiration date. For financial reporting purposes, due to prior year losses of Everest & Jennings, and SRLY limitations, a full valuation allowance was recorded in purchase accounting in 1996 against the Everest & Jennings net operating losses and deferred tax assets. Subsequent realization of any tax benefits for those items will be recorded as a reduction of the excess of cost over net assets acquired. As a result of the continuation of operating losses in 1998, the Company increased its deferred tax valuation allowance by $22,996,000 which results in a full valuation allowance against all net deferred tax assets at December 31, 1998. 13. EMPLOYEE BENEFIT PLANS The Company has a non-contributory defined benefit pension plan covering employees of Everest & Jennings and two non-contributory defined benefit pension plans for the non-bargaining unit salaried employees ("Salaried Plan") and employees subject to collective bargaining agreements ("Hourly Plan") at its Smith & Davis subsidiary. Effective May 1, 1991, benefits accruing under the Everest & Jennings pension plan were frozen. During 1991, Everest & Jennings froze the Hourly Plan and purchased participating annuity contracts to provide for accumulated and projected benefit obligations. In addition, Everest & Jennings froze the Salaried Plan effective as of January 1, 1993. Effective for the fiscal year ended December 31, 1998, the Company adopted SFAS No. 132, "Employers Disclosure about Pensions and Other Post Retirement Benefits." The new standard revises disclosure requirements for pensions benefits, but does not change the measurement or recognition of those plans. The F-33 73 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) following tables, prepared in accordance with the new standard, reconcile the changes in obligations, plan assets and funded status at December 31:
1998 1997 ----------- ----------- Change in benefit obligation: Benefit obligation at beginning of year................... $18,404,000 $17,567,000 Interest cost............................................. 1,276,000 1,284,000 Actuarial losses.......................................... 1,571,000 1,243,000 Benefits paid............................................. (1,702,000) (1,690,000) ----------- ----------- Benefit obligation at end of year......................... $19,549,000 $18,404,000 =========== =========== Change in plan assets: Fair value of plan assets at beginning of year............ $16,817,000 $14,746,000 Actual return on plan assets.............................. 1,667,000 2,534,000 Company contributions..................................... 702,000 1,226,000 Benefits paid............................................. (1,703,000) (1,689,000) ----------- ----------- Fair value of plan assets at end of year.................. $17,483,000 $16,817,000 =========== =========== Funded status: As of end of year......................................... $(2,066,000) $(1,587,000) Unrecognized transition obligation........................ (50,000) (62,000) Unrecognized net loss..................................... 1,507,000 125,000 ----------- ----------- Accrued benefit cost...................................... $ (609,000) $(1,524,000) =========== =========== Amounts recognized in the Consolidated Balance Sheets consist of: Accrued benefit liability................................. $(1,593,000) $(1,806,000) Accumulated comprehensive income.......................... 984,000 282,000 ----------- ----------- Net amount recognized..................................... $ (609,000) $(1,524,000) =========== =========== The components of net periodic pension cost are as follows: Interest cost............................................. $ 1,276,000 $ 1,284,000 Expected return on plan assets............................ (1,480,000) (1,428,000) Net amortization.......................................... (10,000) 110,000 ----------- ----------- Net periodic pension cost (income).......................... $ (214,000) $ (34,000) =========== ===========
The following assumptions were used to determine the projected benefit obligations and plan assets:
EVEREST & JENNINGS SMITH & DAVIS -------------- ------------------------------- SALARIED PLAN HOURLY PLAN ------------- ------------ 1998 1997 1998 & 1997 1998 & 1997 ---- ---- ------------- ------------ Weighted average discount rate.... 6.5% 7.0% 7.0% 7.0% Expected long-term rate of return on assets....................... 9.0% 9.0% 9.0% 9.0%
As all participants are inactive and the plans are frozen, no compensation increases were assumed. Effective as of July 1, 1998, the Company sponsors one 401(k) Savings and Investment Plan, pursuant to which the Company contributes 100% of the first 1% of an employee's base salary up to a maximum of $1,000 per year. In 1997 and 1996, the Company had several subsidiary 401(k) plans, certain of which provided for Company contributions. Amounts expensed for 1998, 1997 and 1996 were immaterial. F-34 74 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of December 31, 1998 and 1997, for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amounts reported in the accompanying balance sheets approximate fair value. Credit facility and acceptances payable: The carrying amounts of the Company's borrowings under its credit facility approximate their fair value. Long-term debt and Senior Subordinated Notes: The fair value of the Company's Senior Subordinated Notes and BIL Note are based on reported Senior Subordinated Notes transaction values (which management believes differs from the value at which such debt could be settled). The fair value of this debt was approximately $67 million at December 31, 1998 as compared to a carrying value of $104 million. At December 31, 1997, the carrying value of the Senior Subordinated Notes and BIL Note approximates fair value. The fair values of the Company's other long-term debt are estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1998 and 1997, the carrying amounts for this debt approximates fair value. 15. COMMITMENTS AND CONTINGENCIES Operating Leases The Company is a party to a number of noncancellable lease agreements for warehouse space, office space and machinery and equipment rental. As of December 31, 1998 the agreements extend for various periods ranging from 1 to 9 years and certain leases contain renewal options. Certain leases provide for payment of real estate taxes and include escalation clauses. As of December 31, 1998, minimal annual rental payments under all noncancellable operating leases (including leases related to exited facilities for which the Company remains liable) are as follows:
YEAR ENDED DECEMBER 31: - ----------------------- 1999................................................ $ 7,071,000 2000................................................ 6,195,000 2001................................................ 5,544,000 2002................................................ 4,637,000 2003................................................ 3,185,000 Thereafter.......................................... 8,758,000 ----------- $35,390,000 ===========
Rent expense for the years ended December 31, 1998, 1997 and 1996 approximated $5,435,000, $3,896,000, and $2,805,000, respectively. Legal Proceedings Following the Company's public announcement on March 23, 1998 of its financial results for the fourth quarter and year ended December 31, 1997, the Company and certain of its directors and officers were named as defendants in at least fifteen putative class action lawsuits filed primarily in the United States District Court for the Eastern District of New York on behalf of all purchasers of common stock of the Company (including former Fuqua shareholders who received shares of the Company Common Stock when the Company acquired Fuqua in December 1997) during various periods within the time period May 1997 to March 1998. The class actions were consolidated into an amended consolidated class action complaint as of January 29, 1999, and F-35 75 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lead counsel was selected. The amended consolidated class action complaint asserts claims against the Company and the other defendants for violations of Sections 11, 12(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged material misrepresentations and omissions in public filings made with the Securities and Exchange Commission and certain press releases and other public statements made by the Company and certain of its officers relating to the Company's business, results of operations, financial condition and future prospects, as a result of which, it is alleged, the market price of the Company Common Stock was artificially inflated during the putative class periods. The amended consolidated class action complaint focuses on statements made concerning the Company's integration of its various recent acquisitions, as well as statements about the Company's inventories accounts receivable, expected earnings and sales levels. The plaintiffs seek unspecified compensatory damages and costs (including attorneys and expert fees), expenses and other unspecified relief on behalf of the putative classes. In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found certain accounting errors and irregularities with respect to the Company's financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting