As filed with the Securities and Exchange Commission on December 27, 1996
Registration No. 333-11955
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE LEHIGH GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 5063 13-1920670
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification
Number)
THE LEHIGH GROUP INC.
810 SEVENTH AVENUE
27TH FLOOR
NEW YORK, NEW YORK 10019
(212) 333-2620
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------------
SALVATORE J. ZIZZA
THE LEHIGH GROUP INC.
810 SEVENTH AVENUE
27TH FLOOR
NEW YORK, NEW YORK 10019
(212) 333-2620
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------------
Copies to:
GARY EPSTEIN, ESQ. ILAN K. REICH, ESQ.
GREENBERG TRAURIG OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
1221 BRICKELL AVENUE 505 PARK AVENUE
MIAMI, FLORIDA 33131 NEW YORK, NEW YORK 10022
(305) 579- 0623 (212) 753-7200
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed Maximum Amount of
Title of Each Class of Amount to be Proposed Maximum Aggregate Offering Registration
Securities to be Registered Registered Offering Price Per Share*** Price Fee**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 10,339,250 $0.25 $2,584,813 $891.48
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Convertible Preferred Stock 951,210 $0.01 $ 9,512 $ 3.28
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon conversion of 237,802,750 N/A* N/A* N/A*
Series A Convertible Preferred Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Total $891.48
====================================================================================================================================
</TABLE>
<PAGE>
* In accordance with Rule 457(i)
** $3,713 was previously paid on September 13, 1996.
*** Based on the closing price of Lehigh common stock on the New York
Stock Exchange on December 18, 1996.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
-2-
<PAGE>
THE LEHIGH GROUP INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE
LOCATION OF INFORMATION REQUIRED BY PART I OF
FORM S-4
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION OR CAPTION IN PROSPECTUS
- -------- ------- ---------------------------------
<S> <C> <C>
Item 1 Forepart of Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
Item 2 Inside Front and Outside Back Cover Inside Front Cover Page; Table of
Pages of Prospectus Contents; Available Information
Item 3 Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors; Business
Charges and Other Information Information Regarding Lehigh and Merger
Sub; Business Information Regarding
FMC
Item 4 Terms of the Transaction Proposal No. 1 -- The Merger; Certain
Federal Income Tax Consequences;
Description of Lehigh's Capital Stock;
Comparison of Certain Rights of
Stockholders
Item 5 Pro Forma Financial Information Financial Statements
Item 6 Material Contracts with the Company Not Applicable
Being Acquired
Item 7 Additional Information Required for Not Applicable
Reoffering by Persons and Parties
Deemed to Be Underwriters
Item 8 Interests of Named Experts and Counsel Legal Matters; Experts
Item 9 Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
Item 10 Information with Respect to S-3 Not Applicable
Registrants
Item 11 Incorporation of Certain Information by Not Applicable
Reference
Item 12 Information with Respect to S-2 or S-3 Not Applicable
Registrants
Item 13 Incorporation of Certain Information by Not Applicable
Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Item 14 Information with Respect to Registrants Summary; Risk Factors; Business
Other than S-2 or S-3 Registrants Information Regarding Lehigh and Merger
Sub; Lehigh Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business Information
Regarding FMC; FMC Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Financial Statements
Item 15 Information with Respect to S-3 Not Applicable
Companies
Item 16 Information with Respect to S-2 or S-3 Not Applicable
Companies
Item 17 Information with Respect to Companies Not Applicable
Other than S-2 or S-3 Companies
Item 18 Information if Proxies, Consents or Summary; Introduction; Proposal No. 1 --
Authorizations are to be Solicited The Merger; Proposal No. 2 -- The
Certificate Amendments; Proposal No. 3 --
Election of Directors; Proposal No. 4 --
Ratification of Independent Auditors;
Security Ownership of Certain Beneficial
Owners of Lehigh
Item 19 Information if Proxies, Consents or Not Applicable
Authorizations are not to be Solicited, or
in an Exchange Offer
</TABLE>
<PAGE>
THE LEHIGH GROUP INC.
810 SEVENTH AVENUE
27TH FLOOR
NEW YORK, NEW YORK 10019
January __, 1997
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
of The Lehigh Group Inc. ("Lehigh"), which will be held on January __, 1997, at
______________________________________ at ____ Eastern Time (the "Special
Meeting").
At this meeting, you will be asked to consider and vote upon a proposal
(the "Merger Proposal") to approve the proposed merger (the "Merger") of Lehigh
Management Corp., a wholly-owned subsidiary of Lehigh ("Merger Sub") , into
First Medical Corporation ("FMC"), pursuant to an Agreement and Plan of Merger
dated as of October 29, 1996, as amended (the "Merger Agreement"), among Lehigh,
FMC and Merger Sub.
If the Merger Proposal is approved by stockholders, each share of the
Common Stock of FMC (the "FMC Common Stock") would be exchanged for (i)
1,033.925 shares of the Common Stock, $.001 par value per share (the "Lehigh
Common Stock") , of Lehigh and (ii) 95.1211 shares of the Series A Convertible
Preferred Stock, par value $.001 (the "Lehigh Preferred Stock"), of Lehigh. As
more fully described in the accompanying Proxy Statement/Prospectus, each share
of Lehigh Preferred Stock will be convertible into 250 shares of Lehigh Common
Stock and will have a like number of votes per share, voting together with the
Lehigh Common Stock. As a result of these actions, immediately following the
Merger, current Lehigh stockholders and FMC stockholders will each own 50% of
the issued and outstanding shares of Lehigh Common Stock. In the event that all
of the shares of Lehigh Preferred Stock issued to the FMC stockholders are
converted into Lehigh Common Stock, current Lehigh stockholders will own
approximately 4% and FMC stockholders will own approximately 96% of the issued
and outstanding shares of Lehigh Common Stock.
Approval of the Merger will also constitute approval of an amendment to
the Restated Certificate of Incorporation of Lehigh to provide for "blank check"
preferred stock by delegating to the Lehigh Board of Directors the authority to
designate, and to fix the number, rights, preferences, restriction and
limitations of, one or more series of preferred stock (including the Lehigh
Preferred Stock to be issued in connection with the Merger).
You will also be asked at the Special Meeting to vote on: (1) the
adoption of amendments to the Restated Certificate of Incorporation of Lehigh,
which will amend the current Certificate of Incorporation by: (A) changing the
name of the corporation from "The Lehigh Group Inc." to "First Medical Group,
Inc."; (B) eliminating cumulative voting for directors; (C) eliminating action
by stockholders by written consent; (D) fixing the number of members of the
Board of Directors at between seven and eleven, as determined from time-to-time
by the Board of Directors; and (E) requiring any further amendment to the
provisions of the Certificate of Incorporation addressed by items (B) through
(D) to require the vote of the holders of at least 60% of the outstanding shares
of Lehigh Common Stock (collectively, the "Certificate Amendments"); (2) the
election of seven directors to the Board of Directors; (3) ratification of the
appointment of BDO Seidman, LLP as the independent certified public accountants
for Lehigh for the fiscal year ending December 31, 1996; and (4) such other
business as may properly come before the Special Meeting or any adjournments
thereof.
The accompanying Proxy Statement/Prospectus provides detailed
information concerning the Merger and certain additional information. You are
urged to read and carefully consider this information.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER AND THE MERGER
AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, LEHIGH. THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, AND RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
<PAGE>
All stockholders are invited to attend the Special Meeting in person.
Approval of the Merger Proposal and the "blank check" preferred stock will
require the affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock. Adoption of the Certificate Amendments eliminating cumulative
voting for directors and fixing the number of directors at between six and nine
requires the affirmative vote of the holders of a majority of the outstanding
shares of Lehigh common stock or 80% of such shares voting at the Special
Meeting, whichever is greater. Adoption of the other Certificate Amendments
requires the affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock. The election of directors requires the affirmative vote of a
plurality of the votes cast by all stockholders represented and entitled to vote
thereon. As of the Record Date for the Special Meeting, FMC is the beneficial
owner of six million shares of Lehigh Common Stock, which represents
approximately 37% of the issued and outstanding Lehigh Common Stock.
Because of the significance of the proposed transaction to Lehigh, your
participation in the Special Meeting, in person or by proxy, is especially
important.
In order that your shares may be represented at the Special Meeting,
you are urged to complete, sign, date and return promptly the accompanying Proxy
in the enclosed envelope, whether or not you plan to attend the Special Meeting.
If you attend the Special Meeting in person, you may, if you wish, vote
personally on all matters brought before the Special Meeting even if you have
previously returned your Proxy.
Sincerely,
Salvatore J. Zizza
President and Chief Executive Officer
<PAGE>
THE LEHIGH GROUP INC.
810 SEVENTH AVENUE
27TH FLOOR
NEW YORK, NEW YORK 10019
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on January ___, 1997
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders of The
Lehigh Group Inc. ("Lehigh") will be held on January __, 1997, at
_____________________________ at ____ __.m., Eastern Time (the "Special
Meeting"), for the following purposes:
1. To consider and to vote on a proposal (the "Merger Proposal") to
approve the proposed merger (the "Merger") of Lehigh Management Corp., a
Delaware corporation and a wholly-owned subsidiary of Lehigh ("Merger Sub"),
with and into First Medical Corporation, a Delaware corporation ("FMC"),
pursuant to an Agreement and Plan of Merger dated as of October 29, 1996, as
amended (the "Merger Agreement"), among Lehigh, FMC and Merger Sub, a copy of
which is attached to the accompanying Proxy Statement/Prospectus as Appendix A.
Approval of the Merger will also constitute approval of an amendment to the
Restated Certificate of Incorporation of Lehigh to provide for "blank check"
preferred stock by delegating to the Lehigh Board of Directors the authority to
designate, and to fix the number, rights, preferences, restriction and
limitations of, one or more series of preferred stock (including the Series A
Convertible Preferred Stock to be issued in connection with the Merger).
2. To approve the adoption of amendments to the Restated Certificate of
Incorporation of Lehigh which will amend the current Certificate of
Incorporation by: (A) changing the name of the corporation from "The Lehigh
Group Inc." to "First Medical Group, Inc." ; (B) eliminating cumulative voting
for directors; (C) eliminating action by stockholders by written consent; (D)
fixing the number of members of the Board of Director at between seven and
eleven, as determined from time-to-time by the Board of Directors; and (E)
requiring any further amendment to the provisions of the Certificate of
Incorporation addressed by items (B) through (D) to require the vote of the
holders of at least 60% of the outstanding shares of Lehigh Common Stock
(collectively, the "Certificate Amendments").
3. To elect seven directors of Lehigh to serve for a one year term and
until their successors are elected and qualify;
4. To confirm the appointment of BDO Seidman, LLP as the independent
certified public accountants for Lehigh for the year ending December 31, 1996;
and
5. To transact such other business as may properly come before the
meeting.
The foregoing items of business are more fully described in the Proxy
Statement/Prospectus accompanying this Notice.
Only stockholders of record at the close of business on January __,
1997 are entitled to notice of, and to vote at, the meeting and any adjournments
thereof.
All stockholders are invited to attend the Special Meeting in person.
Approval of the Merger Proposal and the "blank check" preferred stock will
require the affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock. Adoption of the Certificate Amendments eliminating cumulative
voting for directors and fixing the number of directors at between seven and
eleven requires the affirmative vote of the holders of a majority of the
outstanding shares of Lehigh common stock or 80% of such shares voting at the
Special Meeting, whichever is greater. Adoption of the other Certificate
Amendments requires the affirmative vote of a majority of the outstanding shares
of Lehigh common stock. The election of directors requires the affirmative vote
of a plurality of the votes cast by all stockholders represented and entitled to
vote thereon. As of the Record Date for the Special Meeting, FMC is the
beneficial owner of six million shares of Lehigh common stock, which represents
approximately 37% of the issued and outstanding shares of Lehigh common stock.
