-----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, SscyL//V9W7tBV4h7NaKOSn7dJMEQeZGBT0Bwtx3IDlhTyAEpj3OOsBpSJ3O2FSF O6hTNIxMy3xNOTD15UAp4g== 0000950123-99-010310.txt : 19991117 0000950123-99-010310.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010310 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991116 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-08801 FILM NUMBER: 99758989 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 10-Q 1 GRAHAM-FIELD HEALTH PRODUCTS 1 FORM 10-Q Securities and Exchange Commission Washington, D.C. 20549 (MARK ONE) [ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From to Commission file number 1-8801 GRAHAM-FIELD HEALTH PRODUCTS, INC. ---------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2578230 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 81 Spence Street, Bay Shore, New York 11706 ------------------------------------------- (Address of principal executive offices) (Zip Code) (631) 273-2200 ---------------------------- (Registrant's telephone number, including area code) Not applicable ---------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes No --- --- Applicable Only to Corporate Issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, $.025 Par Value --- 31,808,324 shares as of November 9, 1999 2 GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES I N D E X
Part I. Financial Information: Page ---- Item 1. Financial Statements: Condensed Consolidated Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998 (Audited) 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (Unaudited) 5-6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Part II. Other Information: Item 1. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 6. Exhibits and Reports on Form 8-K 25
- 2 - 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
September 30, December 31, ASSETS 1999 1998 ------------- ------------- (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents $ 3,348,000 $ 3,290,000 Accounts receivable - less allowances for doubtful accounts of $19,504,000 and $20,107,000, respectively 73,274,000 90,969,000 Inventories 45,642,000 63,121,000 Notes receivable and other current assets - less allowance for doubtful notes of $3,767,000 and $5,373,000, respectively 7,063,000 9,252,000 Recoverable and prepaid income taxes 941,000 1,441,000 ------------- ------------- TOTAL CURRENT ASSETS 130,268,000 168,073,000 PROPERTY, PLANT AND EQUIPMENT - net 40,584,000 40,188,000 EXCESS OF COST OVER NET ASSETS ACQUIRED - net of accumulated amortization of $26,462,000 and $20,644,000, respectively 201,851,000 207,554,000 OTHER ASSETS 11,260,000 13,044,000 ------------- ------------- TOTAL ASSETS $ 383,963,000 $ 428,859,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Senior Subordinated Notes $ 100,000,000 $ -- Credit facility 23,844,000 27,606,000 Current maturities of long-term debt 875,000 1,235,000 Accounts payable 24,277,000 28,915,000 Accrued expenses 39,071,000 33,941,000 ------------- ------------- TOTAL CURRENT LIABILITIES 188,067,000 91,697,000 Senior Subordinated Notes -- 100,000,000 Long-term debt 2,126,000 6,715,000 Other long-term liabilities 10,959,000 10,580,000 ------------- ------------- TOTAL LIABILITIES 201,152,000 208,992,000 ------------- ------------- STOCKHOLDERS' EQUITY: Series A preferred stock -- -- Series B preferred stock 28,200,000 28,200,000 Series C preferred stock 3,400,000 3,400,000 Series D preferred stock 4,072,000 -- Common stock 789,000 783,000 Additional paid-in capital 287,267,000 286,503,000 Accumulated deficit (139,469,000) (97,587,000) Accumulated other comprehensive loss (1,448,000) (1,432,000) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 182,811,000 219,867,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 383,963,000 $ 428,859,000 ============= =============
See notes to condensed consolidated financial statements. - 3 - 4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ------------------------------ 1999 1998 1999 1998 ------------ ------------- ------------- ------------- (As restated, (As restated, see Note 6) see Note 6) NET REVENUES: Medical equipment and supplies $ 67,647,000 $ 93,158,000 $ 226,718,000 $ 288,279,000 Interest and other income 244,000 685,000 1,170,000 1,620,000 ------------ ------------- ------------- ------------- 67,891,000 93,843,000 227,888,000 289,899,000 ------------ ------------- ------------- ------------- COSTS AND EXPENSES: Cost of revenues 49,441,000 64,378,000 160,901,000 199,007,000 Selling, general and administrative 28,757,000 31,765,000 88,675,000 91,346,000 Provision for Securities Class Action (Note 10) -- -- 10,000,000 -- Interest expense 3,062,000 3,412,000 9,395,000 9,219,000 ------------ ------------- ------------- ------------- 81,260,000 99,555,000 268,971,000 299,572,000 ------------ ------------- ------------- ------------- LOSS BEFORE INCOME TAXES (13,369,000) (5,712,000) (41,083,000) (9,673,000) INCOME TAX BENEFIT -- 1,287,000 -- 1,287,000 ------------ ------------- ------------- ------------- NET LOSS (13,369,000) (4,425,000) (41,083,000) (8,386,000) PREFERRED STOCK DIVIDENDS 266,000 266,000 799,000 799,000 ------------ ------------- ------------- ------------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(13,635,000) $ (4,691,000) $ (41,882,000) $ (9,185,000) ============ ============= ============= ============= Net loss per common share - basic and diluted $ (.43) $ (.15) $ (1.33) $ (.30) Weighted average number of common shares outstanding 31,526,000 31,244,000 31,430,000 31,079,000
See notes to condensed consolidated financial statements. - 4 - 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED)
Nine Months Ended September 30, ---------------------------- 1999 1998 ------------ ------------ (As restated, see Note 6) OPERATING ACTIVITIES Net loss $(41,083,000) $ (8,386,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for Class Action settlement 10,000,000 -- Depreciation and amortization 11,284,000 11,344,000 Provisions for losses on accounts receivable 3,909,000 1,816,000 Deferred income taxes -- (1,287,000) (Gain) loss on disposal of property, plant and equipment (319,000) 77,000 Non-cash compensation 108,000 3,341,000 Changes in operating assets and liabilities: Accounts receivable 13,786,000 (13,583,000) Inventories 17,479,000 5,319,000 Other current assets and recoverable and prepaid income taxes 2,689,000 (8,121,000) Accounts payable, accrued expenses and other liabilities (9,350,000) (22,694,000) ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 8,503,000 (32,174,000) ------------ ------------ INVESTING ACTIVITIES Purchases of property, plant and equipment-net (4,223,000) (8,060,000) Proceeds from sale of asset held for sale -- 60,167,000 Acquisitions, net of cash acquired -- (419,000) Decrease in excess of cost over net assets acquired -- 2,338,000 Net decrease (increase) in other assets 498,000 79,000 ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,725,000) 54,105,000 ------------ ------------
See notes to condensed consolidated financial statements. - 5 - 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED)
Nine Months Ended September 30, ---------------------------- 1999 1998 ------------ ------------ (As restated, see Note 6) FINANCING ACTIVITIES: Net repayments under Credit Facility (3,303,000) (25,861,000) Principal payments on long-term debt (1,417,000) (1,642,000) Proceeds from exercise of stock options -- 4,722,000 ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (4,720,000) (22,781,000) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 58,000 (850,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,290,000 4,430,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,348,000 $ 3,580,000 ============ ============ SUPPLEMENTARY CASH FLOW INFORMATION: Interest paid $ 11,900,000 $ 11,692,000 ============ ============ Income taxes (received) paid $ (825,000) $ 135,000 ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Payment of accrued dividends by issuance of common stock $ 799,000 $ 533,000 ============ ============ Repayment of long-term debt by issuance of preferred stock $ 4,000,000 ============ Investment in preferred stock received as partial proceeds from sale of asset $ 1,539,000 ============ Decrease in excess of cost over net assets acquired offset by increase in other current assets $ 2,385,000 ============ Increase in excess of cost over net assets acquired offset by adjustments to property, plant and equipment, inventory, prepaid and deferred taxes, accrued expense and debt $ 375,000 ============