firm of Arthur Andersen LLP to assist in conducting the investigation and in providing advice on accounting matters. Based on the results of the investigation, the Company has restated its financial results for 1996 and 1997 (see Note 16). While the accounting errors and irregularities are not presently the basis for the pending class actions, counsel to the class plaintiff have informed the Company's counsel that plaintiffs may seek to amend the consolidated complaint to allege claims based on such items. The Company intends to defend the lawsuit vigorously, but the Company is not currently able to evaluate the likelihood of success in this case or the range of potential loss. However, if the foregoing proceeding were determined adversely to the Company, management believes that such a judgment could have a material adverse effect on the Company's financial condition, results of operations and/or cash flows. In addition, the staff of the SEC has advised the Company that the SEC may conduct an investigation with respect to the aforementioned accounting errors and irregularities. On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug Administration arrived at the Company's principal headquarters and one other Company location and retrieved several documents pursuant to search warrants. The Company has subsequently been advised by an Assistant United States Attorney for the Southern District of Florida that the Company is a target of an ongoing grand jury investigation involving alleged fraud by one or more of the Company's suppliers relating to the unauthorized diversion of medical products intended for sale outside of the United States into United States markets. The Company has also been advised that similar search warrants were obtained with respect to approximately 14 other participants in the distribution of medical products. The Company is presently investigating these matters. The Company does not know when the grand jury investigation will conclude or what action, if any, may be taken by the government against the Company or any of its employees. Accordingly, the impact of this investigation on the Company cannot yet be assessed. The Company intends to cooperate fully with the government in its investigation. In March 1994, the Suffolk County Authorities initiated an investigation to determine whether regulated substances had been discharged in excess of permitted levels from the Lumex division (the "Lumex Division") located in Bay Shore, New York, which was acquired by Fuqua in April 1996. An environmental consulting firm was engaged by the Lumex Division to conduct a more comprehensive site investigation, develop a remediation work plan and provide a remediation cost estimate. These activities were performed to determine the nature and extent of contaminants present on the site and to evaluate their potential off-site extent. In connection with the acquisition of the Lumex Division, Fuqua assumed by contract the obligations associated with this environmental matter. In late 1996, Fuqua conducted surficial soil remediation at the Bay Shore facilities and reported the results to the Suffolk County Authorities in March 1997. A ground water work plan was submitted concurrently with the soil remediation report. In May 1997, the Suffolk County F-36 76 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Authorities stated that they were satisfied with the soil remediation that had been conducted by Fuqua and provided comments on the ground water work plan. In November 1997, the Lumex Division received the results of additional ground water testing that had been performed in August and September 1997. The results revealed significantly lower concentrations of contaminants than were known at the time the "Ground Water Work Plan" was prepared in March 1997. Due to the relatively low levels of contaminants detected, the Lumex Division proposed sampling the groundwater on a quarterly basis for two years to ensure that the groundwater was not significantly affected and deferred implementing the ground water work plan. In January, April, July and October 1998, and in January 1999, additional confirmatory samples were taken and analyzed. These analytic results provide further support that the groundwater is not significantly contaminated. The Lumex Division will continue to monitor the quality of the groundwater to confirm that it remains acceptable. If the quality of the groundwater remains acceptable after the two year period expires, the Lumex Division will seek to withdraw its groundwater work plan. At December 31, 1998, the Company had reserves for remediation costs and additional investigation costs which will be required. Reserves are established when it is probable that a liability has been incurred and such costs can be reasonably estimated. The Company's estimates of these costs were based upon currently enacted laws and regulations and the professional judgment of independent consultants and counsel. Where available information was sufficient to estimate the amount of liability, that estimate has been used. Where information was only sufficient to establish a range of probable liability and no point within the range is more likely than another, the lower end of the range has been used. The Company has not assumed that any such costs would be recoverable from third parties nor has the Company discounted any of its estimated costs, although a portion of the remediation work plan will be performed over a period of years. The amount of environmental liabilities is difficult to estimate due to such factors as the extent to which remedial actions may be required, laws and regulations change or the actual costs of remediation differ when the final work plan is performed. In April 1996, Fuqua acquired the Lumex Division from Cybex International, Inc. (formerly Lumex, Inc.) for a purchase price of $40.7 million, subject to a final purchase price adjustment in the asset sale agreement. The final purchase price adjustment was disputed and, pursuant to the asset sale agreement was resolved through arbitration. On July 30, 1998, Fuqua received a payment of $2,468,358 (inclusive of interest) from Cybex, of which $2,384,606 was recorded as a reduction of the excess of cost over net assets acquired at September 30, 1998. In March 1997, Fuqua gave notice to the seller to preserve Fuqua's indemnification rights as provided under the terms of the asset sale agreement. In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit against the seller and certain former officers stating claims for fraud, breach of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees. Defendants filed an answer and counterclaim on April 7, 1998, denying liability and asserting fifteen defenses. On February 18, 1999, Cybex paid Fuqua $2.6 million in settlement of all of Fuqua's claims. As part of the settlement, Cybex released Fuqua from all liability in connection with Cybex's counterclaim. On August 3, 1998, the Company and another defendant, one of the Company's employees, were served with a lawsuit initiated by JOFRA Enterprises, Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The complaint seeking damages of $25,000,000 alleges that the Company's hiring of a certain officer and employees of JOFRA constituted, among other things, unfair competition and wrongful appropriation of business opportunities. Pursuant to the defendant-employee's employment agreement, the defendant-employee is seeking indemnification with respect to such claims. Discovery is proceeding in the action. The Company considers the plaintiff's allegations to be without merit and intends to defend this lawsuit vigorously. On November 3, 1998, the Company and certain of its directors were named as defendants in a derivative suit commenced in the Court of Chancery of the State of Delaware, New Castle County. The lawsuit seeks to rescind a separation agreement dated as of July 29, 1998 (the "Separation Agreement"), pursuant to which F-37 77 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 'Irwin Selinger, the former Chairman of the Board and Chief Executive Officer, resigned as Chairman of the Board, Chief Executive Officer and President of the Company. The lawsuit also seeks unspecified damages as well as the recovery of all sums paid to Mr. Selinger pursuant to the Separation Agreement. The plaintiff alleges that by approving the terms of the Separation Agreement, the defendants breached their fiduciary duties of loyalty and care to the Company by obligating the Company to pay Mr. Selinger substantially more than his former employment agreement had required. The Company considers the plaintiff's allegations to be without merit, and filed a motion to dismiss the complaint on various grounds in February 1999. The parties are presently in the process of briefing the motion to dismiss. In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a company acquired by Graham-Field in June 1997, asserted certain claims against Graham-Field relating to alleged material misrepresentations and omissions contained in the purchase agreement, certain press releases and other public filings made by the Company with the Securities and Exchange Commission relating to the Company's business, results of operations and financial condition. Under the terms of the