<PAGE>
THE BOARD OF DIRECTORS OF LEHIGH RECOMMENDS THAT STOCKHOLDERS VOTE TO
APPROVE THE MERGER PROPOSAL AND THE OTHER MATTERS TO BE PRESENTED AT THE SPECIAL
MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Robert A. Bruno
Secretary
New York, New York
January __, 1997
YOUR VOTE IS IMPORTANT
To ensure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. To revoke a proxy, you must
submit to the Secretary of Lehigh prior to voting, either a signed instrument of
revocation or a duly executed proxy bearing a date or time later than the proxy
being revoked. If you attend the meeting, you may vote in person even if you
previously returned a proxy.
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION......................................................... 2
SUMMARY ..................................................................... 3
The Companies........................................................ 3
Meeting of Stockholders of Lehigh ................................... 3
The Merger........................................................... 4
Price Range of Lehigh Common Stock................................... 8
Summary Financial Information........................................ 9
RISK FACTORS................................................................10
RISK FACTORS RELATED TO LEHIGH.......................................10
RISK FACTORS RELATING TO FMC.........................................11
INTRODUCTION..................................................................15
Meeting of Stockholders..............................................15
Purpose of Meeting.................................................15
Voting Requirements at the Meeting...................................15
Proxies ............................................................16
PROPOSAL NO. 1 -- THE MERGER..................................................17
General ............................................................17
Background to the Merger.............................................17
Lehigh Reasons For the Merger; Recommendation of the Lehigh Board....22
Federal Income Tax Consequences......................................22
Accounting Treatment..........................................................22
Interests of Certain Members of Lehigh Management in the Merger... .23
Management After the Merger..........................................23
Stock Options........................................................24
No Appraisal Rights..................................................24
Trading Market.......................................................24
Effective Time.......................................................24
The Merger...........................................................24
Exchange of Shares...................................................25
Fractional Shares....................................................26
Registration and Listing of Share Consideration......................26
Representations and Warranties.......................................26
Covenants............................................................26
No Solicitation; Transaction Moratorium..............................26
Access to Information................................................27
Additional Covenants.................................................27
Conditions to the Merger.............................................27
Termination and Termination Expenses.................................28
Governmental and Regulatory Approvals................................28
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................28
Consequences to Lehigh and FMC.......................................29
Consequences to FMC Stockholders.....................................29
Limitations on Description...........................................29
PROPOSAL NO. 2 -- THE CERTIFICATE AMENDMENTS..................................29
Part A -- Changing the Name of the Corporation from
"The Lehigh Group Inc." to "First Medical
Group, Inc.".............................................. 30
Part B -- Eliminating Cumulative Voting for Directors................30
Part C -- Eliminating Action by Stockholders by Written Consent......32
Part D -- Fixing the Number of Directors at between Seven and
Eleven.................................................... 32
<PAGE>
Part E -- Requiring any Further Amendment to the Provisions
of the Certificate of Incorporation addressed by
Parts (B) through (D) to Require the Vote of the
holders of at Least 60% of the Outstanding Shares
of Lehigh Common Stock.................................... 33
PROPOSAL NO. 3 -- ELECTION OF DIRECTORS...................................... 34
PROPOSAL NO. 4 -- RATIFICATION OF INDEPENDENT AUDITORS....................... 44
BUSINESS INFORMATION REGARDING LEHIGH AND MERGER SUB ........................ 45
Lehigh ........................................................... 45
Merger Sub.......................................................... 47
LEHIGH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 48
Results of Operations............................................... 48
DESCRIPTION OF LEHIGH'S CAPITAL STOCK........................................ 53
BUSINESS INFORMATION REGARDING FMC........................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LEHIGH.................... 68
LEGAL MATTERS................................................................ 71
EXPERTS .................................................................... 71
FINANCIAL STATEMENTS.........................................................F-1
APPENDIX A: MERGER AGREEMENT................................................A-1
APPENDIX B: SERIES A CONVERTIBLE PREFERRED STOCK............................B-1
<PAGE>
THE LEHIGH GROUP INC.
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY __, 1997
This Proxy Statement/Prospectus and the accompanying forms of proxy are
being furnished in connection with the solicitation of proxies by the Board of
Directors of The Lehigh Group Inc., a Delaware corporation ("Lehigh"), to be
used at the Special Meeting of Stockholders of Lehigh to be held on January __,
1997 at ______ Eastern Time at _______________, (the "Meeting"). This Proxy
Statement/Prospectus and the accompanying form of proxy is first being mailed to
stockholders of Lehigh on or about January __, 1997.
At the Meeting the stockholders of Lehigh will consider and vote on
Proposal No. 1 (the "Merger Proposal") -- to approve and adopt the Agreement and
Plan of Merger dated as of October 29, 1996, as amended, (the "Merger
Agreement"), among Lehigh, First Medical Corporation, a Delaware corporation
("FMC" or the "Company") and Lehigh Management Corp., a Delaware corporation and
a wholly-owned subsidiary of Lehigh ("Merger Sub"). The Merger Agreement
provides for the merger (the "Merger") of Merger Sub with and into FMC, with FMC
to be the surviving corporation (the "Surviving Corporation").
In the Merger, each share of the Common Stock of FMC (the "FMC Common
Stock") would be exchanged for (i) 1,033.925 shares of the Common Stock, $.001
par value per share (the "Lehigh Common Stock") , of Lehigh and (ii) 95.1211
shares of the Series A Convertible Preferred Stock, par value $.001 (the "Lehigh
Preferred Stock"), of Lehigh. Each share of Lehigh Preferred Stock will be
convertible into 250 shares of Lehigh Common Stock and will have a like number
of votes per share, voting together with the Lehigh Common Stock. Approval of
the Merger shall also constitute approval of an amendment to the Restated
Certificate of Incorporation of Lehigh to provide for "blank check" preferred
stock by delegating to the Lehigh Board of Directors the authority to designate,
and to fix the number, rights, preferences, restriction and limitations of, one
or more series of preferred stock (including the Lehigh Preferred Stock to be
issued in connection with the Merger). As a result of these actions, immediately
following the Merger, current Lehigh stockholders and FMC stockholders will each
own 50% of the issued and outstanding shares of Lehigh Common Stock . In the
event that all of the shares of Lehigh Preferred Stock issued to the FMC
stockholders are converted into Lehigh Common Stock , current Lehigh
stockholders will own approximately 4% and FMC stockholders will own
approximately 96% of the issued and outstanding shares of Lehigh Common Stock.
At the Meeting, the stockholders of Lehigh will also vote on: Proposal
No. 2 -- the adoption of amendments to the Restated Certificate of Incorporation
of Lehigh, which will amend the current Certificate of Incorporation by: (A)
changing the name of the corporation from "The Lehigh Group Inc." to "First
Medical Group, Inc."; (B) eliminating cumulative voting for directors; (C)
eliminating action by stockholders by written consent; (D) fixing the number of
members of the Board of Directors at between seven and eleven, as determined
from time to time by the Board of Directors; and (E) requiring any further
amendment to the provisions of the Certificate of Incorporation addressed by
items (B) through (D) to require the vote of the holders of at least 60% of the
outstanding shares of Lehigh Common Stock (collectively, the "Certificate
Amendments"); Proposal No. 3 -- the election of seven directors to the Board of
Directors; and Proposal No. 4 -- ratification of the appointment of BDO Seidman,
LLP as the independent certified public accountants for Lehigh for the fiscal
year ending December 31, 1996.
STOCKHOLDERS ARE URGED TO CAREFULLY CONSIDER THIS
PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE
FACTORS DISCUSSED UNDER THE HEADING "RISK FACTORS" AT PAGE 10 .
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
<PAGE>
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is January __, 1997.
This Proxy Statement/Prospectus also serves as a Prospectus of Lehigh
under the Securities Act of 1933, as amended (the "Securities Act"), relating to
the shares of Lehigh Common Stock and Lehigh Preferred Stock issuable in
connection with the Merger, and the shares of Lehigh Common Stock issuable upon
conversion of the Lehigh Preferred Stock.
No person is authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus,
and if given or made, such information or representation should not be relied
upon as having been authorized. This Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Proxy Statement/Prospectus, or the solicitation of a
proxy, in any jurisdiction in which such offer or solicitation may not lawfully
be made. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities pursuant to this Proxy Statement/Prospectus shall,
under any circumstances, create an implication that there has been no change in
the information set forth herein since the date of this Proxy
Statement/Prospectus.
AVAILABLE INFORMATION
Lehigh is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "SEC"). Reports and other information filed by Lehigh can be
inspected and copied at the public reference facilities at the SEC's office at
450 Fifth Street, N.W., Washington, D.C. 20549, at the SEC's Regional Office at
Seven World Trade Center, New York, New York 10048 and at the SEC's Regional
Office at Citicorp Center, 500 W. Madison Street, Chicago, Illinois 60621.
Copies of such material can be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material and other information concerning Lehigh can be inspected and copied at
the offices of the New York Stock Exchange, 20 Broad Street, Inc., New York, New
York 10005. Such material may also be accessed electronically by means of the
SEC's home page on the Internet at http://www.sec.gov.
Lehigh has filed with the SEC a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act covering the securities
described herein. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Statements
contained herein or incorporated herein by reference concerning the provisions
of documents are summaries of such documents, and each statement is qualified in
its entirety by reference to the applicable document if filed with the SEC or
attached as an appendix hereto. For further information, reference is hereby
made to the Registration Statement and the exhibits filed therewith. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
2
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. This Summary does not contain a
complete statement of all material features of the proposals to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Proxy Statement/Prospectus and in the Appendices annexed
hereto.
THE COMPANIES
Lehigh........................................ Lehigh (formerly The LVI Group
Inc.) through its wholly-owned
subsidiary, HallMark Electrical
Supplies Corp. ("HallMark"), is
engaged in the distribution of
electrical supplies for the
construction industry both
domestically (primarily in the
New York Metropolitan area) and
for export. See "Business
Information Regarding Lehigh and
Merger Sub."
On January __, 1997, there were
16,339,250 shares of Lehigh
Common Stock outstanding and
entitled to vote at the Special
Meeting.
Lehigh's executive offices are
located at 810 Seventh Avenue,
27th Floor, New York, New York
10019, and its telephone number
is (212) 333-2620.
FMC........................................... FMC is an owner-manager and
provider of management and
consulting services to
physicians, hospitals and other
health care delivery
organizations and facilities.
FMC's diversified operations are
currently conducted through
three divisions: (i) a physician
practice management division
which provides physician
management services including
the operation of clinical
facilities and management
services to Medical Service
Organizations, (ii) an
international division which
currently manages western style
medical centers in Eastern
Europe and the Commonwealth of
Independent States (formerly
Russia) (the "CIS") and (iii) a
recently formed health care
services division which provides
a variety of administrative and
clinical services to acute care
hospitals and other health care
providers. FMC was formed in
January 1996 pursuant to the
reorganization of MedExec, Inc.,
a Florida corporation, and it
subsidiaries and American
Medical Clinics, Inc., a
Delaware corporation, and its
subsidiaries. See "Business
Information Regarding FMC."
MEETING OF STOCKHOLDERS OF LEHIGH
Time, Date, Place and Purposes................ The Lehigh Special Meeting will
be held on January __, 1997 at
_________, Eastern Time, at
_______________________.
3
<PAGE>
At the Meeting, Lehigh
stockholders will be asked to
consider and vote upon proposals
to approve the Merger Agreement,
a copy of which is attached
hereto as Appendix A. Lehigh
stockholders will also be asked
to consider certain charter
amendments and the election of
seven directors. See
"Introduction -- Meeting of
Stockholders and -- Purpose of
Meeting."