See notes to condensed consolidated financial statements. - 6 - 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) 1. LIQUIDITY AND BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The going concern basis of presentation assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The Company has incurred significant losses in 1999 and each of the three years in the period ended December 31, 1998. These losses have arisen as a result of declining sales and margins in 1999, a significant amount of merger, restructuring and other expenses incurred in connection with previous acquisitions, the failure to integrate effectively these acquisitions and realize the benefits and synergies to be derived therefrom and the impact of intense competition within the healthcare industry. The losses also include significant charges relating to provisions for accounts receivable, inventory and other asset write-offs in 1997 and 1998, a provision to increase the valuation allowance on deferred tax assets in 1998, and certain professional, consulting and other advisory fees and severance charges in 1999. Further, the Company and certain of its directors and officers have been named as defendants in at least fifteen putative class action lawsuits which have been consolidated into an amended complaint (the "Class Action"). In August 1999, the Company reached an agreement in principle to settle the Class Action, subject to certain contingencies described herein. However, as further described in Note 10, on October 25, 1999, the Company determined it would not be in a position to proceed with the agreement in principle due to changed circumstances. Management has continued with a program to reduce operating expenses, reduce the investment in working capital and take other actions to improve its cash flow. These actions include, but are not limited to, (i) the completion of the activities contemplated by the Company's restructuring plan as further described in Note 9; (ii) the initiation of inventory reduction and product rationalization programs; (iii) the tightening of credit policies and payment terms; (iv) the reduction in previously budgeted capital expenditures; (v) the implementation of streamlined product pricing and product return guidelines; (vi) the initiation of an aggressive program to collect past due accounts receivable; and (vii) the realignment and consolidation of sales forces and territories. Notwithstanding the actions described above, the Company's losses have continued to accelerate during 1999 and sales have continued to decline, resulting in decreased liquidity. The Company was not in compliance with the net cash flow covenant contained in its Senior Secured Revolving Credit Facility (the "Credit Facility") with IBJ Whitehall Business Credit Corporation, as agent ("IBJ") as of September 30, 1999 and also does not expect to be in compliance with the December 31, 1999 net cash flow covenant. Amounts outstanding under the Credit Facility (including the Term Loan described in Note 12) were $19.7 million and $23.8 million at November 12, 1999 and September 30, 1999, respectively. As of November 12, 1999, the Company had unused borrowing availability under the Credit Facility of $3.6 million. The Company is currently seeking a waiver of the covenant default from its lenders and/or an amendment to the financial covenants. Under the terms of the Credit Facility, the Company's lenders have the right to require immediate repayment of all amounts borrowed or limit future advances, however as of November 15, 1999, the lenders have not exercised such rights. In the event of a demand for repayment by the lenders in the future, such demand would result in a cross default under the Indenture for the Company's $100 million Senior Subordinated Notes, resulting in such notes becoming due and immediately payable. As a result, the Company has classified its $100 million Senior Subordinated Notes as current liabilities on the September 30, 1999 balance sheet. - 7 - 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) In addition to seeking covenant waivers and/or amendments, the Company is also pursuing alternative financing sources. There can be no assurance that the Company will be successful in its efforts to receive waivers and/or amendments, improve its cash flow or that it will be able to obtain alternative financing on satisfactory terms in a timely manner to provide sufficient cash to fund its operations. Should the lenders under the agreements described above begin to exercise their remedies against the Company or if the Company makes a determination that it will not be able to fund its operations outside a bankruptcy, the Company would likely seek protection pursuant to a Chapter 11 of the United States Bankruptcy Code. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 2. GENERAL As further described in Note 6 to the Condensed Consolidated Financial Statements, and as previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, the 1998 quarterly results have been restated to correct for certain improperly recorded transactions. Inventories at September 30, 1999 have been valued at standard cost for manufactured goods and at average cost for other inventories based primarily on perpetual records, each of which approximates actual cost on the first-in, first-out method. On January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 established new rules for the reporting and display of comprehensive income and its components, however, the adoption of this Statement had no impact on the Company's net loss or shareholders' equity. During the three and nine month periods ended September 30, 1999, total comprehensive loss amounted to $13,434,000 and $41,099,000, respectively. Total comprehensive loss for the three and nine month periods ended September 30, 1998 (as restated, see Note 6) amounted to $4,988,000 and $9,066,000, respectively. In March 1998, Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" was issued. SOP 98-1 requires certain costs associated with developing or obtaining software for internal use to be expended as incurred until certain capitalization criteria are met. The Company has adopted SOP 98-01 as of January 1, 1999. Based on the Company's current information systems plans, which include completing its Year 2000 remediation program and the upgrade of its order entry and manufacturing system, adoption of this statement did not have a material impact on the Company's consolidated financial position or results of operations. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued effective for fiscal years beginning after June 15, 1999, which has subsequently been delayed. SFAS No. 133 requires the recognition of all derivatives in the consolidated balance sheet as either assets or liabilities measured at fair value. The Company currently does not use derivative instruments and therefore, adoption of this statement is not expected to impact the Company. In the opinion of the Company, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments, except for the provision for Class Action settlement) necessary to present fairly the financial position as of September - 8 - 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) 30, 1999 (unaudited), the results of operations for the three and nine months ended September 30, 1999 and 1998 (unaudited) and the statements of cash flows for the nine months ended September 30, 1999 and 1998 (unaudited). It should be noted that the accompanying financial statements and notes thereto do not purport to be complete disclosures in conformity with generally accepted accounting principles. While the Company believes that the disclosures presented are adequate to make the information contained herein not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations for the three and nine months ended September 30, 1999 and 1998 are not necessarily indicative of results for the full year. 3. EARNINGS PER SHARE Basic and diluted net loss per common share was computed using the weighted average number of common shares outstanding and by assuming the accrual of a dividend of 1.5% on the Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") for the quarter and nine months ended September 30, 1999 and 1998. Conversion of the preferred stock and common equivalent shares was not assumed since the result would have been antidilutive. 4. INVENTORIES Inventories consist of the following:
September 30, December 31, 1999 1998 ------------ ------------ Raw materials $11,058,000 $10,739,000 Work-in-process 4,467,000 5,412,000 Finished goods 30,117,000 46,970,000 ----------- ----------- $45,642,000 $63,121,000 =========== ===========
- 9 - 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
September 30, December 31, 1999 1998 ------------- ------------ Land and buildings $ 20,166,000 $ 18,366,000 Equipment 37,118,000 33,909,000 Furniture and fixtures 3,465,000 3,219,000 Leasehold improvements 3,790,000 3,865,000 Construction in progress 1,171,000 1,923,000 ------------ ------------ 65,710,000 61,282,000 Accumulated depreciation and amortization (25,126,000) (21,094,000) ------------ ------------ $ 40,584,000 $ 40,188,000 ============ ============
6. RESTATEMENT As previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, the Company has restated its financial results for the first, second and third quarters of 1998 to correct for certain improperly recorded transactions. Such adjustments increased the net loss reported in the first and second quarters of 1998 by $971,000 and $249,000, respectively, and decreased the net loss reported in the third quarter of 1998 by $739,000. The adjustments were primarily related to previously unrecognized stock compensation charges of $954,000 in the first quarter of 1998 and an $800,000 reduction in the previously recorded estimated separation charges in the third quarter of 1998. The following Consolidated Statements of Operations compare the previously reported and restated financial information for the three and nine month periods ended September 30, 1998.