purchase agreement pursuant to which Graham-Field acquired LaBac for approximately $9.1 million in common stock of Graham-Field, all claims that are not resolved between the parties are to be submitted to arbitration. The Company intends to defend the claims vigorously, but the Company is not currently able to evaluate the likelihood of success in this case or the range of potential loss. The Company and its subsidiaries are parties to lawsuits and other proceedings, including those relating to product liability and the sale and distribution of its products. Except as discussed above, while the results of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the consolidated financial position or results of operations or cash flows of the Company. COLLECTIVE BARGAINING AGREEMENTS The Company is a party to four (4) collective bargaining agreements covering Graham-Field's facilities located in Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico. The collective bargaining agreements cover approximately 642 employees. The collective bargaining agreements for Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and Guadalajara, Mexico are scheduled to expire on October 19, 2001, September 13, 1999, July 24, 2003 and December 31, 1999, respectively. Graham-Field has never experienced an interruption or curtailment of operations due to labor controversy that had a material adverse effect on Graham-Field's operations. Graham-Field considers its employee relations to be satisfactory. 16. RESTATEMENT In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of outside counsel, had found certain accounting errors and irregularities with respect to the Company's previously reported financial results. Based on the results of the investigation, the Company has restated its previously issued Consolidated Financial Statements for 1996 and 1997. The following Consolidated Statements of Operations and Balance Sheets compare the previously reported and restated financial information. The restatement adjustments in 1997, which had the effect of increasing the loss before income taxes by $6.781 million, were to correct intercompany balance differences of $4.9 million and certain costs which were incorrectly added to the excess of cost over net assets acquired of $1.3 million, as well as other adjustments related primarily to current period costs incorrectly charged to restructuring and merger related accruals, and compensation expense in connection with employee stock options and improperly recognized revenue including revenue recognized in the incorrect period. F-38 78 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The restatement adjustments in 1996, which had the effect of increasing the loss before income taxes by $2.527 million, were to correct for unrecorded purchases and expenses of $1.4 million and receivable allowances of $570,000, as well as other adjustments related primarily to sales revenue recognized in the incorrect period, and inventory valuation adjustments. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996 ---------------------------- ---------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ------------- ------------ ------------- ------------ Net revenues.......................... $263,143,000 $262,834,000 $143,642,000 $143,270,000 Cost of revenues...................... 188,695,000 193,127,000 99,641,000 100,998,000 Selling, general and administrative... 70,646,000 73,612,000 34,578,000 35,846,000 Interest expense...................... 7,260,000 7,260,000 2,578,000 2,762,000 Purchased-in-process research and development......................... 3,300,000 3,300,000 12,800,000 12,500,000 Merger and restructuring charges...... 23,470,000 22,544,000 3,000,000 2,646,000 ------------ ------------ ------------ ------------ Loss before income taxes (benefit) and extraordinary item.................. (30,228,000) (37,009,000) (8,955,000) (11,482,000) Income taxes (benefit)................ (7,335,000) (10,592,000) 2,918,000 1,356,000 ------------ ------------ ------------ ------------ Loss before extraordinary item........ (22,893,000) (26,417,000) (11,873,000) (12,838,000) Extraordinary loss.................... -- -- (736,000) (736,000) ------------ ------------ ------------ ------------ Net loss.............................. (22,893,000) (26,417,000) (12,609,000) (13,574,000) Preferred stock dividends............. 1,065,000 1,065,000 -- -- ------------ ------------ ------------ ------------ Net loss attributable to common shareholders........................ $(23,958,000) $(27,482,000) $(12,609,000) $(13,574,000) ============ ============ ============ ============ Net loss per common share-basic and diluted: Loss before extraordinary item...... $ (1.16) $ (1.33) $ (.76) $ (.82) Extraordinary item.................. -- -- (.05) (.05) ------------ ------------ ------------ ------------ Net loss............................ $ (1.16) $ (1.33) $ (.81) $ (.87) ============ ============ ============ ============
F-39 79 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------- ---------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ------------- ------------ ------------- ------------ ASSETS Cash and equivalents.................. $ 4,430,000 $ 4,430,000 $ 1,241,000 1,186,000 Accounts receivable, net.............. 91,451,000 87,212,000 45,703,000 43,726,000 Inventories........................... 73,532,000 74,029,000 48,245,000 48,761,000 Other current assets.................. 8,103,000 7,317,000 3,023,000 2,936,000 Recoverable and prepaid income taxes........................ 4,422,000 4,422,000 256,000 256,000 Deferred tax assets................... 10,695,000 10,695,000 -- -- Asset held for sale................... 61,706,000 61,706,000 -- -- ------------ ------------ ------------ ------------ Total current assets........ 254,339,000 249,811,000 98,468,000 96,865,000 Property, plant and equipment, net...................... 35,955,000 35,890,000 11,264,000 11,351,000 Excess of cost over net assets acquired, net................ 240,071,000 230,063,000 91,412,000 88,690,000 Deferred tax assets................... 3,044,000 7,924,000 938,000 2,562,000 Other assets.......................... 13,709,000 13,649,000 5,112,000 4,818,000 ------------ ------------ ------------ ------------ Total assets................ $547,118,000 $537,337,000 $207,194,000 $204,286,000 ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Credit facility....................... $ 65,883,000 $ 65,883,000 $ 13,985,000 13,985,000 Current maturities of long-term debt................................ 2,619,000 2,619,000 2,016,000 2,016,000 Accounts payable...................... 33,888,000 33,758,000 22,995,000 21,644,000 Acceptances payable................... -- -- 19,800,000 19,800,000 Accrued expenses...................... 54,331,000 48,419,000 25,608,000 25,104,000 ------------ ------------ ------------ ------------ Total current liabilities... 156,721,000 150,679,000 84,404,000 82,549,000 Long-term debt and Senior Subordinated Notes.................. 107,733,000 107,733,000 6,535,000 6,535,000 Other long-term liabilities........... 13,816,000 13,816,000 1,752,000 1,752,000 ------------ ------------ ------------ ------------ Total liabilities........... 278,270,000 272,228,000 92,691,000 90,836,000 Preferred stock....................... 31,600,000 31,600,000 31,600,000 31,600,000 Common stock.......................... 764,000 764,000 492,000 492,000 Additional paid-in capital............ 279,341,000 280,179,000 101,573,000 101,573,000 Accumulated deficit................... (42,953,000) (47,530,000) (18,995,000) (20,048,000) Other................................. 96,000 96,000 (167,000) (167,000) ------------ ------------ ------------ ------------ Total stockholders' equity.................... 268,848,000 265,109,000 114,503,000 113,450,000 ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity...... $547,118,000 $537,337,000 $207,194,000 $204,286,000 ============ ============ ============ ============
In addition, the January 1, 1996 accumulated deficit has been increased by $88,000 to reflect the correction of an error related to sales revenue recognized in the incorrect period. 17. QUARTERLY DATA (UNAUDITED) Selected unaudited quarterly financial data for 1998 and 1997 is provided below. Results for 1997 have been restated to correct for the findings from an independent investigation conducted by the Audit Committee F-40 80 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the Board of Directors into the accuracy of prior financial statements. See Note 16 for a description of the restatement adjustments. The Company also restated the financial results for the first, second and third quarters of 1998 to correct for certain improperly recorded transactions. The 1998 adjustments are unrelated to the investigation conducted by the Company's Audit Committee, which was announced in March 1999. Such adjustments increased the net loss reported in the first and second quarters of 1998 by $971,000 and $249,000, respectively, and decreased the net loss reported in the third quarter of 1998 by $739,000. The adjustments were primarily related to previously unrecognized stock compensation charges of $954,000 in the first quarter of 1998 and an $800,000 reduction in the previously recorded estimated separation charges in the third quarter of 1998.