Record Date, Vote Required.................... The record date for stockholders
of Lehigh entitled to vote upon
the Merger is January __, 1997
(the "Record Date"). Approval of
the Merger Proposal by the
Lehigh stockholders requires the
affirmative vote of a majority
of the outstanding shares of
Lehigh Common Stock. If the
Merger is not approved by
stockholders , the Merger will
not be effected and the current
directors of Lehigh will
continue to serve. The presence,
either in person or by properly
executed proxy, at the Meeting
of the holders of a majority of
the outstanding shares entitled
to vote at such meeting is
necessary to constitute a quorum
at each such meeting. For the
effect of abstentions and
"broker non-votes," see
"Introduction-- Voting
Requirements at Meeting."
THE MERGER
Effect of the Merger.......................... If the Merger is approved by the
stockholders of Lehigh and other
conditions to closing specified
in the Merger Agreement are
satisfied or waived, Merger Sub
will be merged with and into
FMC, with FMC being the
surviving corporation of the
Merger. The surviving
corporation will continue to be
a wholly-owned subsidiary of
Lehigh whose name will be
changed to "First Medical
Corporation." On the Effective
Date of the Merger, FMC will
continue to possess all of its
assets and liabilities, and the
separate corporate existence of
Merger Sub will cease. See
"Proposal No. 1 -- The Merger."
Effective Date of the Merger.................. The Merger shall become
effective (the "Effective Time")
when the following actions shall
have been completed: (i) the
Merger Agreement shall have been
adopted and approved by the
stockholders of Lehigh and
Merger Sub; (ii) all conditions
precedent to the consummation of
the Merger specified in the
Merger Agreement shall have been
satisfied or duly waived by the
party entitled to satisfaction;
and (iii) a Certificate of
Merger shall have been filed
with the Secretary of State of
Delaware, all of which must
occur on or before March 31,
1997. See "Proposal No. 1 -- The
Merger."
4
<PAGE>
Terms of the Merger........................... The Merger Agreement provides
that each share of FMC Common
Stock would be exchanged for (i)
1,033.925 shares of Lehigh
Common Stock and (ii) 95.1211
shares of Lehigh Preferred
Stock. Each share of Lehigh
Preferred Stock will be
convertible into 250 shares of
Lehigh Common Stock and will
have a like number of votes per
share, voting together with the
Lehigh Common Stock. As a result
of these actions, immediately
following the Merger, current
Lehigh stockholders and FMC
stockholders will each own 50%
of the issued and outstanding
shares of Lehigh Common Stock.
In the event that all of the
shares of Lehigh Preferred Stock
issued to the FMC stockholders
are converted into Lehigh Common
Stock, current Lehigh
stockholders will own
approximately 4% and FMC
stockholders will own
approximately 96% of the issued
and outstanding shares of Lehigh
Common Stock. See "Proposal No.
1 -- The Merger."
The Board of Directors and Upon consummation of the Merger,
Management of Lehigh Following only one of the six members of
Consummation of the Merger; Lehigh's Board of Directors will
Change of Control........................... be a current director of Lehigh,
and Mr. Dennis A. Sokol,
currently the Chairman of the
Board of FMC, will be the
Chairman of the Board and Chief
Executive Officer of Lehigh
(which will be renamed "First
Medical Group, Inc."), thereby
effectively causing a change of
control of Lehigh.
Mr. Salvatore J. Zizza, the
Chairman and Chief Executive
Officer of Lehigh, will become
Executive Vice President and
Treasurer, and Mr. Robert A.
Bruno, Esq., Vice President and
General Counsel of Lehigh, will
become Vice President and
Secretary. See "Proposal No. 3
-- Election of Directors."
Arrangements with Major Investor; FMC and Generale De Sante
Potential Change of Control of International, PLC ("GDS") are
Lehigh ...................................... parties to a Subscription
Agreement, dated June 11, 1996,
pursuant to which at the
Effective Time of the Merger GDS
will pay $5 million in order to
acquire a variety of ownership
interests in Lehigh and its
subsidiaries. See "Subscription
Agreement with GDS; Potential
Change of Control of Lehigh ."
Pursuant to this agreement, GDS
will become Lehigh's largest
single stockholder following the
Merger , with an approximately
22.7% ownership and voting
interest. Furthermore, until the
fifth anniversary of the Merger
, GDS will have the option to
increase its ownership interest
in Lehigh to 51%, at a price
equal to 110% of the average
30-day trailing market price.
This increase in ownership would
occur through the issuance of
new stock by Lehigh; as a
result, all other stockholders'
ownership interests would be
diluted and GDS would gain
control of Lehigh.
5
<PAGE>
Conditions to the Merger; Lehigh's obligation to
Termination................................. consummate the Merger is subject
to the approval of its
stockholders and a number of
other conditions, each of which
may be waived either before or
after the vote, "Meeting" is
defined as "Special Meeting".
Such other conditions include,
but are not limited to, that on
or before the Effective Time (i)
no action, lawsuit or other
proceeding shall have been
instituted which seeks to or
does prohibit or restrain
consummation of the Merger and
(ii) there shall not have been
any material adverse change
affecting either Lehigh or FMC
since October 29, 1996. The
Board of Directors and
stockholders of FMC approved the
Merger Agreement and the
consummation of the Merger on
October 25, 1996. The Merger
Agreement may be terminated at
any time before the Effective
Time, whether before or after
the Meeting, by the mutual
written consent of the parties,
by any party if it is not
willing to waive a condition
that another party cannot
satisfy by the Effective Time,
or by any party if the Merger is
not consummated by March 31,
1997 for any reason other than a
breach by the party giving such
notice, unless such date is
extended by mutual agreement of
the parties. In addition, Lehigh
may terminate the Merger
Agreement if it consummates a
business combination with any
other party which, in the
opinion of the Board of
Directors of Lehigh, is more
favorable to Lehigh and its
stockholders than the Merger (an
"Alternate Combination"). In the
event Lehigh consummates an
Alternate Combination, Lehigh
shall pay FMC the sum of $1.5
million. See "Proposal No. 1 --
The Merger."
Recommendation of the Board of
Directors of Lehigh......................... The Board of Directors of Lehigh
has approved the Merger
Agreement and the transactions
contemplated thereby. THE BOARD
OF DIRECTORS OF LEHIGH
RECOMMENDS APPROVAL OF THE
MERGER AGREEMENT BY
STOCKHOLDERS. For a discussion
of the reasons favoring the
Merger considered by Lehigh's
Board of Directors in approving
the Merger, see "Proposal No. 1
-- The Merger."
Significant Stockholders' Voting FMC, the holder of approximately
Intentions................................... 37% of the outstanding Lehigh
Common Stock, will vote its
ownership interest in favor of
the Merger Proposal. In
addition, certain officers,
directors and other stockholders
of Lehigh , who together hold
approximately 10% of the Lehigh
Common Stock, have verbally
indicated their intention to
vote in favor of the Merger
Proposal. See "Proposal No. 1 --
The Merger."
Opinion of Financial Advisor.................. Neither Lehigh nor FMC has
requested or obtained the
opinion of any financial advisor
in connection with the Merger.
See "Proposal No. 1 -- The
Merger -- Lehigh Reasons for the
Merger; Recommendation of the
Lehigh Board."
6
<PAGE>
Governmental and Regulatory Neither Lehigh nor FMC believes
Approvals................................... that any government or
regulatory approvals are
required for consummation of the
Merger, other than compliance
with applicable securities laws
and the filing of the
Certificate of Merger under
Delaware law. See "Proposal No.
1 -- The Merger."
Certain United States Federal Income See "Certain Federal Income Tax
Tax Consequences............................ Consequences" for a discussion
of the treatment of the Merger
for federal income tax purposes.
Accounting Treatment.......................... Both Lehigh and FMC intend to
treat the Merger as a "purchase"
of Lehigh by FMC for accounting
and financial reporting
purposes. See "Unaudited Pro
Forma Combined Financial
Statements" in the Financial
Statements portion of this Proxy
Statement/Prospectus.
Appraisal Rights.............................. The stockholders of Lehigh will
not have any appraisal rights in
connection with the Merger. See
"Proposal No. 1 -- The Merger."
7
<PAGE>
PRICE RANGE OF LEHIGH COMMON STOCK
The following table reflects the range of the reported high and low
closing or last sale prices of Lehigh Common Stock on the NYSE Composite Tape
for the calendar quarters indicated. The information in the table and in the
following paragraph has been adjusted to reflect retroactively all applicable
stock splits and stock dividends.
LEHIGH COMMON STOCK
HIGH LOW
---- ---
1993:
First quarter ........................... $1-5/8 $ 7/8
Second quarter .......................... 1-1/8 5/8
Third quarter ........................... 15/16 9/16
Fourth quarter .......................... 7/8 9/16
1994:
First quarter ........................... $1-1/4 $ 5/8
Second quarter .......................... 7/8 5/8
Third quarter ........................... 5/8 5/8
Fourth quarter .......................... 7/8 5/8
1995:
First quarter ........................... $ 3/4 $ 5/8
Second quarter .......................... 5/8 3/8
Third quarter ........................... 1/2 5/8
Fourth quarter .......................... 33/64 13/16
1996:
First quarter ........................... $11/16 $7/16
Second quarter .......................... 9/16 3/8
Third quarter ........................... 11/16 1/4
Fourth quarter
1997:
First quarter (through .................. $____ $____
January __, 1997) .......................
On October 28, 1996, the last full trading day prior to the execution
and public announcement of the execution of the Merger Agreement, the closing
price of the Lehigh Common Stock was $0.34 per share, as reported on the NYSE
Composite Tape. On January __, 1997, the most recent practicable date prior to
the mailing of this Proxy Statement/Prospectus the last sale price of Lehigh
Common Stock was $___ per share, as reported on the NYSE Composite Tape . Lehigh
stockholders are encouraged to obtain a current market quotation.
Lehigh has not paid any cash dividends since January 1, 1993.
8
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data for the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1995 set forth below has
been derived from the combined financial statements of MedExec, Inc. and
subsidiaries; SPI Managed Care Inc.; and SPI Managed Care of Hillsborough
County, Inc. (collectively, "MedExec"). The selected financial data for the nine
months ended September 30, 1996 set forth below has been derived from the
financial statements of the Company, MedExec, American Medical Clinics
Management Corporation, FMC Healthcare Services, Inc. and American Medical
Clinics Development Corporation. The combined financial statements as of
December 31, 1994 and 1995 and for each of the years in the three year period
ended December 31, 1995 are derived from the audited combined financial
statements of MedExec. The combined financial statements as of and for the nine
month periods ended September 30, 1995 and 1996 are derived from the unaudited
financial statements of MedExec and the Company, respectively, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. Interim results are not
necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------- -------- --------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
HMO revenues $ 10,563 $ 20,253 $ 21,744 $ 17,060 $ 34,046
Fee-for-service 96 200 182 140 6,910
Management fees -- 213 111 433 461
Other 428 652 635 641 230
-------- -------- -------- -------- --------
Total revenues 11,087 21,318 22,672 18,274 41,647
Medical expenses 8,405 16,568 18,444 14,296 33,224
Operating expenses:
Salaries and related benefits 670 1,651 2,434 1,958 2,900
Other operating expenses 991 1,771 2,200 1,766 3,962
-------- -------- -------- -------- --------
Total operating expenses 1,661 3,422 4,634 3,724 6,862
Income (loss) from operations 1,021 1,328 (406) 254 1,561
Non-operating expenses (income) 218 (35) (42) -- 47
Net income (loss) 803 1,364 (364) 253 909
Pro forma adjustments for income taxes(1) 321 545 -- 96 --
-------- -------- -------- -------- --------
Pro forma net income (loss) $ 482 $ 818 ($ 364) $ 158 $ 909
======== ======== ======== ======== ========
Pro forma net income (loss) per share $ 48.20 $ 81.80 $ (36.40) $ 15.70 $ 90.90
Pro forma weighted average number of
outstanding 10,000 10,000 10,000 10,000 10,000
</TABLE>
BALANCE SHEET DATA: DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
Working Capital $ (302) $ (2,237)
Total Assets 3,045 10,479
Current Liabilities 2,817 8,787
Stockholders' Equity 227 1,289
(1) Prior to December 31, 1995, MedExec. Inc. and prior to May, 1994, SPI
Managed Care, Inc. were S corporations and not subject to Federal and
Florida corporate income taxes. The Statement of Operations data
reflects a proforma provision for income taxes
9
<PAGE>
as if the Company was subject to Federal and Florida corporate income taxes for
all periods. This proforma provision for income taxes is computed using a
combined effective Federal and State tax rate of 40%. See Note 8 of notes to the
FMC financial statements.