Three Months Ended Nine Months Ended September 30, 1998 September 30, 1998 --------------------------- ---------------------------- As Previously As Previously Reported As Restated Reported As Restated ------------- ----------- ------------- ------------ Net revenues $94,516,000 $93,843,000 $290,114,000 $289,899,000 Cost of revenues 65,075,000 64,378,000 199,207,000 199,007,000 Selling, general and administrative 32,505,000 31,765,000 90,954,000 91,346,000 Interest expense 3,387,000 3,412,000 9,145,000 9,219,000 ----------- ----------- ------------ ------------ Loss before income taxes (6,451,000) (5,712,000) (9,192,000) (9,673,000) Income tax benefit (1,287,000) (1,287,000) (1,287,000) (1,287,000) ----------- ----------- ------------ ------------ Net loss (5,164,000) (4,425,000) (7,905,000) (8,386,000) Preferred stock dividends 266,000 266,000 799,000 799,000 ----------- ----------- ------------ ------------ Net loss attributable to common shareholders $(5,430,000) $(4,691,000) $ (8,704,000) $ (9,185,000) =========== =========== ============ ============ Net loss per common share - basic and diluted $ (.17) $ (.15) $ (.28) $ (.29) =========== =========== ============ ============
- 10 - 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) 7. INCOME TAXES The Company did not record an income tax benefit for the nine months ended September 30, 1999 due to the uncertainty of the future realization of such benefits. At September 30, 1999, the Company had a full valuation allowance recorded against its net deferred tax assets. The Company will realize these tax benefits when the Company generates taxable income. Of the $49.8 million valuation allowance, $12.1 million is attributable to the acquired net operating loss carryforward and other deferred tax assets of Everest & Jennings International Ltd. If realized, the tax benefit related to acquired net operating losses will be recorded as a reduction of the excess of cost over net assets acquired. Realization of the future tax benefits related to the deferred tax assets is dependent upon many factors, including the Company's ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes. 8. DISPOSAL OF ASSETS In connection with the Company's acquisition of Fuqua Enterprises, Inc. (currently known as Lumex/Basic American Holdings, Inc.) ("Fuqua") on December 30, 1997, the Company acquired the leather operations of Fuqua (the "Leather Operations"). It was the Company's intention to dispose of the Leather Operations as soon as reasonably practicable following the consummation of the acquisition of Fuqua. Accordingly, the net assets of the Leather Operations were reflected as "assets held for sale" in the amount of $61,706,000 on the balance sheet as of December 31, 1997. On January 27, 1998, the Company sold the Leather Operations for $60,167,400 in cash, 5,000 shares of Series A Preferred Stock of the buying entity with a stated value of $4,250,000 (valued at $1,539,000) and the assumption of debt of $2,341,250. The cash proceeds from the sale of the Leather Operations were used to repay the indebtedness incurred under the terms of the Credit Facility, which was used to retire the Fuqua indebtedness. 9. ACQUISITION INTEGRATION AND RESTRUCTURING PLAN In connection with the acquisition of Fuqua on December 30, 1997, the Company adopted a plan to implement certain strategic restructuring initiatives (the "Restructuring Plan") and recorded $18,151,000 of restructuring charges and $4,393,000 of indirect merger charges. The plan consists of a broad range of efforts, including the consolidation of the Company's Temco manufacturing operations in New Jersey into Fuqua's Lumex manufacturing facility in New York, relocation of the Company's corporate headquarters to the Lumex facility, and the closure and/or consolidation of certain other distribution facilities and operations. The Company has substantially completed the initiatives contemplated in the Restructuring Plan. During the third quarter of 1999, the Company announced the closures of its Boston and Cleveland distribution centers and recorded a charge of $625,000 (included in selling, general and administrative expenses) for facility exit costs. The following summarizes the activity in the restructuring and merger related accrual for the nine months ended September 30, 1999: - 11 - 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED)
ACCRUAL ACCRUAL BALANCE CASH RESTRUCTURING BALANCE DECEMBER 31, PAYMENTS IN PROVISIONS IN SEPTEMBER 30, 1998 1999 1999 1999 ------------ ----------- ------------- ------------- Facility exit and lease costs $ 11,898,000 $(1,456,000) $ 670,000 $11,112,000 Severance 144,000 (104,000) -- 40,000 Merger related 120,000 -- -- 120,000 ------------ ----------- ----------- ----------- $ 12,162,000 $(1,560,000) $ 670,000 $11,272,000 ============ =========== =========== ===========
10. LEGAL PROCEEDINGS Following the Company's public announcement on March 23, 1998 of its financial results for the fourth quarter and year ended December 31, 1997, the Company and certain of its directors and officers were named as defendants in at least fifteen putative class action lawsuits filed primarily in the United States District Court for the Eastern District of New York (the "Court") on behalf of all purchasers of Common Stock of the Company (the "Company Common Stock"), including former Fuqua shareholders who received shares of the Company Common Stock when the Company acquired Fuqua in December 1997, during various periods within the time period May 1997 to March 1998. The class actions were consolidated into an amended consolidated class action complaint as of January 29, 1999 (the "Class Action"), and lead counsel was selected. The amended consolidated class action complaint asserts claims against the Company and the other defendants for violations of Sections 11, 12(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder with respect to alleged material misrepresentations and omissions in public filings made with the Securities and Exchange Commission and certain press releases and other public statements made by the Company and certain of its officers relating to the Company's business, results of operations, financial condition and future prospects, as a result of which, it is alleged, the market price of the Company Common Stock was artificially inflated during the putative class periods. The amended consolidated class action complaint focuses on statements made concerning the Company's integration of its various recent acquisitions, as well as statements about the Company's inventories, accounts receivable, expected earnings and sales levels. The plaintiffs seek unspecified compensatory damages and costs (including attorneys and expert fees), expenses and other unspecified relief on behalf of the putative classes. In August 1999, the Company reached an agreement in principle to settle the Class Action, subject to certain contingencies described below. By letter dated October 25, 1999, the Company advised the Court that the Company would not be in a position to proceed with the agreement in principle because, due to changed circumstances, the sale of the Company contemplated thereby would likely not occur and the Company lacks the funds to pay its portion of the proposed settlement. The Court has scheduled a status conference regarding this matter to be held on November 29, 1999. Under the terms of the agreement in principle, the Class Action would have been settled for a payment of $20 million, of which $10 million would have been funded by the Company's insurance carrier and $10 million by the Company. The agreement in principle contemplated that the Company's $10 million contribution would be paid either from the proceeds of the sale of the Company or, at the Company's option, from funds otherwise available. Under the terms of the agreement in principle, in the event the shares of the common stock of the Company had been sold for an amount in excess of $3 per share pursuant to a definitive sale/merger agreement, the shareholder class would also have been - 12 - 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) entitled to 25% of the premium in excess of $3 per share upon terms and conditions to be agreed upon between the parties. The plaintiffs may terminate the settlement if the Company does not enter into a definitive sale/merger agreement on or before December 31, 1999, unless the Company had funded its $10 million contribution to the settlement prior to an election to terminate the settlement by the plaintiffs. The Company recorded a provision of $10 million during the second quarter of 1999 reflecting the Company's share of the proposed settlement. In March 1999, the Company reported that an investigation conducted by the Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found certain accounting errors and irregularities with respect to the Company's financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting firm of Arthur Andersen LLP to assist in conducting the investigation and in providing advice on accounting matters. Based on the results of the investigation, the Company has restated its financial results for 1996 and 1997. The staff of the SEC has commenced a formal investigation with respect to the aforementioned accounting irregularities and, in connection with that investigation, has issued a document subpoena to the Company. The impact of the investigation on the Company cannot yet be assessed. On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug Administration arrived at the Company's principal headquarters and one other Company location and retrieved several documents pursuant to search warrants. The Company has subsequently been advised by an Assistant United States Attorney for the Southern District of Florida that the Company is a target of an ongoing grand jury investigation involving alleged fraud by one or more of the Company's suppliers relating to the unauthorized diversion of medical products intended for sale outside of the United States into United States markets. The Company has also been advised that similar search warrants were obtained with respect to approximately 14 other participants in the distribution of medical products. The Company does not know when the grand jury investigation will conclude or what action, if any, may be taken by the government against the Company or any of its employees. Accordingly, the impact of this investigation on the Company cannot yet be assessed. The Company intends to cooperate fully with the government in its investigation. In March 1994, Suffolk County Authorities initiated an investigation to determine whether regulated substances had been discharged in excess of permitted levels from the Lumex division (the "Lumex Division") located