FOR THE QUARTER ENDED ----------------------------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------------------- --------------------- --------------------- ----------- AS AS AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED ---------- -------- ---------- -------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1998: Net revenues: Medical equipment and supplies............. $97,727 $97,893 $ 96,936 $ 97,228 $ 93,831 $93,158 $ 90,561 Interest and other income............... 415 415 520 520 685 685 406 ------- ------- -------- -------- -------- ------- -------- 98,142 98,308 97,456 97,748 94,516 93,843 90,967 Costs and expenses: Cost of revenues........ 67,102 67,378 67,030 67,251 65,075 64,378 66,353 Selling, general and administrative....... 28,210 29,046 30,239 30,535 32,505 31,765 47,640 Interest expense........ 2,743 2,768 3,015 3,039 3,387 3,412 3,433 Merger and restructuring related charges...... -- -- -- -- -- -- (3,547) ------- ------- -------- -------- -------- ------- -------- 98,055 99,192 100,284 100,825 100,967 99,555 113,879 ------- ------- -------- -------- -------- ------- -------- Income (loss) before income taxes (benefit)............... 87 (884) (2,828) (3,077) (6,451) (5,712) (22,912) Income taxes (benefit).... 800 800 (800) (800) (1,287) (1,287) 17,694 ------- ------- -------- -------- -------- ------- -------- Net income (loss)......... $ (713) $(1,684) $ (2,028) $ (2,277) $ (5,164) $(4,425) $(40,606) ======= ======= ======== ======== ======== ======= ======== Net income (loss) per common share: Net income (loss)......... $ (713) $(1,684) $ (2,028) $ (2,277) $ (5,164) $(4,425) $(40,606) Preferred stock dividends............... 266 266 267 267 266 266 266 ------- ------- -------- -------- -------- ------- -------- Net income (loss) attributable to common shareholders............ $ (979) $(1,950) $ (2,295) $ (2,544) $ (5,430) $(4,691) $(40,872) ======= ======= ======== ======== ======== ======= ======== Common shares outstanding -- basic and diluted................. 30,839 30,839 31,100 31,100 31,244 31,244 31,287 Basic and diluted loss per share................... $ (.03) $ (.06) $ (.07) $ (.08) $ (.17) $ (.15) $ (1.31)
- --------------- a) No incremental shares related to conversion of the preferred stock and common equivalent shares are included due to the loss in each quarter. b) The first quarter 1998 selling, general and administrative expenses includes stock compensation charges of $954. c) The third quarter 1998 selling, general and administrative expenses includes separation charges of $2,548. F-41 81 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) d) The fourth quarter 1998 includes certain charges and credits as described below: Write-off of deferred tax asset............................. $18,310 Provision for uncollectible accounts and notes receivable... 11,047 Provision for P.T. Dharma advance........................... 3,000 Provision for inventory obsolescence........................ 2,389 Other miscellaneous charges and credits, net................ 2,320 Impairment of excess of cost over net assets acquired....... 1,873 Reversal of 1997 restructuring accrual...................... (3,547) ------- $35,392 =======
FOR THE QUARTER ENDED ------------------------------------------------------ MARCH 31 JUNE 30 ------------------------ ------------------------ AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ---------- -------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997: Net revenues: Medical equipment and supplies................ $56,191 $56,016 $62,579 $62,307 Interest and other income.................. 144 144 252 252 ------- ------- ------- ------- 56,335 56,160 62,831 62,559 Costs and expenses: Cost of revenues.......... 38,438 39,234 42,503 44,224 Selling, general and administrative.......... 13,193 14,954 14,765 15,507 Interest expense.......... 994 994 1,169 1,169 Purchased in-process research & development costs................... -- -- -- -- Merger and restructuring related charges......... -- -- -- -- ------- ------- ------- ------- 52,625 55,182 58,437 60,900 ------- ------- ------- ------- Income (loss) before income taxes (benefit)........... 3,710 978 4,394 1,659 Income taxes (benefit)...... 1,527 407 1,681 560 ------- ------- ------- ------- Net income (loss)........... $ 2,183 $ 571 $ 2,713 $ 1,099 ======= ======= ======= ======= Net income (loss) per common share: Net income (loss)........... $ 2,183 $ 571 $ 2,713 $ 1,099 Preferred stock dividends... --(a) --(a) --(a) --(a) ------- ------- ------- ------- Net income (loss) attributable to common shareholders.............. $ 2,183 $ 571 $ 2,713 $ 1,099 ------- ------- ------- ------- Common shares outstanding -- basic..................... 19,763 19,763 20,204 20,204 Convertible preferred stock..................... 4,435 4,435 4,435 4,435 Incremental shares using treasury stock method..... 966 966 849 849 ------- ------- ------- ------- Common shares outstanding -- diluted................... 25,164 25,164 25,488 25,488 ======= ======= ======= ======= Basic earnings per share.... $ .11 $ .03 $ .13 $ .05 Diluted earnings per share..................... $ .09 $ .02 $ .11 $ .04 FOR THE QUARTER ENDED ------------------------------------------------------ SEPTEMBER 30 DECEMBER 31 ------------------------ ------------------------ AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ---------- -------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997: Net revenues: Medical equipment and supplies................ $70,745 $69,919 $ 72,466 $ 73,430 Interest and other income.................. 363 363 403 403 ------- ------- -------- -------- 71,108 70,282 72,869 73,833 Costs and expenses: Cost of revenues.......... 47,159 50,064 60,595 59,605 Selling, general and administrative.......... 16,018 18,186 26,670 24,965 Interest expense.......... 2,394 2,394 2,703 2,703 Purchased in-process research & development costs................... -- -- 3,300 3,300 Merger and restructuring related charges......... -- -- 23,470 22,544 ------- ------- -------- -------- 65,571 70,644 116,738 113,117 ------- ------- -------- -------- Income (loss) before income taxes (benefit)........... 5,537 (362) (43,869) (39,284) Income taxes (benefit)...... 2,187 (232) (12,730) (11,327) ------- ------- -------- -------- Net income (loss)........... $ 3,350 $ (130) $(31,139) $(27,957) ======= ======= ======== ======== Net income (loss) per common share: Net income (loss)........... $ 3,350 $ (130) $(31,139) $(27,957) Preferred stock dividends... --(a) --(a) 266 266 ------- ------- -------- -------- Net income (loss) attributable to common shareholders.............. $ 3,350 $ (130) $(31,405) $(28,223) ------- ------- -------- -------- Common shares outstanding -- basic..................... 21,078 21,078 21,296 21,296 Convertible preferred stock..................... 4,435 4,435 --(b) -- Incremental shares using treasury stock method..... 1,227 1,227 --(b) -- ------- ------- -------- -------- Common shares outstanding -- diluted................... 26,740 26,740 21,296 21,296 ======= ======= ======== ======== Basic earnings per share.... $ .16 $ (.01) $ (1.47) $ (1.33) Diluted earnings per share..................... $ .13 $ -- (1.47)(b) $ (1.33)(b)
- --------------- (a) Assumes conversion of the preferred stock and elimination of any dividends in relation to such preferred stock. (b) No incremental shares related to conversion of the preferred stock and options are included due to the loss in the fourth quarter. (c) The March 31 and June 30 quarters have been restated to reflect the Medapex transaction recorded as a pooling of interests. F-42 82 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) The third quarter 1997 selling, general and administrative expenses includes stock compensation charges of $838. (e) The fourth quarter 1997 loss before income taxes includes certain charges described below: Merger and restructuring related charges................. $ 22,544 Provision for inventory obsolescence..................... 7,732 Provision for uncollectible accounts and notes receivable............................................. 5,000 Write-off of purchased in-process research and development............................................ 3,300 ------------- $ 38,576 =============