10
<PAGE>
THE LEHIGH GROUP INC. & SUBSIDIARIES
Selected Financial Information
(in Thousands, Except For Per Share Data)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years ended
December 31, 1995 1994 1993 1992 1991
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues earned $ 12,105 $ 12,247 $ 12,890 $ 10,729 $ 17,146
Loss from continuing operations $ (558) $ (410) $ (250) $ (2,048) $ (6,166)
Loss per common share from
continuing operations (A) $ (0.05) $ (0.04) $ (0.03) $ (0.19) $ (0.70)
Cash dividends declared per
common share -- -- -- -- --
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31, 1995 1994 1993 1992 1991
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 2,437 $ 3,233 $ 2,800 ($28,700) ($25,500)
Total assets $ 6,622 $ 7,441 $ 7,050 $ 13,753 $ 19,232
Long-term debt $ 2,080 $ 2,361 $ 2,524 $ 12,787 $ 15,269
Total debt (B) $ 2,950 $ 3,240 $ 3,615 $ 45,882 $ 47,169
Shareholders' equity (deficit) $ 202 $ 510 $ (5,099) $(45,041) $(44,638)
</TABLE>
(A) Loss per common share from continuing operations for the years
presented has been adjusted to reflect the 35-for-1 reverse split of
the Common Stock that occurred in December 1991.
(B) Includes long term debt, current maturities of long term debt and Note
payable - bank.
11
<PAGE>
RISK FACTORS
HOLDERS OF LEHIGH COMMON STOCK SHOULD CONSIDER CAREFULLY ALL OF THE
INFORMATION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS INCLUDING THE
INFORMATION IN THE APPENDIX AND, IN PARTICULAR, SHOULD EVALUATE THE SPECIFIC
FACTORS SET FORTH BELOW FOR RISKS ASSOCIATED WITH THE MERGER AND OWNERSHIP OF
LEHIGH COMMON STOCK. THESE RISK FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH
THE OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS.
RISK FACTORS RELATED TO LEHIGH
Dilution of Ownership of Lehigh Stockholders. Following the
consummation of the Merger and assuming the conversion of the shares of Lehigh
Preferred Stock issued in connection therewith, the former stockholders of FMC
as a group will beneficially own approximately 96% of the Lehigh Common Stock
and the existing stockholders of Lehigh will own approximately 4% of Lehigh.
This represents substantial dilution of the ownership interests of Lehigh's
current stockholders after consummation of the Merger.
Change of Control of Lehigh . Upon consummation of the Merger, Mr.
Dennis A. Sokol, Chairman of FMC will own approximately 5.77% of Lehigh's Common
Stock and 5.77% of the Lehigh Preferred Stock. See "Proposal No. 1 -- The Merger
- -- Management After the Merger." In addition, assuming the persons nominated as
directors in Proposal No. 3 are elected, only one of the seven members of the
Board of Directors of Lehigh following consummation of the Merger will be
current directors of Lehigh. Accordingly, the former stockholders of FMC as a
group, and Mr. Sokol in particular, will be in a position to control the
election of directors and other corporate matters that require the vote of
Lehigh stockholders. FMC and Generale De Sante International, PLC ("GDS") are
parties to a Subscription Agreement, dated June 11, 1996, pursuant to which at
the Effective Time of the Merger GDS will pay $5 million in order to acquire a
variety of ownership interests in Lehigh and its subsidiaries. See "Subscription
Agreement with GDS; Potential Change of Control of Lehigh." Pursuant to this
agreement, GDS will become Lehigh's largest single stockholder following the
Merger, with an approximately 22.7% ownership and voting interest. Furthermore,
until the fifth anniversary of the Merger, GDS will have the option to increase
its ownership interest in Lehigh to 51%, at a price equal to 110% of the average
30-day trailing market price. This increase in ownership would occur through the
issuance of new stock by Lehigh; as a result, all other stockholders' ownership
interest would be diluted and GDS would gain control of Lehigh.
Possible Volatility of Stock Price. Upon consummation of the Merger,
the market price of the Lehigh Common Stock may be highly volatile. In addition,
the trading volume of Lehigh Common Stock on the New York Stock Exchange, Inc.
(the "NYSE") has been limited. Also, the price of Lehigh Common Stock following
consummation of the Merger will be sensitive to the performance and prospects of
the combined companies.
No Dividends. Lehigh has paid no cash dividends on Lehigh Common Stock
and does not anticipate paying cash dividends in the foreseeable future.
Lehigh's ability to pay dividends is dependent upon, among other things, future
earnings, the operating results and financial condition of Lehigh, its capital
requirements, general business conditions and other pertinent factors, and is
subject to the discretion of the Board of Directors. The Board is authorized to
issue, at any time hereafter, up to 5,000,000 shares of preferred stock on such
terms and conditions as it may determine, which may include preferences as to
dividends. Accordingly, there is no assurance that any dividends will ever be
paid on Lehigh Common Stock.
12
<PAGE>
Authorization and Discretionary Issuance of Preferred Stock; Issuance
of Lehigh Preferred Stock in the Merger. Lehigh's Certificate of Incorporation
authorizes the issuance of up to 5,000,000 shares of preferred stock and
approval of the Merger Agreement will also contribute approval of an amendment
to the Lehigh Certificate of Incorporation providing for "blank check" preferred
stock, with such designations, rights, and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors will
be empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting, or other rights that could adversely
affect the voting power or other rights of the holders of Lehigh's Common Stock.
In the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying, or preventing a change in
control of Lehigh. Lehigh's Board expects to approve the issuance of 951,211
shares of Lehigh Preferred Stock to be issued pursuant to the Merger. The
issuance of the Lehigh Preferred Stock could adversely affect the interests of
the holders of Lehigh Common Stock.
Effect of Outstanding Warrants and Options. Lehigh currently has
outstanding options and warrants to purchase an aggregate of 12,752,187 shares
of Lehigh Common Stock . All of the foregoing securities represent the right to
acquire Lehigh Common Stock during various periods of time and at various
prices. Holders of these securities are given the opportunity to profit from a
rise in the market price of the Lehigh Common Stock and are likely to exercise
their rights at a time when Lehigh may wish to obtain additional equity capital
on more favorable terms.
RISK FACTORS RELATING TO FMC
DOMESTIC OPERATIONS
Health Care Reforms Proposals. Numerous legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the U.S. health care system nationally or at the state
level. Among the proposals under consideration are cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health insurance
coverage to their employees and the creation of a single government health
insurance plan that would cover all citizens. It is not clear at this time what
proposals will be adopted, if any, or, if adopted, what effect, if any, such
proposals would have on the First Medical Corporation (Company's) business.
Certain proposals, such as cutbacks in the Medicare and Medicaid programs,
containment of health care costs on an interim basis by means that could include
a freeze on prices charged by physicians, hospitals and other health care
providers, and permitting states greater flexibility in the administration of
Medicaid, could adversely affect the Company. There can be no assurance that
currently proposed or future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the Company's operating results. See
"Business--Government Regulation." In addition, concern about the proposed
reform measures and their potential effect has contributed to the volatility of
stock prices of companies in health care and related industries and may
similarly affect the price of the Common Stock following the Offering.
Capitated Fee Revenue. For the year ended December 31, 1995 and the
nine months ended September 30, 1996, approximately 96.0% and 82.0%,
respectively, of the Company's net revenues derived from contracts pursuant to
which the Company received a fixed, prepaid monthly fee, or capitated fee, for
each covered life in exchange for assuming the responsibility for providing of
medical services. The Company's success under these contracts is dependent upon
effective utilization controls, competitive pricing for purchased services and
favorable agreements with payers. To the extent that the patients or enrollees
covered under a capitated fee contract require more frequent or extensive care
than was anticipated by the Company, the revenue to the Company under the
contract may be insufficient to cover the costs of the care that was provided.
All of the Company's capitated fee contracts contain aggregate expense
limitations on each covered life. Given the increasing pressures from health
care payers to restrain costs, changes in health care practices, inflation, new
technologies, major epidemics, natural disasters and numerous other factors
affecting the delivery and cost of health care, most of which are beyond the
Company's control, there can be no assurance that capitated fee contracts will
be profitable for the Company in the future.
Execution of Growth Strategy. A significant portion of the Company's
historical and planned growth in revenues has resulted from, and is expected to
continue to result from, the addition of new contracts providing for
13
<PAGE>
the Company's management and delivery of health care services. Obtaining new
contracts, which may involve a competitive bidding process, requires that the
Company accurately assess the costs it will incur in providing services so that
it undertakes contracts where the Company can expect to realize adequate profit
margins or otherwise meet its objectives. The acquisition of new contracts, as
well as the maintenance of existing contracts, is made more difficult by
increasing pressures from health care payors to restrict or reduce reimbursement
rates at a time when the cost of providing medical services continues to
increase. Any failure of the Company to manage the cost of providing health care
services or price its services appropriately may have a material adverse effect
on the Company's operations.
Competition. The provision of physician management services for HMOs is
a highly competitive business in which the Company competes for contracts with
several national and many regional and local providers of physician management
services. Furthermore, the Company competes with traditional managers of health
care services, such as hospitals and HMOs, some of which directly recruit and
manage physicians. While competition is generally based on cost and quality of
care, it is not possible to predict the extent of competition that present or
future activities of the Company will encounter because of changing competitive
conditions, changes in laws and regulations, government budgeting, technological
and economic developments and other factors. Certain of the Company's
competitors have access to substantially greater financial resources than the
Company. See "Business--Competition."
Dependence on Certain Clients. A substantial portion of the revenues of
the Company's managed care business are derived from prepaid contractual
arrangements with Humana Medical Plan, Inc. and its affiliates (collectively,
"Humana"), pursuant to which Humana pays the Company a capitated fee. In the
ordinary course of business, the Company may in the future enter into
significant additional capitation arrangements with Humana. The Company's
operating results could be adversely affected by the loss of any such agreements
or business relationships. In addition, a significant decline in an HMO client's
number of enrollees could have a material adverse effect on the Company's
operating results.
State Laws Regarding the Corporate Practice of Medicine. The laws of
many states prohibit physicians from splitting fees with nonphysicians and
prohibit business corporations from providing or holding themselves out as
providers of medical care. While the Company believes it complies in all
material respects with state fee splitting and corporate practice of medicine
laws, there can be no assurance that , given varying and uncertain
interpretations of such laws, the Company would be found to be in compliance
with all restrictions on fee splitting and the corporate practice of medicine in
all states. The Company currently operates in certain states through
professional corporations, and has recently formed professional corporations or
qualified foreign professional corporations to do business in several other
states where corporate practice of medicine laws may require the Company to
operate through such a structure. A determination that the Company is in
violation of applicable restrictions on fee splitting and the corporate practice
of medicine in any state in which it operates could have a material adverse
effect on the Company.