in Bay Shore, New York, which was acquired by Fuqua in April 1996. An environmental consulting firm was engaged by the Lumex Division to conduct a more comprehensive site investigation, develop a remediation work plan and provide a remediation cost estimate. These activities were performed to determine the nature and extent of contaminants present on the site and to evaluate their potential off-site extent. In connection with the acquisition of the Lumex Division, Fuqua assumed by contract the obligations associated with this environmental matter. In late 1996, Fuqua conducted surficial soil remediation at the Bay Shore facilities and reported the results to the Suffolk County Authorities in March 1997. A ground water work plan was submitted concurrently with the soil remediation report. In May 1997, the Suffolk County Authorities stated that they were satisfied with the soil remediation that had been conducted by Fuqua and provided comments on the ground water work plan. In November 1997, the Lumex Division received the results of additional ground water testing that had been performed in August and September 1997. The results revealed significantly lower concentrations of contaminants than were known at the time the "Ground Water Work Plan" was prepared in March 1997. Due to the relatively low levels of contaminants detected, the Lumex Division proposed sampling the groundwater on a quarterly basis for two years to ensure that the groundwater was not significantly affected and deferred implementing the ground water work plan. The results of the quarterly ground-water sampling undertaken during 1998 and 1999 provide further support that the - 13 - 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) groundwater is not significantly contaminated. The Company will continue to monitor the quality of the groundwater to confirm that it remains acceptable. If the quality of the groundwater remains acceptable after the two year period expires, the Company will seek to withdraw its groundwater work plan. At September 30, 1999, the Company had reserves for the remediation costs and additional investigation costs which will be required. Reserves are established when it is probable that a liability has been incurred and such costs can be reasonably estimated. The Company's estimates of these costs were based upon currently enacted laws and regulations and the professional judgment of independent consultants and counsel. Where available information was sufficient to estimate the amount of liability, that estimate has been used. Where information was only sufficient to establish a range of probable liability and no point within the range is more likely than another, the lower end of the range has been used. The Company has not assumed that any such costs would be recoverable from third parties nor has the Company discounted any of its estimated costs, although a portion of the remediation work plan will be performed over a period of years. The amount of environmental liabilities is difficult to estimate due to such factors as the extent to which remedial actions may be required, laws and regulations change or the actual costs of remediation differ when the final work plan is performed. On August 3, 1998, the Company and another defendant, one of the Company's employees, were served with a lawsuit initiated by JOFRA Enterprises, Inc. ("JOFRA") in New York State Supreme Court, Westchester County. The derivative complaint, seeking damages of $25,000,000, alleged that the Company's hiring of a certain officer and employees of JOFRA constituted, among other things, unfair competition and wrongful appropriation of business opportunities. The Company defended this lawsuit vigorously and recently agreed to pay JOFRA $87,500 in full settlement for all claims made against the Company and its employee. On November 3, 1998, the Company and certain of its directors were named as defendants in a derivative suit commenced in the Court of Chancery of the State of Delaware, New Castle County. The lawsuit seeks to rescind a separation agreement dated as of July 29, 1998 (the "Separation Agreement"), pursuant to which Irwin Selinger resigned as Chairman of the Board, Chief Executive Officer and President of the Company. The lawsuit also seeks unspecified damages as well as the recovery of all sums paid to Mr. Selinger pursuant to the Separation Agreement. The plaintiff alleges that by approving the terms of the Separation Agreement, the defendants breached their fiduciary duties of loyalty and care to the Company by obligating the Company to pay Mr. Selinger substantially more than his former employment agreement had required. The Company considers the plaintiff's allegations to be without merit, and filed a motion to dismiss the complaint on various grounds in February 1999. The motion was argued in September 1999, and the parties are awaiting the Court's decision. In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a company acquired by Graham-Field in June 1997, asserted certain claims in the aggregate amount of approximately $3.2 million (inclusive of prejudgment interest) against Graham-Field relating to alleged material misrepresentations and omissions contained in the purchase agreement, certain press releases and other public filings made by the Company with the Securities and Exchange Commission relating to the Company's business, results of operations and financial condition. Under the terms of the purchase agreement pursuant to which Graham-Field acquired LaBac for approximately $9.1 million in common stock of Graham-Field, all claims that are not resolved between the parties are to be submitted to arbitration. The Company intends to defend the claims vigorously, but the Company is not currently able to evaluate the likelihood of success in this case or the range of potential loss. On June 28, 1999, the Irving Tanning Company ("ITC"), a company acquired as part of the acquisition of Fuqua on December 30, 1997 and sold by Graham-Field on January 27, 1998 to a group including the former management of ITC, asserted a claim for indemnification in the amount of $6.75 - 14 - 15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) million, plus attorney's fees and costs, against Graham-Field for certain alleged misrepresentations contained in the purchase agreement. The claim relates to an alleged material adverse change in the business of ITC from November 22, 1997 through January 27, 1998 and possibly prior to November 22, 1997. Under the terms of the purchase agreement, all claims that are not resolved between the parties may be submitted to arbitration and no indemnity payments shall be made unless all indemnity claims exceed $1.3 million. The Company considers the indemnity claims to be without merit and intends to defend the claims vigorously. The parties have selected a panel of arbitrators and are beginning discovery. The Company and its subsidiaries are parties to lawsuits and other proceedings, including those relating to product liability and the sale and distribution of its products. Except as discussed above, while the results of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the consolidated financial position or results of operations or cash flows of the Company. 11. SERIES D PREFERRED STOCK Effective as of May 12, 1999, BIL Securities (Offshore) Ltd. ("BIL") waived certain events of default under a $4 million note owing by the Company to BIL (the "BIL Note") and exchanged all of its right, title and interest under the BIL Note, in consideration of the issuance of 2,036 fully paid, validly issued, non-assessable shares of the Company's Series D Preferred Stock (the "Series D Preferred Stock"). The shares of Series D Preferred Stock are non-voting, but have substantially the same economic rights as 2,036,000 shares of Common Stock. Based on the closing price of the Common Stock on May 12, 1999, that number of shares would have a market value of $4,072,000, which equals the aggregate of the unpaid principal amount and accrued interest on the BIL Note. Simultaneously with the closing of such transaction, Graham-Field and BIL entered into an agreement dated as of May 12, 1999, which provided Graham-Field with the sole and exclusive option for a period of one year following May 12, 1999, to convene a meeting of its stockholders or take such other corporate action, in accordance with applicable laws and regulatory requirements, as may be required to obtain applicable corporate approval to exchange each share of Series D Preferred Stock for 1,000 shares of Common Stock. 12. CREDIT FACILITY On August 12, 1999, the Company entered into the August 1999 Amendment to its Credit Facility. Under the terms of the August 1999 Amendment, the Company was provided with a Term Loan of $4.5 million, secured by certain real estate and the existing collateral under the Credit Facility. The Term Loan bears interest at IBJ's prime rate plus 2% and provides for the repayment of principal at the rate of $250,000 per month commencing on September 1, 1999, and increasing to $500,000 on January 1, 2000, with a balloon payment due upon the maturity date of the Credit Facility. In addition, the August 1999 Amendment provides for, among other things, a reduction in the maximum revolving advance amount under the Credit Facility from $50 million to $35 million, the elimination of certain availability borrowing base reserves through December 31, 1999, and an amendment to certain financial covenants. Under the terms of the August 1999 Amendment, the interest rate on borrowings was increased from IBJ's prime rate (8.25% at September 30, 1999) plus one percent to IBJ's prime rate plus two percent. In connection with the August 1999 Amendment, the Company paid a commitment fee of $300,000 and a waiver fee of $400,000, which was provided for under the terms of the 1999 Amendments (as hereinafter defined). Under the terms of the August 1999 Amendment, the Company is required to pay an additional waiver fee (the "Waiver Fee") in the amount of $200,000 on or before December 31, 1999, unless the - 15 - 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES (UNAUDITED) Company either presents an acceptable business plan to the banks on or before December 31, 1999, or repays in full all outstanding obligations under the Credit Facility on or before December 31, 1999. Notwithstanding the foregoing, in the event the Company is in receipt on or before December 31, 1999, of a commitment letter, letter of intent or agreement to (i) sell substantially all or a part of the assets or equity securities of the Company in a sale, merger, consolidation or other similar transaction, which results in the repayment of all of the outstanding obligations under the Credit Facility, or (ii) refinance the indebtedness under the Credit Facility (the transactions referred to in clauses (i) and (ii) are individually referred to as a "Significant Transaction"), the payment date for the Waiver Fee will be extended until the earlier to occur of the consummation of a Significant Transaction, which results in the repayment of all outstanding obligations under the Credit Facility, or March 31, 2000. The Credit Facility is secured by substantially all of the assets of the Company, including the capital stock of certain of the Company's subsidiaries and certain real estate. The Company was not in compliance with the net cash flow covenant contained in the Credit Facility as of September 30, 1999 and also does not expect to be in compliance with the December 31, 1999 covenant. Amounts outstanding under the Credit Facility were $19.7 million and $23.8 million at November 12, 1999 and September 30, 1999, respectively. As of November 12, 1999, the Company had unused borrowing availability under the Credit Facility of $3.6 million. The Company is currently seeking a waiver of the covenant default from its lenders and/or an amendment to the financial covenants. Under the terms of the Credit Facility, the Company's lenders have the right to require immediate repayment of all amounts borrowed or limit future advances, however as of November 15, 1999, the lenders have not exercised such rights. In the event of a demand for repayment in the future, such demand would result in a cross default under the Indenture for the Company's $100 million Senior Subordinated Notes, resulting in such notes becoming due and immediately payable. As a result, the Company has classified its $100 million Senior Subordinated Notes as current liabilities on the September 30, 1999 balance sheet. In addition to seeking covenant waivers and/or amendments, the Company is also pursuing alternative financing sources. There can be no assurance that the Company will be successful in its efforts to receive waivers and/or amendments, improve its cash flow or that it will be able to obtain alternative financing on satisfactory terms in a timely manner to provide sufficient cash to fund its operations. Should the lenders under the agreements described above begin to exercise their remedies against the Company or if the Company makes a determination that it will not be able to fund its operations outside a bankruptcy, the Company would likely seek protection pursuant to Chapter 11 of the United States Bankruptcy Code. On April 22, 1999, the Company entered into an amendment to the Credit Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999 Amendments"). The 1999 Amendments provided for, among other things, the waiver of certain financial covenant defaults, an amendment to certain financial covenants, a new undrawn availability covenant relating to scheduled interest payments on the Senior Subordinated Notes, and other terms and provisions contained in the Credit Facility, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. The 1999 Amendments reduced the maximum revolving advance amount under the Credit Facility from $80 million to $50 million, and reduced and/or eliminated certain availability and borrowing base reserves. - 16 - 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements This report on Form 10-Q and the Company's report on Form 10-K for the year ended December 31, 1998 contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements include, but are not limited to, statements relating to (i) the Company's ability to continue as a going concern (ii) the Company's ability to reduce operating expenses and working capital investment and obtain additional financing to operate the business, (iii) the expansion of the Company's market share, (iv) the Company's growth into new markets, (v) the development of new products and product lines to appeal to the needs of the Company's customers, (vi) the consolidation of the Graham-Field Express distribution network, (vii) obtaining regulatory and governmental approvals, (viii) the upgrading of the Company's technological resources and systems, and (ix) the ability of the Company to implement its Year 2000 remediation plan and address the risk related to Year 2000 compliance. Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the Company's ability to continue as a going concern, the effect of economic and market conditions, the impact of the consolidation of healthcare practitioners, the impact of healthcare reform, the Company's ability to effectively integrate acquired companies, and realize certain manufacturing, operational and distribution efficiencies and cost savings, the termination of the Company's Wheelchair Supply Agreement with P.T. Dharma Polimetal ("P.T. Dharma"), an Indonesian company, the ability of the Company to maintain its gross profit margins, the ability to obtain financing and vendor credit support necessary to operate the Company's business, the ability of the Company to implement its Year 2000 remediation plan and address the risks related to Year 2000 compliance, the ability of the Company to successfully defend the class actions arising out of the Company's public announcement on March 23, 1998 of its financial results for the fourth quarter and year ended December 31, 1997, the failure of the Company to successfully compete with the Company's competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, adverse litigation results, the acceptance and quality of new software and hardware products which will enable the Company to expand its business, the acceptance and ability to manage the Company's operations in foreign markets, possible disruptions in the Company's computer systems or distribution technology systems, possible increases in shipping rates or interruptions in shipping service, the level and volatility of interest rates and currency values, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company's filings with the Securities and Exchange Commission, which include this report on Form 10-Q, the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and the Company's Registration Statement on Form S-4 dated as of December 19, 1997. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, expressed or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. - 17 - 18 Operating Revenues Operating revenues for the three and nine month periods ended September 30, 1999 were $67,647,000 and $226,718,000, respectively, representing a decrease of approximately 27% and 21%, respectively, from the same periods in the prior year. The decrease is primarily due to the implementation of more stringent credit policies, intense competition in the healthcare industry, the effect of the Company's product rationalization programs to eliminate unprofitable product lines, the negative impact of certain customers experiencing financial difficulty, reduced vendor credit support on certain distributed products and general market concerns regarding the future direction of the Company. Interest and Other Income Interest and other income for the three and nine month periods ended September 30, 1999 was $246,000 and $1,170,000, respectively, as compared to $685,000, and $1,620,000, respectively, for the same periods in the prior year. The net decrease is primarily due to interest income not recognized under a loan arrangement with P.T. Dharma and dividends not received from Irving Tanning in 1999. Cost of Revenues Cost of revenues as a percentage of operating revenues was 73.1% and 71.0%, respectively, for the three and nine month periods ended September 30, 1999, as compared to 69.1% and 69.0%, respectively, recorded in the same periods in the prior year. Gross margin decreased primarily due to intense competition and pricing pressures within the healthcare industry and lower factory utilization during 1999. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of operating revenues for the three and nine month periods ended September 30, 1999 were 42.5% and 39.1%, respectively, as compared to 34.1% and 31.7%, respectively, in the same periods in the prior year. The increase in selling, general and administrative expenses as a percentage of operating revenue is primarily the result of accounting, audit and other professional expenses associated with the accounting investigation conducted by the Company's Audit Committee relating to the Company's restatement of its financial results for 1996 and 1997, consulting fees incurred in connection with the initial implementation of the Company's strategic and operating business plan, certain severance charges and facility exit costs related to distribution center closures (collectively, the "Non-Recurring Expenses"), a significant decrease in operating revenues, higher bad debt expense in 1999, and costs related to the services rendered by Jay Alix & Associates. Excluding the Non-Recurring Expenses, selling, general and administrative expenses for the three and nine month periods ended September 30, 1999 were $27,425,000 and $82,568,000, respectively, as compared to $29,217,000 and $88,798,000, respectively, in the same periods in the prior year. The reduction in selling, general and administrative expenses is primarily related to (i) lower distribution and warehousing costs as a result of cost savings from certain distribution center closures in the first half of 1999 and lower variable distribution expenses (principally outbound freight) due to reduced revenues and (ii) lower selling and marketing expenses as a result of lower personnel costs, cost reduction programs and reduced commissions due to lower revenues. Class Action Settlement In August 1999, the Company reached an agreement in principle to settle the Class Action, subject to certain contingencies described below. By letter dated October 25, 1999, the Company advised the Court that the Company would not be in a position to proceed with the agreement in principle due to changed circumstances. Under the terms of the agreement in principle, the Class - 18 - 19 Action would have been settled for a payment of $20 million, of which $10 million would have been funded by the Company's insurance carrier and $10 million by the Company. The agreement in principle contemplated that the Company's $10 million contribution would be paid either from the proceeds of the sale of the Company or, at the Company's option, from funds otherwise available. Under the terms of the agreement in principle, in the event the shares of the common stock of the Company had been sold for an amount in excess of $3 per share pursuant to a definitive sale/merger agreement, the shareholder class would also be entitled to 25% of the premium in excess of $3 per share upon terms and conditions to be agreed upon between the parties. The