18. SUBSEQUENT EVENTS On March 24, 1999, the Board of Directors appointed a new President and Chief Executive Officer and a new Chief Financial Officer who are employed with Jay Alix & Associates ("JA&A"), a corporate turnaround and financial restructuring consulting firm. In connection with such appointments, the Company entered into an agreement with JA&A (the "Consulting Agreement") which provides for billings on an hourly basis for services rendered. In addition, JA&A was granted a stock option with a four year term to purchase 200,000 shares of the Company Common Stock which vests and becomes exercisable seven months following the termination of the consulting engagement (or upon the consummation of a sale of the business, if earlier). The stock option contains an exercise price equal to the lowest five day average closing price of the Company Common Stock for the period beginning on March 24, 1999 and ending on the earlier to occur of (i) consummation of a sale of the business, or (ii) June 22, 1999. The Consulting Agreement also provides for a contingent success fee in the event of a sale of all or a portion of the Company's business. The minimum amount payable to JA&A under the Consulting Agreement, inclusive of any contingent success fee, is $1,000,000. Effective as of May 12, 1999, BIL waived certain events of default under the BIL Note and exchanged all of its right, title and interest under the BIL Note, in consideration of the issuance of 2,036 fully-paid, validly issued, non-assessable shares of the Series D Preferred Stock. The shares of Series D Preferred Stock are non-voting, but have substantially the same economic rights as 2,036,000 shares of Common Stock. Based on the closing price of the Common Stock on May 12, 1999, that number of shares would have a market value of $4,072,000, which equals the aggregate of the unpaid principal amount and accrued interest on the BIL Note. Simultaneously with the closing of such transaction, Graham-Field and BIL entered into an agreement dated as of May 12, 1999, which provided Graham-Field with the sole and exclusive option for a period of one year following May 12, 1999, to convene a meeting of its stockholders or take such other corporate action, in accordance with applicable laws and regulatory requirements, as may be required to obtain applicable corporate approval to exchange each share of Series D Preferred Stock for 1,000 shares of Common Stock. F-43 83 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
COL C COL A COL B ADDITIONS COL D COL E - ----- ----------- --------------------------------------- ---------------- ----------- 1 BALANCE AT ADDITIONS 2 OTHER CHANGES -- BALANCE AT BEGINNING CHARGED TO COSTS CHARGED TO OTHER ADD (DEDUCT) -- END OF DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS -- DESCRIBE DESCRIBE PERIOD ----------- ---------- ---------------- -------------------- ---------------- ---------- Allowance for doubtful accounts: Year ended December 31, 1998........ $14,368,000 $11,904,000 $ -- $(6,165,000)(1)(5) $20,107,000 Year ended December 31, 1997........ 8,363,000 6,542,000 1,253,000(3) (1,790,000)(1) 14,368,000 Year ended December 31, 1996........ 1,811,000 1,176,000 5,627,000(2) (251,000)(1) 8,363,000 Allowance for doubtful notes: Year ended December 31, 1998........ $ -- 4,500,000(4) -- 873,000(5) $ 5,373,000 Valuation allowance for net deferred tax assets: Year ended December 31, 1998........ $12,118,000 $22,996,000 $ -- $ -- $35,114,000 Year ended December 31, 1997........ 12,118,000 -- -- 12,118,000 Year ended December 31, 1996........ 55,000 12,063,000(2) -- 12,118,000
- --------------- (1) Net write-offs of accounts receivable. (2) Represents an allocation of the purchase price of the Everest & Jennings and V.C. Medical acquisitions. (3) Represents accounts receivable allowances of Kuschall and Fuqua acquired during 1997. (4) Reserve set up for advance to PT Dharma and for trade notes receivable. (5) Transfer of $873,000 reserve amount applicable to notes receivable from allowance for doubtful accounts. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: The response to this Item is submitted as a separate section of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES: None. F-44 84 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: The information required by this Item is set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1999 Proxy Statement"), and is incorporated herein by reference. Information concerning the executive officers of the Company is set forth above under "Directors and Executive Officers of the Registrant -- Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION: The information required by this Item is set forth under the caption "Executive Compensation" in the 1999 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information required by this Item is set forth under the captions "Principal Stockholders of the Company" and "Security Ownership of Management" in the 1999 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The information required by this Item is set forth under the caption "Executive Compensation -- Certain Relationships and Related Transactions" in the 1999 Proxy Statement and is incorporated herein by reference. 79 85 PART IV ITEM 16. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K: 14(a). Documents filed as part of this Form 10-K: 1. Financial Statements. The following financial statements are included in Part II, Item 8:
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets -- December 31, 1998 and 1997... F-3 Consolidated Statements of Operations -- Years ended December 31, 1998, 1997 and 1996.......................... F-4 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1998, 1997 and 1996.................... F-5 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996.......................... F-7 Notes to Consolidated Financial Statements -- December 31, 1998...................................................... F-9
2. Financial Statement Schedules. The following consolidated financial statement schedule for the company is included in Part II, Item 14(d): Schedule II -- Valuation and Qualifying Accounts............
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits filed under Item 601 of Regulation S-K. (Numbers assigned to the following correlate to those used in such Item 601; asterisks indicate that an Exhibit is incorporated by reference). 80 86 EXHIBIT INDEX
EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 3.1 Graham-Field's Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3(1) to Graham-Field's Registration Statement on Form S-1 (File No. 33-40442)...... * 3.2 Certificate of Amendment of Certificate of Incorporation of Graham-Field dated as of November 27, 1996, incorporated by reference as Exhibit 3(b) to Graham-Field's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K")........................................... * 3.3 Graham-Field's By-Laws, as amended, incorporated by reference as an Exhibit to Graham-Field's Current Report on Form 8-K dated as of July 14, 1995.......................... * 3.4 Amendment to Graham-Field's By-Laws, dated August 12, 1996, incorporated by reference as Exhibit 3.4 to Graham-Field's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 Form 10-K").................... * 3.5 Amendment to Graham-Field's By-Laws, dated December 1, 1997, incorporated by reference as Exhibit 3.4 to Graham-Field's S-4/A Registration Statement filed on December 19, 1997 (Registration No.: 333-42561) (the "1997 S-4 Registration Statement")................................................. * 4.1 Certificate of Designations of Graham-Field's Series B Cumulative Convertible Preferred Stock, incorporated by reference to Annex D to Graham-Field's S-4 Registration Statement filed on October 18, 1996 (Registration No.: 333-14423) (the "1996 S-4 Registration Statement").......... * 4.2 Certificate of Designations of Graham-Field's Series C Cumulative Convertible Preferred Stock, incorporated by reference to Annex E to the 1996 S-4 Registration Statement................................................... * 4.3 Certificate of Designations of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 4(c) to Graham-Field's Current Report on Form 8-K dated as of September 3, 1996 (the "September 1996 Form 8-K")........... * 4.4 Rights Agreement dated as of September 3, 1996 between Graham-Field and American Stock Transfer & Trust Company, as Rights Agent, incorporated by reference to Exhibit 4(b) to the September 1996 Form 8-K................................. * 4.5 Certificate of Designation of Graham-Field's Series D Preferred Stock, incorporated by reference as Exhibit 4.5 to the 1998 Form 10-K.......................................... * 10.1 Registration Rights Agreement, dated as of September 3, 1996, between Graham-Field and BIL (Far East Holdings) Limited ("BIL"), incorporated by reference to Exhibit 4(g) to the September 1996 Form 8-K.............................. * 10.2 Registration Rights Agreement dated as of June 25, 1997, by and among Graham-Field, Gregory A. Peek, and Michael L. Peek, incorporated by reference to Exhibit 4(a) to Graham-Field's Current Report on Form 8-K dated as of June 1997 (the "June 1997 Form 8-K")............................. * 10.3 Registration Rights Agreement dated as of August 28, 1997, by and among Graham-Field, S.E. (Gene) Davis, and Vicki Ray, incorporated by reference to Exhibit 4(a) to Graham-Field's Current Report on Form 8-K dated as of September 1997 (the "September 1997 Form 8-K").................................. * 10.4 Registration Rights Agreement, dated as of September 5, 1997, by and between Graham-Field and the Fuqua Stockholders, incorporated by reference to Annex D to the 1997 S-4 Registration Statement............................. * 10.5 Registration Rights Agreement, dated as of November 25, 1997, by and among Graham-Field, Minotto Partners, L.P. and Gene J. Minotto, incorporated by reference to Annex E to the 1997 S-4 Registration Statement............................. *