Corporate Exposure to Professional Liabilities. Due to the nature of
its business, the Company from time to time becomes involved as a defendant in
medical malpractice lawsuits, some of which are currently ongoing, and is
subject to the attendant risk of substantial damage awards. The most significant
source of potential liability in this regard is the negligence of health care
professionals employed or contracted by the Company. To the extent such health
care professionals are employees of the Company or were regarded as agents of
the Company in the practice of medicine, the Company could be held liable for
their negligence. In addition, the Company could be found in certain instances
to have been negligent in performing its contract management services even if no
agency relationship with the health care professional exists. The Company
maintains professional liability insurance on a claims made basis in amounts
deemed appropriate by management, based upon historical claims and the nature
and risks of its business. There can be no assurance , however, that a future
claim or claims will not exceed the limits of available insurance coverage, that
any insurer will remain solvent and able to meet its obligations to provide
coverage for any claim or claims or that such coverage will continue to be
available or available with sufficient limits and at a reasonable cost to
adequately and economically insure the Company's operations in the future. See
"Business--Professional Liability Insurance."
14
<PAGE>
Other Insurance. The Company attempts to mitigate the risk of
potentially high medical costs incurred in catastrophic cases through stop-loss
provisions, reinsurance and other special reserves which limit the Company's
financial risk. To date, such protection has been provided to the Company
through its provider agreements with Humana. There can be no assurances that the
agreements which provide such insurance to the Company will continue.
Fee-for-Service Reimbursement. For the year ended December 31, 1995 and
the nine months ended September 30, 1996, approximately 0.1% and 17.0%,
respectively, of the Company's net revenues were derived from payments made on a
fee-for-service basis by patients and third-party payers, including government
programs (such as Medicare and Medicaid) and private insurers. Under
fee-for-service contracts, the Company assumes the financial risks related to
changes in patient volume, payer mix and reimbursement rates. There are
increasing public and private sector pressures to restrain health care costs and
to restrict reimbursement rates for medical services. During the past decade,
federal and state governments have implemented legislation designed to slow the
rise of health care costs and it is anticipated that such legislative
initiatives will continue. Any such legislation could result in reductions in
reimbursement for the care of patients in governmental programs such as
Medicare, Medicaid and workers' compensation. For the years ended December 31,
1995 and the nine months ended September 30, 1996, approximately 0.0% and 2.0%,
respectively, of the Company's net revenue was derived from direct
fee-for-service billings to Medicare. In addition, a large percentage of the
capitated fee revenue described below is also derived indirectly from a Medicare
funded program with a third-party payor.
Any change in reimbursement policies, practices, interpretations or
regulations, or legislation that limits reimbursement amounts or practices,
could have a material adverse effect on the Company's operating results. See
"Business--Government Regulation." While the Company believes it is in material
compliance with applicable Medicare and Medicaid reimbursement regulations, all
Medicare and Medicaid providers and practitioners are subject to claims review
and audits. There can be no assurance that the Company would be found to be in
compliance in all respects with such regulations. A determination that the
Company is in violation of such regulations could result in retroactive
adjustments and recoupments and have a material adverse effect on the Company.
The Company's fee-for-service contractual arrangements also involve a
credit risk related to services provided to uninsured individuals. Adverse
changes in the percentage of billed services the Company collects could have a
material adverse effect on the Company's operating results. Fee-for-service
contracts also have less favorable cash flow characteristics than traditional
flat-fee contracts due to longer collection periods.
INTERNATIONAL OPERATIONS
The Company is subject to numerous factors relating to the business
environments of those developing countries in which the Company conducts
business operations. In particular, fundamental economic and political changes
occurring in Eastern Europe and the CIS could have a material impact on the
Company's international operations and on the Company's ability to continue the
development of its international businesses. There can be no assurance that such
developments in Eastern Europe and the CIS will not have a material adverse
effect on the Company's business operations. See "Potential Political and
Economic Instability in the Eastern Europe and the CIS," "Foreign Government
Regulation."
Potential Political and Economic Instability in Eastern Europe and the
CIS. Eastern Europe and the CIS are undergoing fundamental political and
economic changes, including the introduction of market economies. Consequently,
such countries have only recently begun the process of developing the necessary
framework and infrastructure to support this transition. Laws and regulations
are sometimes adopted without widespread notification, which can delay full
knowledge of their scope and impact, and the enforcement and administration
thereof are often inconsistent and without precedents. As a result, governments
will continue to exercise influence over their country's economy. Uncertainties
will continue to exist with respect to the future governance of, and economic
policies in, such countries. Such involvement could include, but not be limited
to, expropriation, confiscatory taxation, foreign exchange restrictions or
nationalization, all of which could materially effect the Company's
international operations.
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Foreign Government Regulation. The Company's operations in Eastern
Europe and the CIS are subject to diverse laws and regulations primarily
relating to foreign investment and numerous national and local laws and
regulations. Failure to comply with such laws or regulations could have a
material adverse effect on the Company.
OTHER RISKS RELATED TO FMC
Dependence on Key Personnel. The Company is dependent upon the services
of certain of its executive officers for the management of the Company and the
implementation of its strategy. The loss to the Company of the services of any
of these executive officers could adversely affect the Company's operations.
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INTRODUCTION
MEETING OF STOCKHOLDERS
This Proxy Statement/Prospectus is being furnished to the holders of
Lehigh Common Stock in connection with the solicitation of proxies by and on
behalf of the Lehigh Board for use at the Meeting to be held at
________________, Eastern Time, on January __, 1997, at
_________________________, and at any adjournments thereof. The Lehigh Board has
fixed the close of business on January __, 1997 (the "Lehigh Record Date") as
the record date for determining the stockholders of Lehigh entitled to vote at
the Meeting. This Proxy Statement/Prospectus and the enclosed proxy are first
being sent to holders of Lehigh Common Stock on or about January ___, 1997.
PURPOSE OF MEETING
At the Meeting, Lehigh's stockholders will consider and vote upon
Proposal No. 1 -- The Merger Proposal. Approval of the Merger shall also
constitute approval of an amendment to the Restated Certificate of Incorporation
of Lehigh to provide for "blank check" preferred stock by delegating to the
Lehigh Board of Directors the authority to designate, and to fix the number,
rights, preferences, restriction and limitations of, one or more series of
preferred stock (including the Lehigh Preferred Stock to be issued in connection
with the Merger). Lehigh stockholders will also consider and vote at the Meeting
on: Proposal No. 2 -- The adoption of amendments to the Restated Certificate of
Incorporation of Lehigh, which will amend the current Certificate of
Incorporation by: (A) changing the name of the corporation from "The Lehigh
Group Inc." to "First Medical Group, Inc."; (B) eliminating cumulative voting
for directors; (C) eliminating action by stockholders by written consent; (D)
fixing the number of members of the Board of Directors at between seven and
eleven, as determined by the Board of Directors; and (E) requiring any further
amendment to the provisions of the Certificate of Incorporation addressed by
items (B) through (D) to require the vote of the holders of at least 60% of the
outstanding shares of the Lehigh Common Stock (collectively, the "Certificate
Amendments"); Proposal No. 3 -- The election of seven directors to the Board of
Directors; Proposal No. 4 -- ratification of the appointment of BDO Seidman, LLP
as the independent certified public accountants for Lehigh for the fiscal year
ending December 31, 1996; and such other business as may properly come before
the Meeting or any adjournments thereof.
If the Merger Proposal is not approved by the stockholders of Lehigh
then Proposal No. 3 -- The election of directors, will be deemed withdrawn from
a vote of the stockholders and the current directors of Lehigh will n remain in
office. The submission of Proposal No. 2 -- The Certificate Amendments, to a
vote of the stockholders n of Lehigh is not dependant upon the approval of the
Merger Proposal, except that if the Merger Proposal is not n approved by
stockholders, then the proposed name change of Lehigh will automatically be
removed from the n Certificate Amendments. n
FMC, the holder of approximately 37% of the outstanding Lehigh Common
Stock, will vote its ownership interest at the Meeting in favor of the Merger
Proposal. In addition, certain officers, directors and other stockholders of
Lehigh, who together hold approximately 10% of the Lehigh Common Stock, have
verbally indicated their intention to vote in favor of the Merger Proposal.
VOTING REQUIREMENTS AT THE MEETING
At the Meeting, approval and adoption of the Merger Proposal (Proposal
No. 1) and the "blank check" preferred stock will require the affirmative vote
of majority of the outstanding shares of Lehigh Common Stock. Approval of the
Certificate Amendments (Proposal No. 2) requires the affirmative vote of holders
of a majority of the outstanding Lehigh Common Stock, except with respect to the
Certificate Amendments eliminating cumulative voting for directors and fixing
the number of directors at between seven and eleven in the discretion of the
Board, which require the affirmative vote of the holders of a majority of the
outstanding shares of Lehigh Common Stock or 80% of such shares voting at the
Meeting, whichever is greater. The election of directors at the Meeting
(Proposal No. 3) requires a plurality of votes cast by the Lehigh stockholders
entitled to vote thereon at the Meeting. Ratification of the selection of BDO
Seidman, LLP as Lehigh's independent public accountants for the
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year ending December 31, 1996 (Proposal No. 4) requires the affirmative vote of
a majority of the votes cast at the Meeting by holders of Lehigh Common Stock.
The presence at the Meeting, in person or by proxy, of the holders of
one-third of the total number of shares of Lehigh Common Stock outstanding on
the Lehigh Record Date will constitute a quorum for the transaction of business
by such holders at the Meeting. On the Lehigh Record Date, there were 16,339,250
outstanding shares of Lehigh Common Stock, each holder of which is entitled to
one vote per share with respect to each matter to be voted on at the Meeting,
except that, pursuant to the provisions of the Certificate of Incorporation of
Lehigh, voting for directors is cumulative whereby each stockholder may give any
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of shares held by such stockholder, or may distribute
such votes on the same principle among as many candidates as the stockholder
determines. Lehigh has no class or series of stock outstanding other than Lehigh
Common Stock entitled to vote at the Meeting.
At the Meeting, abstentions and broker non-votes (as hereinafter
defined) will be counted as present for the purpose of determining the presence
of a quorum. For the purpose of computing the vote required for approval of
matters to be voted on at the Meeting, shares held by stockholders who abstain
from voting will be treated as being "present" and "entitled to vote" on the
matter and, thus, an abstention has the same legal effect as a vote against the
matter, except that abstentions will have no effect on the election of directors
of Lehigh or on the ratification of independent accountants for Lehigh .
However, in the case of a broker non-vote or where a stockholder withholds
authority from his proxy to vote the proxy as to a particular matter, such
shares will not be treated as "present" and "entitled to vote" on the matter
and, thus, a broker non-vote or the withholding of a proxy's authority will have
no effect on the outcome of the vote on the matter. A "broker non-vote" refers
to shares represented at the Meeting in person or by proxy by a broker or
nominee where such broker or nominee (i) has not received voting instructions on
a particular matter from the beneficial owners or persons entitled to vote and
(ii) the broker or nominee does not have discretionary voting power on such
matter.
PROXIES
All proxies that are properly executed by holders of Lehigh Common
Stock and received by Lehigh prior to the Meeting will be voted in accordance
with the instructions noted thereon. Any proxy that does not specify to the
contrary will be voted in favor of the Merger Proposal, the Certificate
Amendments, the nominees for election as directors and in favor of the
ratification of Lehigh's independent certified public accountants and for any
other matter that may be properly brought before the Meeting in accordance with
the judgment of person or persons voting the proxies. Any holder of Lehigh
Common Stock who submits a proxy will have the right to revoke it, at any time
before it is voted, by filing with the Secretary of Lehigh written notice of
revocation or a duly executed later-dated proxy, or by attending the Meeting and
voting such Lehigh Common Stock in person.
All costs relating to the solicitation of proxies of holders of Lehigh
Common Stock will be borne by Lehigh . Proxies may be solicited by officers,
directors and regular employees of Lehigh and FMC and its subsidiaries
personally, by mail or by telephone or otherwise. Although there is no formal
agreement to do so, Lehigh may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries holding shares of stock in their names or
those of their nominees for their reasonable expenses in sending solicitation
material to their principals.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. STOCKHOLDERS WHO DO
NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO MARK, SIGN AND DATE THE
RESPECTIVE ACCOMPANYING PROXY AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, SO THAT THEIR VOTES CAN BE
RECORDED.