plaintiffs may terminate the settlement if the Company does not enter into a definitive sale/merger agreement on or before December 31, 1999, unless the Company has funded its $10 million contribution to the settlement prior to an election to terminate the settlement by the plaintiffs. The Company recorded a provision of $10 million during the second quarter of 1999 reflecting the Company's share of the proposed settlement. Interest Expense Interest expense for the three and nine month periods ended September 30, 1999 was $3,062,000 and $9,395,000, respectively, as compared to $3,412,000 and $9,219,000, respectively, for the same periods in the prior year. The decrease for the three month period is the result of lower average borrowings under the Credit Facility for the period, partially offset by higher interest rates. The increase for the nine month period is due to a higher cost of borrowings under the Credit Facility, partially offset by a decreased level of borrowings. Net Loss Loss before income taxes for the three and nine month periods ended September 30, 1999 was $13,369,000 and $41,083,000, respectively, as compared to a loss before income taxes of $5,712,000 and $9,673,000 for the same periods in the prior year. The increase in the loss before income taxes was primarily due to a decrease in operating revenues, an increase in cost of revenues as a percentage of sales, an increase in selling, general and administrative expenses and a $10 million provision recorded for the proposed settlement of the Class Action. For the three and nine month periods ended September 30, 1999, the Company did not record an income tax benefit because a full valuation allowance was recorded against the net deferred tax assets. The Company recorded an income tax benefit of $1,287,000 for the third quarter of 1998. The Company's business has not been materially affected by inflation. Liquidity and Capital Resources Cash provided by operating activities for the nine months ended September 30, 1999 was $8,503,000 compared to cash used in operating activities of $32,174,000 in the same period in the prior year. This improvement is primarily due to a reduction in receivables, inventories and other current assets in 1999 and an increase in accounts payable and accruals in 1999, offset by a reduction in earnings before non-cash items in 1999. The reduction in inventories and receivables is the result of the implementation of initiatives to reduce inventory and collect past due receivables as well as a significant decline in sales. On August 12, 1999, the Company entered into the August 1999 Amendment to its Credit Facility, which provides for borrowings including letters of credit and bankers acceptances. Under the terms of the August 1999 Amendment, the Company was provided with a Term Loan of $4.5 million, secured by certain real estate and the existing collateral under the Credit Facility. The Term Loan bears interest at IBJ's prime rate plus 2% and provides for the repayment of principal at the rate of $250,000 - 19 - 20 per month commencing on September 1, 1999, and increasing to $500,000 on January 1, 2000, with a balloon payment due upon the maturity date of the Credit Facility. In addition, the August 1999 Amendment provides for, among other things, a reduction in the maximum revolving advance amount under the Credit Facility from $50 million to $35 million, the elimination of certain availability borrowing base reserves through December 31, 1999, and an amendment to certain financial covenants. Under the terms of the August 1999 Amendment, the interest rate on borrowings was increased from IBJ's prime rate (8.25% at September 30, 1999) plus one percent to IBJ's prime rate plus two percent. In connection with the August 1999 Amendment, the Company paid a commitment fee of $300,000 and a waiver fee of $400,000, which was provided for under the terms of the 1999 Amendment (as hereinafter defined). Under the terms of the August 1999 Amendment, the Company is required to pay an additional Waiver Fee in the amount of $200,000 on or before December 31, 1999, unless the Company either presents an acceptable business plan to the banks on or before December 31, 1999, or repays in full all outstanding obligations under the Credit Facility on or before December 31, 1999. Notwithstanding the foregoing, in the event the Company is in receipt on or before December 31, 1999, of a commitment letter, letter of intent or agreement to (i) sell substantially all or a part of the assets or equity securities of the Company in a sale, merger, consolidation or other similar transaction, which results in the repayment of all of the outstanding obligations under the Credit Facility, or (ii) refinance the indebtedness under the Credit Facility (the transactions referred to in clauses (i) and (ii) are individually referred to as a "Significant Transaction"), the payment date for the Waiver Fee will be extended until the earlier to occur of the consummation of a Significant Transaction, which results in the repayment of all outstanding obligations under the Credit Facility, or March 31, 2000. The Credit Facility is secured by substantially all of the assets of the Company, including the capital stock of certain of the Company's subsidiaries and certain real estate. The Company has incurred significant losses in 1999 and each of the three years in the period ended December 31, 1998. These losses have arisen as a result of declining sales and margins in 1999, a significant amount of merger, restructuring and other expenses incurred in connection with previous acquisitions, the failure to integrate effectively these acquisitions and realize the benefits and synergies to be derived therefrom and the impact of intense competition within the healthcare industry. The losses also included significant charges relating to provisions for accounts receivable, inventory and other asset write-offs in 1997 and 1998, a provision to increase the valuation allowance on deferred tax assets in 1998, and certain professional, consulting and other advisory fees and severance charges in 1999. Further, the Company and certain of its directors and officers have been named as defendants in at least fifteen putative class action lawsuits (the "Class Action") which have been consolidated into an amended complaint. In August 1999, the Company reached an agreement in principle to settle the Class Action, subject to certain contingencies described herein. However, as further described in Note 10, on October 25, 1999, the Company determined it would not be in a position to proceed with the agreement in principle due to changed circumstances. Management has continued with a program to reduce operating expenses, reduce the investment in working capital and take other actions to improve its cash flow. These actions include, but are not limited to, (i) the completion of the activities contemplated by the Company's restructuring plan as further described in Note 9; (ii) the initiation of inventory reduction and product rationalization programs; (iii) the tightening of credit policies and payment terms; (iv) the reduction in previously budgeted capital expenditures; (v) the implementation of streamlined product pricing and product return guidelines; (vi) the initiation of an aggressive program to collect past due accounts receivable; and (vii) the realignment and consolidation of sales forces and territories. Notwithstanding the actions described above, the Company's losses have continued to accelerate during 1999 and sales have continued to decline, resulting in decreased liquidity. The Company was not in compliance with the net cash flow covenant contained in its Credit Facility as of September 30, 1999 and also does not expect to be in compliance with the December 31, 1999 net cash - 20 - 21 flow covenant. Amounts outstanding under the Credit Facility (including the Term Loan described in Note 12) were $19.7 million and $23.8 million at November 12, 1999 and September 30, 1999, respectively. As of November 12, 1999, the Company had unused borrowing availability under the Credit Facility of $3.6 million. The Company is currently seeking a waiver of the covenant default from its lenders and/or an amendment to the financial covenants. Under the terms of the Credit Facility, the Company's lenders have the right to require immediate repayment of all amounts borrowed or limit future advances, however as of November 15, 1999, the lenders have not exercised such rights. In the event of a demand for repayment in the future, such demand would result in a cross default under the Indenture for the Company's $100 million Senior Subordinated Notes, resulting in such notes becoming due and immediately payable. As a result, the Company has classified its $100 million Senior Subordinated Notes as current liabilities on the September 30, 1999 balance sheet. In addition to seeking covenant waivers and/or amendments, the Company is also pursuing alternative financing sources. There can be no assurance that the Company will be successful in its efforts to receive waivers and/or amendments, improve its cash flow or that it will be able to obtain alternative financing on satisfactory terms in a timely manner to provide sufficient cash to fund its operations. Should the lenders under the agreements described above begin to exercise their remedies against the Company or if the Company makes a determination that it will not be able to fund its operations outside a bankruptcy, the Company would likely commence a Chapter 11 bankruptcy case under the United States Bankruptcy Code. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. On April 22, 1999, the Company entered into an amendment to the Credit Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999 Amendments"). The 1999 Amendments provided for, among other things, the waiver of certain financial covenant defaults, an amendment to certain financial covenants, a new undrawn availability covenant relating to scheduled interest payments on the Senior Subordinated Notes, and other terms and provisions contained in the Credit Facility, and an extension of the term of the Credit Facility from December 10, 1999 to May 31, 2000. The 1999 Amendments reduced the maximum revolving advance amount under the Credit Facility from $80 million to $50 million, and reduced and/or eliminated certain availability and borrowing base reserves. The Credit Facility contains certain customary terms and provisions, including limitations with respect to the repayment or prepayment of principal on subordinated debt, including the Senior Subordinated Notes, the incurrence of additional debt, liens, transactions with affiliates and certain consolidations, mergers and acquisitions and sales of assets. In addition, Graham-Field is prohibited from declaring or paying any dividend or making any distribution on any shares of common stock or preferred stock of Graham-Field (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or applying any of its funds, property or assets to the purchase, redemption or other retirement of any such shares, or of any options to purchase or acquire any such shares. Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay cash dividends in any fiscal year in an amount not to exceed the greater of (i) the amount of dividends due BIL under the terms of the Series B and Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of Graham-Field on a consolidated basis, provided that no event of default under the Credit Facility shall have occurred and be continuing or would exist after giving effect to the payment of the dividends. On August 4, 1997, Graham-Field issued its $100 million Senior Subordinated Notes (the - 21 - 22 "Senior Subordinated Notes") under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). On February 9, 1998, Graham-Field completed its exchange offer to exchange the outstanding Senior Subordinated Notes for an equal amount of the new Senior Subordinated Notes, which have been registered under the Securities Act. The new Senior Subordinated Notes are identical in all material respects to the previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The Senior Subordinated Notes are general unsecured obligations of Graham-Field, subordinated in right of payment to all existing and future senior debt of Graham-Field, including indebtedness under the Credit Facility. The Senior Subordinated Notes are guaranteed (the "Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis by all existing and future restricted subsidiaries of Graham-Field (the "Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in right of payment to all existing and future senior debt of the Guaranteeing Subsidiaries, including any guarantees by the Guaranteeing Subsidiaries of Graham-Field's obligations under the Credit Facility. The Company is a holding company with no assets or operations other than its investments in its subsidiaries. The subsidiary guarantors are wholly-owned subsidiaries of the Company and comprise all of the direct and indirect subsidiaries of the Company. Accordingly, the Company has not presented separate financial statements and other disclosures concerning each subsidiary guarantor because management has determined that such information is not material to investors. Under the terms of the Indenture, the Senior Subordinated Notes are not redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the Senior Subordinated Notes are redeemable, in whole or in part, at the option of Graham-Field, at certain redemption prices plus accrued and unpaid interest to the date of redemption. In addition, prior to August 15, 2000, Graham-Field may, at its option, redeem up to 25% of the aggregate principal amount of Senior Subordinated Notes originally issued with the net proceeds from one or more public offerings of common stock at a redemption price of 109.75% of the principal amount, plus accrued and unpaid interest to the date of redemption; provided that at least 75% of the aggregate principal amount of Senior Subordinated Notes originally issued remain outstanding after giving effect to any such redemption. The Indenture contains customary covenants including, but not limited to, covenants relating to limitations on the incurrence of additional indebtedness, the creation of liens, restricted payments, the sales of assets, mergers and consolidations, payment restrictions affecting subsidiaries and transactions with affiliates. In addition, in the event of a change of control of Graham-Field as defined in the Indenture, each holder of the Senior Subordinated Notes will have the right to require Graham-Field to repurchase such holder's Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Graham-Field will be required in certain circumstances to make an offer to purchase Senior Subordinated Notes at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase, with the net cash proceeds of certain asset sales. The Credit Facility, however, prohibits Graham-Field from purchasing the Senior Subordinated Notes without the consent of the lenders thereunder. In addition, the Indenture prohibits the Company from declaring or paying any dividend or making any distribution or restricted payment as defined in the Indenture (collectively, the "Restricted Payments") (other than dividends or distributions payable in capital stock of the Company), unless, at the time of such payment (i) no default or event of default shall have occurred and be continuing or would occur as a consequence thereof; (ii) the Company would be able to incur at least $1.00 of additional indebtedness under the fixed charge coverage ratio contained in the Indenture; and (iii) such Restricted Payment, together with the aggregate of all Restricted Payments made by the Company after the date of the Indenture is less than the sum of (a) 50% of the consolidated net income of the Company for the period (taken as one accounting period) beginning on April 1, 1997 to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of - 22 - 23 such Restricted Payment (or, if such consolidated net income for such period is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company from contributions of capital or the issue or sale since the date of the Indenture of capital stock of the Company or of debt securities of the Company that have been converted into capital stock of the Company. Effective as of May 12, 1999, BIL waived certain events of default under a $4 million note owing by the Company to BIL (the "BIL Note") and exchanged all of its right, title and interest under the BIL Note, in consideration of the issuance of 2,036 fully paid, validly issued, non-assessable shares of the Company's Series D Preferred Stock. The shares of Series D Preferred Stock are non-voting, but have substantially the same economic rights as 2,036,000 shares of Common Stock. Based on the closing price of the Common Stock on May 12, 1999, that number of shares would have a market value of $4,072,000, which equals the aggregate of the unpaid principal amount and accrued interest on the BIL Note. Simultaneously with the closing of such transaction, Graham-Field and BIL entered into an agreement dated as of May 12, 1999, which provided Graham-Field with the sole and exclusive option for a period of one year following May 12, 1999, to convene a meeting of its stockholders or take such other corporate action, in accordance with applicable laws and regulatory requirements, as may be required to obtain applicable corporate approval to exchange each share of Series D Preferred Stock for 1,000 shares of Common Stock. Year 2000 The following disclosure is a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. Graham-Field has developed, and is in the process of implementing, a Year 2000 ("Y2K") remediation plan, in an attempt to address the risks related to the Y2K readiness of information technology ("IT") systems, non-IT systems and products, and relationships with third parties. The Company has three major IT application environments: distribution, manufacturing and warehouse automation. Management has selected application packages that the Company believes are Y2K ready based upon representations from the supplier of such application packages. The distribution package includes the corporate general ledger, accounts payable, accounts receivable, purchasing, inventory control and order entry functions. General ledger, accounts payable and accounts receivable upgrades were completed in 1997. Purchasing and inventory control functions were completed in 1998, and the order entry and manufacturing system upgrades were all completed in 1999. Management believes, subject to completion of its review of the Y2K readiness of its critical business partners (as discussed below) and completion of testing, that the Distribution, Manufacturing, and Warehouse automation systems should be Y2K ready. With respect to each of these application environments, the Company is relying on the representations of suppliers and other third parties whose activities may impact the Company's business operations that they are Y2K ready. The Company has engaged external resources to perform independent Y2K evaluation and remediation of critical systems. The independent readiness testing and remediation for the Distribution and Warehouse Automation systems have been completed. The independent readiness testing for the Manufacturing system is in process and is expected to be completed not later than December 1999. The Company is in the process of reviewing its relationships with high-priority business partners, including such areas as payroll, electronic banking, EDI links, and freight systems, to determine their Y2K readiness status. The Company is relying primarily on the representations of these external parties about their Y2K readiness. The inability of the Company's high-priority business partners to be Y2K ready could have a material adverse effect on the business, financial position, and results of operations of the Company. With respect to non-IT system issues, the Company is in the process of assessing the Y2K readiness of its products to determine if there are any material issues associated with the Y2K problem, including any issues related to embedded technology in these products. Towards that end, the Company has identified its at-risk products (which include date data processing), prioritized these products, and identified and addressed pertinent Y2K concerns. - 23 - 24 The Company is assessing the Y2K readiness representations made by suppliers. Since the Company's Y2K plan is dependent in part upon these suppliers and other key third parties being Y2K ready, there can be no assurance that the Company's efforts in this area will be able to prevent a material adverse effect on the Company's business, financial position, and results of operations in future periods should a significant number of suppliers and customers experience business disruptions as a result of their lack of Y2K readiness. The Y2K readiness of the Company's products is posted on the Graham-Field web site (www.grahamfield.com). In the event that the Company's IT and non-IT systems are not Y2K ready, the most reasonably likely worst case scenario is a material adverse effect on the Company's business, financial position, and results of operations in future periods. The Company is creating a contingency plan to address potential Y2K failures of its critical IT and non-IT systems. This contingency plan will include, but not be limited to, identification