81 87
EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.6 Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996, and amended as of October 1, 1996, by and among Graham-Field, E&J Acquisition Corp., E&J and BIL, incorporated by reference to Exhibit 2(a) to Graham-Field's Current Report on Form 8-K dated as of December 12, 1996 (the "December 1996 Form 8-K").............................. * 10.7 Agreement and Plan of Merger dated as of June 25, 1997, by and among Graham-Field, LaBac Acquisition Corp., a wholly-owned subsidiary of Graham-Field, LaBac Systems, Inc., Gregory A. Peek, and Michael L. Peek, incorporated by reference to Exhibit 2(a) to the June 1997 Form 8-K......... * 10.8 Agreement and Plan of Reorganization dated as of August 28, 1997, by and among Graham-Field, S.E. (Gene) Davis, and Vicki Ray, incorporated by reference to Exhibit 2(a) to the September 1997 Form 8-K..................................... * 10.9 Agreement and Plan of Merger, dated as of September 5, 1997, as amended as of September 29, 1997, by and among Graham-Field, GFHP Acquisition Corp. and Fuqua Enterprises, Inc., incorporated by reference to Exhibit 2.1 to the 1997 S-4 Registration Statement.................................. * 10.10 Stockholder Agreement, dated as of September 3, 1996, and amended and restated as of September 19, 1996, among Graham-Field, BIL and Irwin Selinger, incorporated by reference to Exhibit 4(b) to the December 1996 Form 8-K..... * 10.11 Amendment No. 1, dated as of May 1, 1997, to the Amended and Restated Stockholder Agreement, dated as of September 3, 1996, as amended on September 19, 1996, by and among Graham-Field, BIL and Irwin Selinger, incorporated by reference to Exhibit 4(a) to Graham-Field's Current Report on Form 8-K dated as of May 14, 1997........................ * 10.12 Agreement, dated as of April 17, 1998, by and between Graham-Field and the Fuqua Stockholders, incorporated by reference to Exhibit 5 to Graham-Field's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.............. * 10.13 Promissory Note dated as of December 10, 1996 (the "BIL Note"), in the principal amount of $4 million made by Graham-Field and payable to BIL Securities (Offshore) Limited, incorporated by reference to Exhibit 10(vv) to the 1996 Form 10-K.............................................. * 10.14 John Hancock Mutual Life Insurance Note and Warrant Agreement dated as of March 12, 1992 is incorporated by reference to Exhibit 10(ee) to Graham-Field's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K")...................................... * 10.15 Amendment dated as of December 31, 1992, to the John Hancock Mutual Life Insurance Note and Warrant Agreement, incorporated by reference to Exhibit 10(ff) to the 1992 Form 10-K........................................................ * 10.16 Amendment dated as of June 30, 1993, to the John Hancock Mutual Life Insurance Note and Warrant Agreement, incorporated by reference as an Exhibit to Graham-Field's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.......................................... * 10.17 Amendment dated as of December 31, 1993, to the John Hancock Mutual Life Insurance Note and Warrant Agreement, incorporated by reference to Exhibit 10(dd) to Graham- Field's Annual Report on Form 10-K for the year ended December 31, 1993........................................... * 10.18 Amendment dated as of December 30, 1994, to the John Hancock Mutual Life Insurance Note and Warrant Agreement, incorporated by reference to Exhibit 10(ee) to Graham- Field's Annual Report on Form 10-K for the year ended December 31, 1994........................................... * 10.19 Indenture dated as of August 4, 1997, by and between Graham-Field and American Stock Transfer & Trust Company as trustee, incorporated by reference to Exhibit 4.1 to Graham-Field's S-4 Registration Statement filed on January 8, 1997 (Registration No. 333-43189)........................ * 10.20 Voting Agreement, dated as of September 5, 1997, by and between Graham-Field and Gene J. Minotto, incorporated by reference to Annex C to the 1997 S-4 Registration Statement................................................... *
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.21 Supply Agreement, by and between Everest & Jennings, Inc. and P.T. Dharma Polimetal, dated as of March 5, 1999, incorporated by reference as Exhibit 10.21 to the 1998 Form 10-K........................................................ * 10.22 Supply Agreement dated as of April 3, 1997, between Maxwell Products, Inc. and Graham-Field, incorporated by reference to Exhibit 99 to Graham-Field's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.................... * 10.23 International Distributorship Agreement dated as of September 30, 1997, by and between Graham-Field and Thuasne, incorporated by reference to Exhibit 1 to Graham-Field's Quarterly Report for the quarter ended September 30, 1997 (the "September 1997 Form 10-Q")............................ * 10.24 Letter Agreement to International Distributorship Agreement dated as of January 26, 1999, by and between Graham-Field and Thuasne, incorporated by reference as Exhibit 10.24 to the 1998 Form 10-K.......................................... * 10.25 Asset Purchase Agreement dated as of September 4, 1996, by and among Graham-Field, Graham-Field Express (Puerto Rico), Inc., and V.C. Medical Distributors, Inc., incorporated by reference to Exhibit 2(a) to the September 1996 Form 8-K.... * 10.26 Asset Purchase Agreement dated as of February 10, 1997, by and among Graham-Field, Everest & Jennings Canadian Ltd. ("E&J Canada"), Motion 2000 Inc. ("Motion 2000"), and Motion 2000 Quebec Inc.("Motion Quebec"), incorporated by reference to Exhibit 2(a) Graham-Field's Current Report on Form 8-K dated as of March 12, 1997 (the "March 1997 Form 8-K")...... * 10.27 Asset Purchase Agreement dated as of August 21, 1997, by and among Graham-Field, Graham-Field, Inc., Medi-Source, Inc., Peter Galambos and Irene Galambos, incorporated by reference to Exhibit 2 to the September 1997 Form 10-Q................ * 10.28 Stock Purchase Agreement dated as of March 7, 1997, by and among Graham-Field, Everest & Jennings, Inc., Michael H. Dempsey, and Naomi C. Dempsey, incorporated by reference to Exhibit 2(a) to the March 1997 Form 8-K..................... * 10.29 Stock Purchase Agreement dated as of January 27, 1998, by and among IT Acquisition Corporation, Graham-Field and Lumex/Basic American Holdings, Inc, incorporated by reference to Exhibit 2(a) to Graham-Field's Current Report on Form 8-K dated as of February 2, 1998 (the "February 1998 Form 8-K").................................................. * 10.30 Stock Purchase Agreement dated as of January 27, 1998, by and among HEK'S Corporation, Graham-Field and Fuqua, incorporated by reference to Exhibit 2(b) to the February 1998 Form 8-K............................................... * 10.31 Real Estate Sales Agreement dated as of August 28, 1997, by and between BBD&M, Ltd. and Graham-Field, incorporated by reference to Exhibit 4(g) to the September 1997 Form 8-K.... * 10.32 The Incentive Program, as amended, incorporated by reference to Graham-Field's Registration Statements on Form S-8 (File Nos.:33-37179, 33-38656, 33-48860, 033-60679, 333-16993, and 333-43493).................................................. * 10.33 Revolving Credit and Security Agreement dated as of December 10, 1996 (the "Revolving Credit Agreement"), by and among IBJ Whitehall Business Credit Corporation (formerly known as IBJ Schroder Bank & Trust Company) (as lender and as agent), Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and Everest & Jennings, Inc., incorporated by reference to Exhibit 10 to the December 1996 Form 8-K.................................................... *