PROPOSAL NO. 1 -- THE MERGER
GENERAL
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This section of the Proxy Statement/Prospectus describes certain
aspects of the Merger, the Merger Agreement and other related matters. The
following description does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement, which is attached as Appendix A
to this Proxy Statement/Prospectus and is incorporated herein by reference. All
Lehigh stockholders are urged to read the Merger Agreement in its entirety. r
The Merger Agreement provides that, subject to the satisfaction or
waiver of certain conditions, including, but not limited, to the receipt of all
necessary third party, regulatory and stockholder approvals, Merger Sub will be
merged with and into FMC. As a result of the Merger, the separate corporate
existence of Merger Sub will cease and FMC, as the Surviving Corporation, shall
continue to possess all of its rights and property as constituted immediately
prior to the Effective Date of the Merger and shall succeed, without transfer,
to all of the rights and property of Merger Sub and shall continue to be subject
to all of its debts and liabilities as the same shall have existed immediately
prior to the Effective Date of the Merger, and shall become subject to all the
debts and liabilities of Merger Sub in the same manner as if FMC had itself
incurred them, all as more fully provided under the Delaware General Corporation
law.
In the Merger, each share of FMC Common Stock would be exchanged for
(i) 1,033.925 shares of Lehigh Common Stock and (ii) 95.1211 shares of Lehigh
Preferred Stock. Each share of Lehigh Preferred Stock will be convertible into
250 shares of Lehigh Common Stock and will have a like number of votes per
share, voting together with the Lehigh Common Stock. As a result of these
actions, immediately following the Merger, current Lehigh stockholders and FMC
stockholders will each own 50% of the issued and outstanding shares of Lehigh
Common Stock. In the event that all of the shares of Lehigh Preferred Stock
issued to the FMC stockholders are converted into Lehigh Common Stock, current
Lehigh stockholders will own approximately 4% and FMC stockholders will own
approximately 96% of the issued and outstanding shares of Lehigh Common Stock.
In addition, Lehigh will change its name to "First Medical Group, Inc." On
October 25, 1996, the Board of Directors and stockholders of FMC approved the
Merger.
BACKGROUND TO THE MERGER
Prior to 1994, Lehigh, through its wholly owned subsidiaries, had been
engaged in the following other businesses: (i) interior construction; (ii)
asbestos abatement; (iii) the design, production and sale of electrical
products; (iv) the manufacture and sale of dredging equipment and precision
machined castings; and (v) energy recovery and power generation and landfill
closure services. All of such other businesses were transferred or sold prior to
1994.
Following that restructuring, in which Lehigh eliminated approximately
$46 million of indebtedness, Messrs. Zizza and Bruno remained the only executive
officers of Lehigh and embarked on a mission of continuing to reduce Lehigh's
indebtedness, seek to raise working capital to allow Lehigh to remain viable,
and at the same time locate an acquisition candidate with the potential of
increasing shareholder value.
During the last two years, the management of Lehigh has held
discussions with approximately twenty companies who were purportedly interested
in an acquisition by, or a business combination transaction with, Lehigh. None
of those discussions resulted in a contract or understanding except that on
December 21, 1995, Lehigh and Consolidated Technology Group Ltd.
("Consolidated") signed a letter of intent whereby Consolidated agreed in
principle to merge with Lehigh in a transaction whereby the stockholders of
Consolidated would own approximately 75 % of the combined company after the
merger. On May 15, 1996 Lehigh and Consolidated jointly announced that after
extensive negotiations they were unable to proceed further with the business
transaction contemplated by the letter of intent, which was terminated.
Shortly following the termination of the letter of intent with
Consolidated, preliminary discussions between Mr. Dennis A. Sokol, Chairman of
the Board of FMC, and Lehigh concerning a possible business combination
commenced. Discussions between FMC and Lehigh terminated on the morning of June
12, 1996. Also, Lehigh commenced discussions with DHB Capital Group, Inc.
("DHB"). These discussions culminated with the execution on June 11, 1996 of a
letter of intent whereby DHB agreed in principle to merge with and into Merger
Sub with
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DHB being the surviving corporation. On or about July 8, 1996, DHB and Lehigh
entered into a Merger Agreement (the "DHB Merger Agreement") pursuant to which,
among other things, DHB would merge with and into Merger Sub and in exchange for
all of the issued and outstanding capital stock of DHB, the DHB stockholders
would receive on a fully diluted basis, approximately 97% the issued and
outstanding Lehigh Common Stock.
On July 12, 1996 Southwicke Corporation and its affiliates
("Southwicke") filed a Schedule 13D indicating that they had acquired beneficial
ownership, through purchases and irrevocable proxies, of an aggregate of
2,670,757 shares of Lehigh Common Stock (approximately 25.8%). The purpose in
acquiring that ownership position was stated as "investment", and the Schedule
13D also stated the intention to seek representation on Lehigh's Board of
Directors.
On July 17, 1996 Lehigh's Board of Directors met to consider the
Schedule 13D filing by Southwicke Corporation and its affiliates and to consider
certain amendments to Lehigh's By-laws. Mr. Zizza reported that he had not
received any proposal from Southwicke regarding a potential acquisition of
Lehigh. Thereafter, the Board of Directors adopted amendments to Lehigh's
By-laws which (i) eliminate the ability of stockholders to call a special
meeting, and (ii) add provisions which give the Board of Directors the power to
set a record date for any proposed stockholder action by written consent and
provide a procedure for managing actions by written consent. These amendments
were designed to foreclose the ability of a significant stockholder (such as
Southwicke ) to control the timing of the presentation of matters to a vote by
stockholders and, conversely, to clarify and enhance the authority of the Board
of Directors with respect to such matters.
Prior to the termination of the DHB Merger Agreement, on August 28,
1996, Lehigh received a letter from Southwicke . The Southwicke letter contained
a demand that the Board of Directors of Lehigh should commence a derivative
action to rescind Mr. Zizza's option to DHB, terminate the Merger Agreement and
rescind the By-law amendments which were enacted on July 17, 1996.
Also on August 28, 1996, Lehigh received a letter from Mentmore
Holdings Corporation ("Mentmore"), which appears to be an indirect affiliate of
Southwicke . The Mentmore letter asked for an opportunity to meet with Lehigh's
Board of Directors so that an acquisition proposal could be discussed; it went
on to present the outlines of such a proposal. The Mentmore proposal envisioned
in general that Mentmore would contribute $3 million while the equity of
Lehigh's current stockholders would be valued at $3 million (less any amounts
payable under employment or severance agreements), and that each party's
ownership in the surviving company would be based on their proportionate shares
of that valuation. Mr. Zizza and Bruno met again with representatives of
Mentmore in an effort to clarify Mentmore's proposal, which proposal was
subsequently presented to Lehigh's Board. Lehigh's Board unanimously rejected
the Mentmore proposal.
On September 25, 1996, Lehigh formed an independent committee
consisting of only outside directors to review the allegations raised by
Southwicke and also notified Southwicke of the same. On October 1, 1996
Southwicke commenced an action against Lehigh and its entire Board to prevent,
among other things, the proposed merger between Lehigh and DHB, to void the
stock option granted by Mr. Zizza, declare certain stock warrants void as well
as certain stock warrants void as well as certain amendments made to Lehigh's
bylaws. On October 11, 1996, DHB notified Lehigh of its decision to terminate
the DHB Merger Agreement and the related option agreement due to the pendency of
the Southwicke lawsuit. On November 13, 1996 Lehigh and its board served its
answer to Southwicke's lawsuit generally denying the allegations and raising
various affirmative defenses.
Shortly following the termination of the DHB Merger Agreement,
discussions between FMC and Lehigh concerning a possible business combination
were renewed. Following numerous discussions between Mr. Zizza, Mr. Bruno and
Mr. Sokol, the Chairman of the Board and Chief Executive of FMC, the parties met
to further discuss the proposed business combination. Mr. Zizza subsequently
visited the corporate headquarters of MedExec, Inc., a subsidiary of FMC in
Miami, Florida, where senior management was interviewed and due diligence
conducted. On or about October 16, 1996, Lehigh's Board of Directors was
appraised of the discussions with FMC. Following several meetings between Lehigh
and FMC, the parties entered into the Merger Agreement. Lehigh's Board of
Directors approved the Merger Agreement by written consent dated October 21,
1996. In addition, FMC's Board
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of Directors and stockholders approved the Merger Agreement on October 25, 1996.
The Merger Agreement was executed by the parties on October 29, 1996.
On December 9, 1996 Southwicke filed an amended complaint to its
lawsuit, which substituted FMC as a defendant for DHB. The substantive
allegations on the amended complaint were substantially similar to the original
complaint involving the DHB merger proposal.
Under the terms of the Merger Agreement, each share of the FMC Common
Stock would be exchanged for (i) 1,033.925 shares of Lehigh Common Stock and
(ii) 95.1211 shares of Lehigh Preferred Stock. Each share of Lehigh Preferred
Stock will be convertible into 250 shares of Lehigh Common Stock and will have a
like number of votes per share, voting together with the Lehigh Common Stock. As
a result of these actions, immediately following the Merger, current Lehigh
stockholders and FMC stockholders will each own 50% of the issued and
outstanding shares of Lehigh Common Stock. In the event that all of the shares
of Lehigh Preferred Stock issued to the FMC stockholders are converted into
Lehigh Common Stock, current Lehigh stockholders will own approximately 4% and
FMC stockholders will own approximately 96% of the issued and outstanding shares
of Lehigh Common Stock. In addition, under the terms of the Merger Agreement
Lehigh will be renamed "First Medical Group, Inc." Following the Merger, Mr.
Sokol will become Chairman and Chief Executive Officer of the combined company,
Mr. Zizza will become Executive Vice President and Treasurer and Mr. Bruno will
continue as Vice President and Secretary.
Concurrently with the execution of the Merger Agreement, on October 29,
1996 Mr. Zizza sold to FMC in consideration of a note in the principal amount of
$100,000, an option to purchase up to six million shares (approximately 37%) of
Lehigh Common Stock at $0.50 per share, which is the price at which Mr. Zizza is
entitled to acquire those shares from Lehigh under pre-existing agreements. That
option was exercised in full on January __, 1997 and accordingly, FMC acquired
approximately 37% of the outstanding Lehigh Common Stock as of the Lehigh Record
Date.
SUBSCRIPTION AGREEMENT WITH GDS; POTENTIAL CHANGE OF CONTROL OF LEHIGH
FMC and Generale De Sante International, PLC ("GDS") are parties to a
Subscription Agreement, dated February 8, 1995, which was subsequently modified
on June 11, 1996 (the "Subscription Agreement"), pursuant to which at the
Effective Time of the Merger GDS will pay $5 million in order to acquire the
following ownership interests and rights:
1. 10% of FMC Common Stock, which will automatically be exchanged in
the Merger for 1,033,925 shares of Lehigh Common Stock and 95,121 shares of
Lehigh Preferred Stock.
2. Shares of FMC's 9% Series A Convertible Preferred convertible into
10% of FMC Common Stock; each such share will be convertible into one share of
FMC Common Stock. Following the Merger, this class of preferred stock will
remain outstanding as a security of FMC; however, it will be convertible in
accordance with its terms into the same Merger consideration as all other shares
of FMC Common Stock. Consequently, when and if GDS decides to convert its shares
of FMC's 9% Series A Convertible Preferred Stock, GDS will receive 1,033,925
shares of Lehigh Common Stock and 95,121 shares of Lehigh Preferred Stock.
Together with the shares issued in step 1 above, these shares will give GDS a
total of approximately 23% ownership interest and voting power of Lehigh.