and mitigation of potentially serious business interruptions, adjustment of inventory levels to meet customer needs, and establishment of crisis response processes to address unexpected problems. In developing the contingency plan, the Company will be prioritizing its applications and developing emergency measures to address potential failures of applications that are deemed significant to the Company's business operations. Moreover, the Company's contingency plans will attempt to address Y2K risks in connection with potential Y2K failures experienced by third parties such as suppliers. A Y2K program manager has been assigned to coordinate the computer system upgrades and the Company's Y2K readiness plan. In 1998, the Company expended approximately $150,000 on its Y2K plan, primarily related to the costs of outside consulting and review services. In 1999, the Company expects to expend approximately $250,000 for outside consulting assistance, and $250,000 in the form of capital equipment leases to replace equipment that is determined not to be Y2K ready. In addition, in 1999, the Company expects to expend $150,000 for an independent Y2K audit, and approximately $350,000 to undertake and complete system testing. The Company's upgrades of IT systems were not accelerated because of Y2K issues, and accordingly, such costs are not included in the costs of the Y2K plan. With respect to non-IT system issues, the Company is unable to estimate its remediation costs since it does not have information available upon which to measure the cost of Y2K readiness in the non-IT system areas. At this time, Management does not believe that such costs will have a material effect on the business, financial position, and results of operations of the Company. The Company's statements regarding its Y2K readiness are forward-looking and, therefore, subject to change as a result of known and unknown factors. The estimates and expected completion dates described above are based on information available at this time and may change as additional information and assessment phase results become available. - 24 - 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 1999, the Company did not hold any derivative financial or commodity instruments. The Company is subject to interest rate risk and certain foreign currency risk relating to its operations in Mexico and Canada; however, the Company does not consider its exposure in such areas to be material. The Company's interest rate risk is related to its Senior Subordinated Notes, which bear interest at a fixed rate of 9.75%, and borrowings under its Credit Facility, as further described in Note 12 to the Condensed Consolidated Financial Statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 10 to the Condensed Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS The 1999 annual meeting of shareholders was held on August 16, 1999. Directors elected at the meeting were Rupert O.H. Morley and Louis A. Lubrano. In addition, a proposal to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the 1999 fiscal year was approved. The tabulation of votes for these matters is as follows: 1. Election of Directors
DIRECTOR FOR % AGAINST % ABSTAINED -------- --- -- ------- -- --------- Rupert O.H. Morley 30,755,696 85 459,366 1 0 Louis A. Lubrano 30,753,407 85 461,655 1 0
2. Appointment of Ernst & Young LLP
FOR % AGAINST % ABSTAINED % --- -- ------- -- --------- -- 28,090,784 78 3,052,575 8 71,703 *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. 3.6 - Amendment to Graham-Field's By-Laws, dated October 21, 1999. Reports on Form 8-K: Not applicable. - ------------- *less than 1%. - 25 - 26 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GRAHAM-FIELD HEALTH PRODUCTS, INC. (Registrant) Date: November 16, 1999 /s/ John G. McGregor ---- ------------------------------------- John G. McGregor President and Chief Executive Officer Date: November 16, 1999 /s/ Robert J. Gluck ---- ------------------------------------- Robert J. Gluck Senior Vice President and Chief Financial Officer
- 26 - EX-3.6 2 AMENDMENT TO BY-LAWS 1 Exhibit 3.6 AMENDMENT TO BY-LAWS OF GRAHAM-FIELD HEALTH PRODUCTS, INC. OCTOBER 21, 1999 The By-laws of Graham-Field Health Products, Inc. are hereby amended as follows: Article V of the By-laws shall be amended in its entirety to read as follows: "ARTICLE V INDEMNIFICATION A. The Corporation shall, to the fullest extent permitted by the General Corporation Law of Delaware, indemnify any and all persons whom it shall have power to indemnify against any and all expenses, liabilities or other matters. B. In addition to Article V A., the following provisions shall also be effective as of October 21, 1999: Section 1. Indemnity Undertaking. To the extent not prohibited by law, the Corporation shall indemnify any person who is or was made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, including, without limitation, an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a Director or Officer of the Corporation, or, at the request of the 2 Corporation, is or was serving as a Director or Officer of any other corporation or in a capacity with comparable authority or responsibilities for any partnership, joint venture, trust, employee benefit plan or other enterprise (an "Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees, disbursements and other charges). Persons who are not directors or officers of the Corporation (or otherwise entitled to indemnification pursuant to the preceding sentence) may be similarly indemnified in respect of service to the Corporation or to an Other Entity at the request of the Corporation to the extent the Board at any time specifies that such persons are entitled to the benefits of this Article V. Section 2. Advancement of Expenses. From and after October 21, 1999, the Corporation shall, from time to time, reimburse or advance to any Director or Officer or other person entitled to indemnification hereunder the funds necessary for payment of expenses, including attorneys' fees and disbursements, incurred in connection with any Proceeding, in advance of the final disposition of such Proceeding ("Advances"); provided, however, that, if required by the General Corporation Law of Delaware (the "General Corporation Law"), such expenses incurred by or on behalf of any Director or Officer or other person may be paid in advance of the final disposition of a Proceeding only upon receipt by the Corporation of an undertaking, by or on behalf of such Director or Officer (or other person indemnified hereunder), to repay any such Advances 3 if it shall ultimately be determined by final judicial decision from which there is no further right of appeal that such Director, Officer or other person is not entitled to be indemnified for such expenses. Notwithstanding the foregoing, the making of any Advances to any person who is not a Director or Officer of the Corporation as of October 21, 1999, shall be in the discretion of the Corporation and subject to the provisions of Section 145(e) of the General Corporation Law. Section 3. Rights Not Exclusive. The rights to indemnification and Advances provided by, or granted pursuant to, this Article V shall not be deemed exclusive of any other rights to which a person seeking indemnification or reimbursement or advancement of expenses may have or hereafter be entitled under any statute, the Certificate of Incorporation, these Bylaws, any agreement, any vote of stockholders or disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. Section 4. Continuation of Benefits. The rights to indemnification and Advances provided by, or granted pursuant to, this Article V shall continue as to a person who has ceased, or who after October 21, 1999 ceases, to be a Director or Officer (or other person indemnified hereunder) and shall inure to the benefit of the executors, administrators, legatees and distributees of such person. Section 5. Binding Effect. The provisions of this Article V shall be a contract between the Corporation, on the 4 one hand, and each Director and Officer who serves in such capacity at any time while this Article V is in effect and any other person entitled to indemnification hereunder, on the other hand, pursuant to which the Corporation and each such Director, Officer or other person intend to be, and shall be, legally bound. No repeal or modification of this Article V shall affect any rights or obligations with respect to any state of facts then or theretofore existing or thereafter arising or any proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. Section 6. Procedural Rights. The rights to indemnification and Advances provided by, or granted pursuant to, this Article V shall be enforceable by any person entitled to such indemnification or Advances in any court of competent jurisdiction. The burden of proving that such indemnification or Advances is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that such indemnification or Advances is proper in the circumstances nor an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) that such person is not entitled to such indemnification or Advances shall constitute a defense to the action or create a presumption that such person is not so entitled. Such a person shall also be indemnified for any expenses incurred in connection with successfully establishing 5 his or her right to such indemnification or Advances, in whole or in part, in any such proceeding. Section 7. Service Deemed at Corporation's Request. Any Director or Officer of the Corporation serving in any capacity (a) another corporation of which a majority of the shares entitled to vote in the election of its Directors is held, directly or indirectly, by the Corporation or (b) any employee benefit plan of the Corporation or any corporation referred to in clause (a) shall be deemed to be doing so at the request of the Corporation. Section 8. Election of Applicable Law. Any person entitled to be indemnified or to Advances as a matter of right pursuant to this Article V may elect to have the right to indemnification or Advances interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or Advances is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or Advances is sought; provided, however, that if no such notice is given, the right to indemnification or Advances shall be determined by the law in effect at the time indemnification or Advances is sought." EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AS INCLUDED IN THE FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 3,348 0 73,274 0 45,642 130,268 40,584 0 383,963 188,067 2,126 0 35,672 789 146,350 383,963 226,718 228,053 160,901 160,901 88,840 10,000 9,395 (41,083) 0 (41,083) 0 0 0 (41,083) (1.33) (1.33)
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