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.34 Amendment No. 1, dated as of June 25, 1997, to the Revolving Credit and Security Agreement dated as of December 10, 1996 (the "Revolving Credit Agreement"), by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and Everest & Jennings, Inc., incorporated by reference to Exhibit 10(a) to Graham-Field's Current Report on Form 8-K dated as of July 17, 1997 (the "July 1997 Form 8-K")........ * 10.35 Amendment No. 2, dated as of July 9, 1997, to the Revolving Credit Agreement, by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and Everest & Jennings, Inc., incorporated by reference to Exhibit 10(b) to the July 1997 Form 8-K.................................................... * 10.36 Amendment No. 3, dated as of July 9, 1997, to the Revolving Credit Agreement, by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and Everest & Jennings, Inc., incorporated by reference to Exhibit 10(c) to the July 1997 Form 8-K.................................................... * 10.37 Letter Amendment, dated as of September 18, 1997, to the Revolving Credit Agreement, by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and Everest & Jennings, Inc., incorporated by reference as Exhibit 10.67 to the 1997 S-4 Registration Statement...................... * 10.38 Amendment No. 4 and Joinder Agreement, dated as of December 30, 1997, to the Revolving Credit Agreement, by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac Systems, Inc., Medical Supplies of American, Inc., Health Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care Associates, Inc., Lumex/Basic American Holdings, Inc., Basic American Medical Products, Inc., Lumex Medical Products, Inc., Prism Enterprises, Inc., Basic American Sales and Distribution Co., Inc., PrisTech, Inc., Lumex Sales and Distribution Co., Inc., MUL Acquisition Corp. II, incorporated by reference to Exhibit 10.11 to Graham-Field's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 10-K")...................................................... * 10.39 Amendment No. 5, dated as of April 13, 1998, to the Revolving Credit Agreement by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac Systems, Inc., Medical Supplies of American, Inc., Health Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care Associates, Inc., Lumex/Basic American Holdings, Inc., Basic American Medical Products, Inc., Lumex Medical Products, Inc., Prism Enterprises, Inc., Basic American Sales and Distribution Co., Inc., Pristech, Inc., Lumex Sales and Distribution Co., Inc., MUL Acquisition Corp. II, incorporated by reference to Exhibit 10.12 to the 1997 Form 10-K......................... *
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.40 Waiver and Amendment No. 6 to Revolving Credit and Security Agreement dated as of August 12, 1998, by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac Systems, Inc., Medical Supplies of America, Inc., Health Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care Associates, Inc., Lumex/Basic American Holdings, Inc., Basic American Medical Products, Inc., Lumex Medical Products, Inc., Prism, Enterprises, Inc., Basic American Sales and Distribution Co., Inc., PrisTech, Inc., Lumex Sales & Distribution Co., Inc., and MUL Acquisition Corp. Ltd., incorporated by reference to Exhibit No. 10 to Graham-Field's Quarterly Report for the fiscal quarter ended June 30, 1998........... * 10.41 Pledge Agreement, dated September 15, 1998, made by and among IBJ Whitehall Business Credit Corporation, Graham-Field, Graham-Field, Inc., Everest & Jennings, Inc., Medical Supplies of America, Inc., Lumex/Basic American Holdings, Inc., Basic American Medical Products, Inc., Lumex Medical Products, Inc., Prism Enterprises, Inc., and Everest & Jennings International Ltd., incorporated by reference as Exhibit 10.41 to the 1998 Form 10-K......................... * 10.42 Amendment No. 7 to Revolving Credit and Security Agreement dated as of April 22, 1999, by and among IBJ Whitehall Business Credit Corporation and Graham-Field, Graham-Field, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac Systems, Inc., Medical Supplies of America, Inc., Health Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care Associates, Inc., Lumex/Basic American Holdings, Inc., Basic American Medical Products, Inc., Lumex Medical Products, Inc., Prism Enterprises, Inc., Basic American Sales and Distribution Co., Inc., Pristech, Inc., Lumex Sales and Distribution Co., Inc., and MUL Acquisition Corp. II, incorporated by reference as Exhibit 10.42 to the 1998 Form 10-K........................................................ * 10.43 Letter Amendments dated as of May 21, 1999 and June 3, 1999, to the Revolving Credit and Security Agreement, by and among IBJ Whitehall Business Credit Corporation and Graham-Field, Graham-Field, Inc., Graham-Field Temco, Inc., Graham-Field Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac Systems, Inc., Medical Supplies of America, Inc., Health Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care Associates, Inc., Lumex/Basic American Holdings, Inc., Basic American Medical Products, Inc., Lumex Medical Products, Inc., Prism Enterprises, Inc., Basic American Sales and Distribution Co., Inc., Pristech, Inc., Lumex Sales and Distribution Co., Inc., and MUL Acquisition Corp. II, incorporated by reference as Exhibit 10.43 to the 1998 Form 10-K........................................................ * 10.44 Separation Agreement dated as of July 29, 1998, by and between Irwin Selinger and Graham-Field, incorporated by reference to Exhibit 10 to Graham-Field's Current Report on Form 8-K dated July 29, 1998................................ * 10.45 Consultant Agreement dated as of March 7, 1997, by and between Graham-Field and Michael H. Dempsey, incorporated by reference to Exhibit 10(b) to the March 1997 Form 8-K....... * 10.46 Consulting Agreement dated as of June 25, 1997, by and among Graham-Field, Gregory A. Peek, and Michael L. Peek, incorporated by reference to Exhibit 4(b) to the June 1997 Form 8-K.................................................... * 10.47 Consulting Agreement dated as of September 17, 1998, by and between Andrew A. Giordano and Graham-Field, incorporated by reference to Exhibit 10(a) to Graham-Field's quarterly report for the quarter ended September 30, 1998 (the "September 1998 Form 10-Q")................................. *
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.48 Golden Parachute Agreement, dated as of July 21, 1989, by and between Graham-Field and Beatrice Scherer, incorporated by reference to Exhibit 10.54 to the 1997 Form 10-K......... * 10.49 Employment Agreement, dated as of March 15, 1996, by and between Jeffco Express Medical Supply, Inc. and Jeff Schwartz, incorporated by reference to Exhibit 10.47 to the 1997 Form 10-K.............................................. * 10.50 Golden Parachute Agreement, dated as of May 14, 1996, by and between Graham-Field and Jeff Schwartz, incorporated by reference to Exhibit 10.51 to the 1997 Form 10-K............ * 10.51 Employment Agreement dated as of February 28, 1997, by and between Graham-Field and Marco Ferrara, incorporated by reference to Exhibit 10(b) to the March 1997 Form 8-K....... * 10.52 Non-Competition Agreement dated as of June 25, 1997, by and among Graham-Field and Gregory A. Peek, incorporated by reference to Exhibit 4(c) to the June 1997 Form 8-K......... * 10.53 Non-Competition Agreement dated as of June 25, 1997, by and among Graham-Field and Michael L. Peek, incorporated by reference to Exhibit 4(d) to the June 1997 Form 8-K......... * 10.54 Employment Agreement dated as of August 28, 1997, by and between Graham-Field and S.E. (Gene) Davis, incorporated by reference to Exhibit 4(b) to the September 1997 Form 8-K.... * 10.55 Non-Competition Agreement dated as of August 28, 1997, by and between Graham-Field and S.E. (Gene) Davis, incorporated by reference to Exhibit 4(d) to the September 1997 Form 8-K......................................................... * 10.56 Employment Agreement dated as of August 28, 1997, by and between Graham-Field and Vicki Ray, incorporated by reference to Exhibit 4(c) to the September 1997 Form 8-K.... * 10.57 Non-Competition Agreement dated as of August 28, 1997, by and between Graham-Field and Vicki Ray, incorporated by reference to Exhibit 4(e) to the September 1997 Form 8-K.... * 10.58 Noncompetition Agreement, dated as of September 5, 1997, by and among Graham-Field, GFHP Acquisition Corp., J.B. Fuqua and J. Rex Fuqua, incorporated by reference to Annex F to the 1997 S-4 Registration Statement......................... * 10.59 Employment Agreement, dated as of March 2, 1998, by and between Graham-Field and Paul Bellamy, incorporated by reference to Exhibit 10.46 to the 1997 Form 10-K............ * 10.60 Amendment No. 1 to Employment Agreement dated as of September 15, 1998, by and between Paul Bellamy and Graham-Field, incorporated by reference to Exhibit 10(i) to the September 1998 Form 10-Q................................ * 10.61 Agreement dated as of September 15, 1998, by and between Paul Bellamy and Graham-Field, incorporated by reference to Exhibit 10(b) to the September 1998 Form 10-Q............... * 10.62 Employment Agreement dated as of April 17, 1998, by and between Graham-Field and Richard S. Kolodny, incorporated by reference to Exhibit 2 to Graham-Field's Quarterly Report for the quarter ended March 31, 1998 (the "March 1998 Form 10-Q")...................................................... * 10.63 Amendment No. 1 to Employment Agreement dated as of September 15, 1998, by and between Richard S. Kolodny and Graham-Field, incorporated by reference to Exhibit 10(j) to the September 1998 Form 10-Q................................ * 10.64 Agreement dated as of September 15, 1998, by and between Richard S. Kolodny and Graham-Field, incorporated by reference to Exhibit 10(c) to the September 1998 Form 10-Q........................................................ * 10.65 Employment Agreement dated as of April 17, 1998, by and between Graham-Field and Ralph Liguori, incorporated by reference to Exhibit 3 to the March 1998 Form 10-Q.......... * 10.66 Amendment No. 1 to Employment Agreement dated as of September 15, 1998, by and between Ralph Liguori and Graham-Field, incorporated by reference to Exhibit 10(k) to the September 1998 Form 10-Q................................ *
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.67 Agreement dated as of September 15, 1998, by and between Ralph Liguori and Graham-Field, incorporated by reference to Exhibit 10(d) to the September 1998 Form 10-Q............... * 10.68 Employment Agreement dated as of April 17, 1998, by and between Graham-Field and Peter Winocur, incorporated by reference to Exhibit 4 to the March 1998 Form 10-Q.......... * 10.69 Amendment No. 1 to Employment Agreement dated as of September 15, 1998, by and between Peter Winocur and Graham-Field, incorporated by reference to Exhibit 10(l) to the September 1998 Form 10-Q................................ * 10.70 Agreement dated as of September 15, 1998, by and between Peter Winocur and Graham-Field, incorporated by reference to Exhibit 10(e) to the September 1998 Form 10-Q............... * 10.71 Employment Agreement dated November 2, 1998, by and between Harvey P. Diamond and Graham-Field, incorporated by reference to Exhibit 10(f) to the September 1998 Form 10-Q........................................................ * 10.72 Non-Competition Agreement dated as of November 2, 1998, by and between Harvey P. Diamond and Graham-Field, incorporated by reference to Exhibit 10(h) to the September 1998 Form 10-Q........................................................ * 10.73 Agreement dated as of November 2, 1998, by and between Harvey P. Diamond and Graham-Field, incorporated by reference to Exhibit 10(g) to the September 1998 Form 10-Q........................................................ * 10.74 Agreement dated as of March 24, 1999, by and between Jay Alix & Associates and Graham-Field incorporated by reference as Exhibit 10.74 to the 1998 Form 10-K...................... * 10.75 Letter Agreement dated as of May 12, 1999, by and between BIL Securities (Offshore) Limited and Graham-Field incorporated by reference as Exhibit 10.75 to the 1998 Form 10-K........................................................ * 10.76 Letter Agreement dated as of May 12, 1999, by and among BIL Securities (Offshore) Limited, BIL (Far East Holdings) Limited, and Graham-Field incorporated by reference as Exhibit 10.76 to the 1998 Form 10-K......................... * 21. Subsidiaries of the Company: Graham-Field, Inc. (a New York corporation) Graham-Field Temco, Inc. (a New Jersey corporation) AquaTherm Corp. (a New Jersey corporation)
Graham-Field Distribution, Inc. (a Missouri corporation) Graham-Field Bandage, Inc. (a Rhode Island corporation) Graham-Field European Distribution Corporation Limited (an Ireland corporation) Graham-Field Express (Puerto Rico), Inc. (a Delaware corporation) Graham-Field Express (Dallas), Inc. (a Delaware corporation) Zens Data Systems, Inc. (a Delaware corporation)
- --------------- * Incorporated by reference. 87 93 Graham-Field Sales Corp. (a Delaware corporation) Everest & Jennings International Ltd. (a Delaware corporation) Everest & Jennings, Inc. (a California corporation) Smith & Davis Manufacturing Company (a Missouri corporation) Everest & Jennings de Mexico S.A. de C.V. (a Mexico corporation) Everest & Jennings Canadian Limited (a Canadian corporation) Rabson Medical Sales, Ltd. (a New York corporation) Kuschall of America, Inc. (a California corporation) LaBac Systems, Inc. (a Colorado corporation) Medical Supplies of America, Inc. (a Georgia corporation) Health Care Wholesalers, Inc. (a Georgia corporation) H C Wholesalers, Inc. (a Georgia corporation) Critical Care Associates, Inc. (a Georgia corporation) Lumex/Basic American Holdings, Inc. (a Delaware corporation) Basic American Medical Products, Inc. (a Georgia corporation) Basic American Sales and Distribution Co., Inc. (a Delaware corporation) Lumex Medical Products, Inc. (a Delaware corporation) Lumex Sales and Distribution Co., Inc. (a Delaware corporation) MUL Acquisition Corp. II (a Delaware corporation) Prism Enterprises, Inc. (a Delaware corporation) PrisTech, Inc. (a Delaware corporation) P.T. Dharma Medipro (49% equity interest) (an Indonesia corporation) Kerma Medical Products, Inc. (25% equity interest) (a Virginia corporation) 23. Consent of Independent Auditors.............................
14(b). Reports on Form 8-K Not Applicable. 88 94 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRAHAM-FIELD HEALTH PRODUCTS, INC. By: /s/ JOHN G. MCGREGOR ------------------------------------ John G. McGregor, President and Chief Executive Officer (Principal Executive Officer) Date: June 3, 1999 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN G. MCGREGOR President and Chief Executive Officer June 3, 1999 - ------------------------------------------------ (Principal Executive Officer) John G. McGregor /s/ J. SOREN REYNERTSON Senior Vice President, Chief June 3, 1999 - ------------------------------------------------ Financial J. Soren Reynertson and Accounting Officer (Principal Financial and Accounting Officer) /s/ RUPERT O.H. MORLEY Chairman of the Board and Director June 3, 1999 - ------------------------------------------------ Rupert O.H. Morley /s/ DAVID P. DELANEY, JR. Director June 3, 1999 - ------------------------------------------------ David P. Delaney, Jr. /s/ J. REX FUQUA Director June 3, 1999 - ------------------------------------------------ J. Rex Fuqua /s/ LOUIS A. LUBRANO Director June 3, 1999 - ------------------------------------------------ Louis A. Lubrano /s/ MICHAEL DREYER Director June 3, 1999 - ------------------------------------------------ Michael Dreyer
89 95 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES CORPORATE INFORMATION BOARD OF DIRECTORS Rupert O.H. Morley(1) Chairman of the Board of Graham-Field and Operations Director Brierley Investments Limited Michael S. Dreyer(2)(3) Managing Partner Dreyer, Edmonds & Associates J. Rex Fuqua(1)(2)(3) President and Chief Executive Officer Fuqua Capital Corporation Louis A. Lubrano(2)(3) Investment Banker Herzog, Heine, Geduld, Inc. Dr. Kenneth R. Jennings Vice Chairman Jay Alix & Associates (1) Executive Committee (2) Compensation Committee (3) Audit Committee CORPORATE OFFICERS John G. McGregor Chief Executive Officer and President Robert J. Gluck Senior Vice President, Chief Financial Officer Richard S. Kolodny Senior Vice President, General Counsel, and Secretary Robert J. Mealey Senior Vice President, Operations PRINCIPAL OPERATING OFFICERS Peter Winocur President, Labtron Jeffrey Schwartz Vice President, Sales Cherie L. Antoniazzi Vice President, Human Resources Donald D. Cantwell Vice President, Chief Information Officer Edward J. Link Vice President, Corporate Marketing Gene J. Minotto President, Basic American Andrew E. Halls President, Everest & Jennings Merle M. Smith President, Prism AUDITORS Ernst & Young, LLP Melville, New York REGISTRAR AND TRANSFER AGENT American Stock Transfer & Trust Company 40 Wall Street -- 46th Floor New York, New York 10005 96 Graham-Field Logo (Back) Printed in the U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----