3. A 49% common stock interest in FMC Healthcare Services, Inc.
(formerly WHEN, Inc.) ("FMC Healthcare"). This subsidiary of FMC is engaged in
the business of providing management, consulting and financial services to
troubled not-for-profit hospitals and other health care providers.
The purchase price for the common and preferred stock of FMC to be
acquired under steps 1. and 2. above is $4 million. The purchase price for a 49%
ownership interest in FMC Healthcare to be acquired under step 3. above is $1
million.
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4. Until the fifth anniversary of the Merger, GDS will have the option
to increase its ownership interest in Lehigh to 51%, at a price equal to 110% of
the average 30-day trailing market price. This increase in ownership would occur
through the issuance of new stock by Lehigh; as a result, all other
stockholders' ownership interests would be diluted and GDS would gain control of
Lehigh.
5. In addition to the foregoing option to acquire control of Lehigh,
GDS has the option to increase its ownership interest in FMC Healthcare to 52%,
also through the issuance of new stock. This option may be exercised from the
second to the fifth anniversary of the Merger, upon payment of (i) $3 million
cash, or (ii) the shares of Lehigh Common Stock and Lehigh Preferred Stock
issued to GDS in the Merger under step 1. above. Furthermore, upon the exercise
of this option GDS has the option to acquire all of the remaining equity in FMC
Healthcare at the "fair market price" as determined by an independent investment
banker.
6. Alternatively, until the third anniversary of the Merger, GDS can
"put" to Lehigh its 49% ownership interest in FMC Healthcare for (i) $1 million,
plus (ii) the "fair market value" of that investment as determined by an
independent investment banker.
7. GDS also has the option to acquire 52% of the common stock of
American Medical Clinics Development Corporation, an Irish corporation which is
a subsidiary of FMC ("AMCDC"). AMCDC is engaged in the business of managing
health care facilities in Eastern Europe.
The $5 million proceeds to be received from GDS at the Effective Time
of the Merger can only be utilized to purchase capital assets to be used in the
business of FMC Healthcare and/or AMCDC.
In the event GDS exercises its option under step 5. above to increase
its ownership interest in FMC Healthcare to 52%, then FMC Healthcare will be
obligated to enter into a two year management agreement with Lehigh or its
designee, for a fee that will be based on the cost of management plus a
reasonable success fee to be determined by Lehigh and GDS.
In conjunction with the Subscription Agreement, as of the Effective
Time of the Merger FMC and GDS agreed to terminate various pre-existing loans
and option arrangements. In consideration for those terminations, GDS will
acquire approximately 500 shares of FMC Common Stock.
The Subscription Agreement also provides for the following senior
management arrangements:
1. GDS has the right to designate one-half of the members of the Board
of Directors of FMC Healthcare as of the Effective Time of the Merger.
2. The Executive Committee of FMC and FMC Healthcare includes the
chairman of FMC, the CEO of FMC, and a designee of GDS. All extraordinary
capital investments are approved by a unanimous vote of those Executive
Committees.
3. Mr. Charles Pendola became the Chief Executive Officer of FMC
Healthcare.
4. GDS has the right to designate three members of Lehigh's Board of
Directors. Those persons are Paul Murphy, Alain Lellouche and Dennis Sokol.
Also, GDS will have the right to designate a Deputy Chief Financial Officer of
FMC and a Deputy Managing Director of FMC Health Care Services, Inc.
CONVERSION AND EXCHANGE RATIO
At the Effective Time of the Merger, all of the outstanding shares of
FMC Common Stock (other than shares of FMC Common Stock held in FMC's treasury,
if any) will be converted into shares of Lehigh Common Stock and Lehigh
Preferred Stock. Each outstanding share of FMC Common Stock shall be exchanged
for (i) 1,033.925 shares of Lehigh Common Stock and (ii) 95.1211 shares of
Lehigh Preferred Stock and each of the stockholders of FMC, as of the Effective
Time of the Merger, shall be entitled to exchange certificates representing all
of the issued and
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outstanding shares of FMC Common Stock held by such FMC stockholder for
certificates representing the shares of Lehigh Common Stock and Lehigh Preferred
Stock issuable to such FMC stockholder pursuant to the Merger. At the Effective
Time of the Merger, shares of FMC Common Stock, if any, held in FMC's treasury
shall be canceled and shall cease to exist. Such conversion ratio was
established through arms-length negotiations between Lehigh and FMC. Also at the
Effective Time of the Merger, all of the shares of Lehigh Common Stock owned by
FMC will be cancelled.
LEHIGH REASONS FOR THE MERGER; RECOMMENDATION OF THE LEHIGH BOARD
The Lehigh Board has unanimously approved the Merger and has determined
that the Merger and the Merger Agreement and the related transactions are in the
best interests of Lehigh and are fair to Lehigh's stockholders from a financial
point of view. THE LEHIGH BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
LEHIGH VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
During the course of its deliberations, the Board of Directors
considered, without assigning relative weights to, the following factors: (i)
the historical and prospective operations of Lehigh, including, among other
things, the current financial condition and future prospects of Lehigh, (ii) the
terms and conditions of the Merger Agreement and related documentation, (iii) a
review of the operations of FMC, including, among other things, the current
financial condition and future prospects of FMC, (iv) a review of Lehigh's
efforts over the past two years in trying to locate a suitable acquisition
candidate and the absence of any other competing offer from any other business
proposing a business combination with Lehigh, (v) the ability of a combination
with FMC to increase Lehigh's market capitalization, (vi) the increase in the
market value of the Lehigh Common Stock held by Lehigh stockholders which could
result from the Merger even after giving effect to the dilutive impact of the
merger on Lehigh stockholders, and (vii) the management contracts and continued
services of Messrs. Zizza and Bruno with Lehigh.
The Lehigh Board also considered certain potentially negative factors
in its deliberations concerning the Merger, including, among others: (i) the
change of control of Lehigh after the Merger , (ii) the risks associated with
FMC's business including competitive factors, and (iii) the absence of an
investment banker's opinion regarding the transaction. In this regard the Board
did not feel an investment banker's opinion would be an appropriate use of
corporate funds.
In view of the wide variety of factors considered by the Lehigh Board,
the Lehigh Board did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination. However,
in the view of the Lehigh Board, the potentially negative factors considered by
it were not sufficient, either individually or collectively, to outweigh the
positive factors it considered in its deliberations relating to the Merger.
The foregoing discussion of the information and factors considered by
the Lehigh Board is not intended to be exhaustive but is believed to include all
material factors considered by the Lehigh Board.
THE LEHIGH BOARD RECOMMENDS THAT LEHIGH STOCKHOLDERS VOTE FOR APPROVAL
OF THE MERGER PROPOSAL.
FEDERAL INCOME TAX CONSEQUENCES
For a discussion of the federal income tax consequences of the Merger,
see "Certain Federal Income Tax Consequences of the Merger."
ACCOUNTING TREATMENT
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Lehigh intends to treat the Merger as a "purchase" for accounting and
financial reporting purposes with FMC as the acquiring company. See "Unaudited
Pro Forma Combined Financial Statements" contained in the Financial Statements
portion of this Proxy Statement/Prospectus.
INTERESTS OF CERTAIN MEMBERS OF LEHIGH MANAGEMENT IN THE MERGER
In considering the Merger, Lehigh stockholders should be aware that
certain members of the Board and management of Lehigh have certain interests
that are in addition to the interests of Lehigh stockholders generally and may
cause them to have potential conflicts of interest.
At the Effective Time, Dennis A. Sokol, currently the Chairman of the
Board and Chief Executive Officer of FMC, will become the Chairman and Chief
Executive Officer of Lehigh (which will be renamed "First Medical Group, Inc."
if the Certificate Amendments are approved) . It is anticipated that senior
officers and employees of FMC will participate in Lehigh stock option plans and
other benefit arrangements.
At the Effective Time, Mr. Salvatore J. Zizza, the Chairman and CEO of
Lehigh, will become Executive Vice President and Treasurer and Mr. Robert A.
Bruno, Esq., Vice President of Lehigh, will continue in that position and will
become Secretary. In addition, as of the Effective Time of the Merger,
amendments to their respective employment agreements will become effective. See
"Proposal No. 3 -- Election of Directors -- Executive Compensation."
MANAGEMENT AFTER THE MERGER
DIRECTORS
Assuming they are elected at the Meeting, the directors of Lehigh after
consummation of the Merger will be Dennis A. Sokol , Salvatore J. Zizza, Elliot
H. Cole, Charles J. Pendola, Melvin E. Levinson, M.D., Paul Murphy and Alain
Lellouche. See "Proposal No. 3 -- Election of Directors -- Proposed Directors
and Executive Officers."
EXECUTIVE OFFICERS
Assuming election of the Board of Directors recommended by the Lehigh
Board in Proposal No. 3, it is expected that the principal executive officers of
Lehigh to be appointed after consummation of the Merger will be as follows:
NAME TITLE
---- -----
Dennis A. Sokol Chairman and Chief
Executive Officer
Charles J. Pendola President and Chief
Operating Officer of First
Medical Corporation
Elias M. Nemnom Chief Financial Officer
Salvatore J. Zizza Executive Vice President
and Treasurer
Robert A. Bruno Vice President and
Secretary
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STOCK OPTIONS
Salvatore J. Zizza, currently Chairman of the Board, President and
Chief Executive Officer of Lehigh owns options and warrants to purchase an
aggregate of 12,000,000 shares of Lehigh Common Stock, at exercise prices
ranging from $.50 to $1.00 per share, and Robert A. Bruno, currently Vice
President, General Counsel, Secretary and a director of Lehigh, owns options to
purchase an aggregate of 250,000 shares of Lehigh Common Stock at an exercise
price of $.50 per share. In addition, Messrs. Bready, Gargano, Anthony F.L.
Amhurst, and Salvatore M. Salibello, current directors of Lehigh, own options to
purchase, respectively, 15,000 shares, 10,000 shares, 10,000 shares and 10,000
shares of Lehigh Common Stock at exercise prices of $.50 per share. See
"Proposal No. 3 - Election of Directors - Certain Relationships and Related
Transactions" and " - Executive Compensation." During 1996, Lehigh issued
options to purchase an aggregate of 10,000 shares of Lehigh Common Stock at an
exercise price of $.50 per share to each of Messrs. Bready, Gargano, Amhurst and
Salibello in lieu of cash compensation for 1996.
NO APPRAISAL RIGHTS
Delaware law provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the stockholders of such corporation,
unless in either case, the holders of such stock are required pursuant to the
merger to accept anything other than (A) shares of stock of the surviving
corporation, (B) shares of stock of another corporation which are also listed on
a national securities exchange or held by more than 2,000 holders, or (C) cash
in lieu of fractional shares of such stock. Consequently, the holders of Lehigh
Common Stock are not entitled to appraisal rights in connection with the Merger.
TRADING MARKET
The outstanding shares of Lehigh Common Stock are listed for trading on
the NYSE. Lehigh will use its best efforts to cause the shares of Lehigh Common
Stock issuable as Merger consideration to be approved for listing on the NYSE.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective at
the time a certificate of merger (the "Certificate of Merger") is duly filed
with the Secretary of the State of the State of Delaware. The time at which the
Merger will become effective is referred to herein as the "Effective Time." Such
filing, together with all other filings or recordings required by Delaware law
in connection with the Merger, will be made upon the satisfaction or, to the
extent permitted under the Merger Agreement, waiver of all conditions to the
Merger contained in the Merger Agreement.
THE MERGER
At the Effective Time, Merger Sub will be merged with and into FMC, at
which time the separate corporate existence of Merger Sub will cease and FMC, as
the Surviving Corporation, (i) shall continue to possess all of its rights and
property as constituted immediately prior to the Effective Date of the Merger
and shall succeed, without transfer, to all of the rights and property of Merger
Sub and (ii) shall continue subject to all of its debts and liabilities as the
same shall have existed immediately prior to the Effective Date of the Merger,
and become subject to all the debts and liabilities of Merger Sub in
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the same manner as if FMC had itself incurred them, all as more fully provided
under the Delaware General Corporation law.
EXCHANGE OF SHARES
As part of the Merger, each share of FMC Common Stock would be
exchanged for (i) 1,033.925 shares of Lehigh Common Stock and (ii) 95.1211
shares of Lehigh Preferred Stock. Each share of Lehigh Preferred Stock will be
convertible into 250 shares of Lehigh Common Stock and will have a like number
of votes per share, voting together with the Lehigh Common Stock. As a result of
these actions, immediately following the Merger, current Lehigh stockholders and
FMC stockholders will each own approximately 50% of the issued and outstanding
shares of Lehigh Common Stock. In the event that all of the shares of Lehigh
Preferred Stock issued to the FMC stockholders are converted into Lehigh Common
Stock, current Lehigh stockholders will own approximately 4% and FMC
stockholders will own approximately 96% of the issued and outstanding shares of
Lehigh Common Stock. Lehigh will then be renamed "First Medical Group, Inc."
Before the Effective Time, Lehigh will deposit with its transfer agent,
for the benefit of holders of FMC Common Stock, certificates representing shares
of Lehigh Common Stock and Lehigh Preferred Stock issuable pursuant to the
Merger Agreement in exchange for shares of FMC Common Stock evidencing the right
to receive (i) 1,033.925 shares of Lehigh Common Stock and (ii) 95.1211 shares
of Lehigh Preferred Stock, for each share of FMC Common Stock. Promptly after
the Effective Time, Lehigh will, or will cause the transfer agent to, send to
each holder of FMC Common Stock at the Effective Time a letter of transmittal to
be used in such exchange.
Each holder of shares of FMC Common Stock, upon surrender to the
transfer agent of a certificate or certificates representing such FMC Common
Stock, together with a properly completed letter of transmittal, will be
entitled to receive in exchange therefor the number of shares of Lehigh Common
Stock and Lehigh Preferred Stock which such holder has the right to receive
pursuant to the Merger Agreement and cash in lieu of any fractional shares of
Lehigh Common Stock, as contemplated by the Merger Agreement. The certificate or
certificates for shares of FMC Common Stock so surrendered shall be canceled.
Until so surrendered, each such certificate will, after the Effective Time,
represent for all purposes only the right to receive Lehigh Common Stock and
Lehigh Preferred Stock pursuant to the terms of the Merger Agreement.
If any shares of Lehigh Common Stock and/or Lehigh Preferred Stock are
to be issued to any person other than the registered holder of the shares of FMC
Common Stock represented by the certificate or certificates surrendered in
exchange therefor, it will be a condition to such issuance that the certificate
or certificates so surrendered be properly endorsed or otherwise be in proper
form for transfer and that the person requesting such issuance shall pay to the
transfer agent any transfer or other taxes required as a result of such
issuance.
No dividends or other distributions on shares of Lehigh Common Stock or
Lehigh Preferred Stock will be paid to the holder of any certificates
representing shares of FMC Common Stock until such certificates are surrendered
for exchange as provided in the Merger Agreement. Upon such surrender, there
will be paid, without interest, to the person in whose name the certificates
representing the shares of Lehigh Common Stock and Lehigh Preferred Stock into
which such shares were converted are registered, all dividends and other
distributions, if any, paid in respect of such Lehigh Common Stock
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or Lehigh Preferred Stock on a date subsequent to, and in respect of a record
date after, the Effective Time.
FRACTIONAL SHARES
No fractional shares of Lehigh Common Stock will be issued in the
Merger or upon conversion of the Lehigh Preferred Stock, if any. All fractional
shares of Lehigh Common Stock that a holder of shares of FMC Common Stock or
Lehigh Common Stock would otherwise be entitled to receive as a result of the
Merger will be aggregated, and the transfer agent will sell such shares in the
public market and distribute to each such holder entitled thereto a pro rata
portion of the net proceeds of such sale. No cash in lieu of fractional shares
of Lehigh Common Stock will be paid to any holder of shares of FMC Common Stock
or Lehigh Common Stock until certificates representing such shares are
surrendered and exchanged.
REGISTRATION AND LISTING OF SHARE CONSIDERATION
Lehigh has agreed that it will cause the offer and sale of Lehigh
Common Stock and Lehigh Preferred Stock issuable in the Merger, as well as the
Lehigh Common Stock issuable upon conversion of the Lehigh Preferred Stock, to
be registered under the Securities Act. Lehigh has agreed to use its best
efforts to have such shares listed for trading on the NYSE. Such listing is not
a condition to the consummation of the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties by each of
Lehigh and FMC that are customary and usual for transactions similar to that
contemplated by the Merger Agreement. These include, but are not limited to
corporate existence and authority to enter into the Merger Agreement; the
capitalization of each of Lehigh and FMC; that the shares to be issued by Lehigh
to the stockholders of FMC will be validly authorized and issued and fully-paid
and nonassessable; and that the financial statements furnished by each party
present fairly their financial position and results of operations and have been
prepared in conformity with generally accounting principles consistently
applied.
COVENANTS
The Merger Agreement also contains covenants by each of Lehigh and FMC,
principally as to the conduct of their respective business between the date of
the Merger Agreement and the Effective Date of the Merger. The principal
covenants are that Lehigh and FMC will conduct their business only in the usual
and ordinary course; neither shall amend their Certificates of Incorporation or
By-Laws unless it is deemed reasonably necessary to consummate the Merger; and
neither will declare any dividends or distributions on their outstanding shares
of capital stock.
NO SOLICITATION; TRANSACTION MORATORIUM
The agreement pursuant to which Mr. Zizza sold FMC an option to
purchase up to 6 million shares of Lehigh Common Stock at $.50 per share
contains certain restrictions on FMC's ability to vote or dispose of Lehigh
shares which it may acquire and prohibits the transfer of the option.
Until December 31, 2001, FMC agreed (i) it cannot acquire any shares of
common stock of Lehigh except (a) by means of the option and (b) up to 15% of
Lehigh's common stock through open
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market or privately negotiated purchases which are consummated prior to January
15, 1997; (ii) the only matter for which FMC may solicit proxies from Lehigh
stockholders is for approval of the Merger Agreement for which it must vote all
shares of common stock of Lehigh under its control or to which it obtains
proxies in favor of the Merger Agreement; (iii) on all other matters submitted
for a vote of stockholders, it must vote all shares of common stock of Lehigh
under its control in accordance with the recommendation of the Board of
Directors of Lehigh (so long as such matter has no detrimental effect on the
Merger Agreement); and (iv) it shall not transfer, assign, hypothecate, pledge
or otherwise dispose of any of the shares of common stock of Lehigh under its
control (or the voting rights attendant thereto) without first obtaining (a) Mr.
Zizza's consent and (b) the agreement of the purchaser to be bound by the
foregoing provisions . to the terms of an agreement with Lehigh.
ACCESS TO INFORMATION
In addition to each party having the opportunity to investigate the
properties and financial and legal condition of the other prior to the execution
of the Merger Agreement, Lehigh and FMC agreed that if matters come to the
attention of either party requiring additional due diligence, each will permit
the other and its authorized agents or representatives to have full access to
its premises and to all of its books and records and officers of the respective
companies will furnish the party making such investigation with such financial
and operating data and other information with respect to its business and
properties as the party making such investigation shall reasonably request.
ADDITIONAL COVENANTS
Additional covenants between the parties include Lehigh's covenant to
apply for listing on the New York Stock Exchange of the Lehigh shares to be
delivered to FMC stockholders; compliance by Lehigh with state securities laws;
reasonable efforts by both parties to obtain any required approvals or consents
of government or other authorities to the transactions contemplated by the
Merger Agreement; and for Lehigh and FMC to cooperate with each other and with
their respective counsel and accountants with respect to action required to be
taken as part of their obligations under the Merger Agreement, including the
preparation of financial statements and the supplying of information in
connection with the preparation of the Proxy Statement/Prospectus.
CONDITIONS TO THE MERGER
The Merger Agreement contains certain conditions which are to be
satisfied by Lehigh and FMC to each other's satisfaction on or before the
closing of the Merger. These conditions include, but are not limited to,
approval of the Merger Agreement by the vote of a majority of the outstanding
shares of common stock of Lehigh and FMC; Lehigh and FMC shall have furnished
each other with appropriate stockholder and Board of Directors resolutions
approving the Merger Agreement; appropriate and customary opinions of counsel
with respect to various aspects of the transactions; and that the representation
and warranties of each party as set forth in the Merger Agreement are true in
all material respects as of the Closing Date.
FMC's obligation to close is subject to the further condition that a
certificate of designation respecting the shares of Lehigh Preferred Stock
issuable pursuant to the Merger shall be filed with the Secretary of State for
the State of Delaware; that the Board of Directors of Lehigh shall be
constituted as set forth herein upon effectiveness of the Merger; and that
Lehigh's name shall have been changed to "First Medical Group, Inc." effective
upon the Merger.
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TERMINATION AND TERMINATION EXPENSES
The Merger Agreement provides that it may be terminated at any time
prior to the Closing Date by (i) mutual consent of the parties or (ii) upon
written notice to the other party, by either party upon authorization of its
Board of Directors if in its reasonably exercised judgment since October 29,
1996 there shall have occurred a material adverse change in the financial
condition or business of the other party or the other party shall have suffered
a material loss or damage to any of its property or assets, which change, loss
or damage materially affects or impairs the ability of the other party to
conduct its business, or if any previously undisclosed condition which
materially adversely affects the earning power or assets of either party come to
the attention of the other party .
The Merger Agreement may also be terminated by either party upon notice
to the other in the event the Closing shall not be held by March 31, 1997,
unless such termination date is extended upon mutual agreement of the parties.
The Merger Agreement also provides that if prior to the consummation of the
Merger, Lehigh consummates Alternate Combination which is found by the Lehigh
Board of Directors to be more favorable to Lehigh and its stockholders than the
Merger, Lehigh shall be obligated to pay FMC $1.5 million.
Any term or condition may be waived by the party which is entitled to
the benefit thereof by action taken by the Board of Directors of such party.
Except in the case of Lehigh's consummation of an Alternate
Combination, upon termination of the Merger Agreement each party shall bear its
own expenses in connection the contemplated transactions.
GOVERNMENTAL AND REGULATORY APPROVALS
Lehigh and FMC are not aware of any governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
applicable securities laws and the filing of the Certificate of Merger under
Delaware law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a discussion of certain federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
to Lehigh and FMC and to stockholders of FMC who receive Lehigh Common Stock as
a result of the Merger . This discussion does not deal with all aspects of
federal taxation that may be relevant to particular FMC stockholders, or with
the effects of state, local or foreign income taxation.
STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY
OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
No ruling has been requested from the Internal Revenue Service (the
"Service") in connection with the Merger, and in the opinion of counsel for
Lehigh and FMC no ruling would be given if one were requested. The tax
description set forth below has been prepared and reviewed by such counsel and
in their opinion is correct in all material respects. An opinion represents only
the best judgment of tax counsel. The description of the tax consequences set
forth below will not be binding on the Service, and the Service may adopt a
position contrary to that described below.
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CONSEQUENCES TO LEHIGH AND FMC
The Merger will constitute a reorganization under Section 368(a) of the
Code if carried out in the manner set forth in the Merger Agreement. By reason
of the Merger constituting a "reorganization," no gain or loss will be
recognized by Lehigh or FMC on account of the Merger.
CONSEQUENCES TO FMC STOCKHOLDERS
By virtue of the qualification of the Merger as a "reorganization"
under the Code, no gain or loss will be recognized by FMC stockholders upon the
receipt in connection with the Merger of Lehigh Common Stock and Lehigh
Preferred Stock in exchange for their shares of FMC Common Stock.
The aggregate tax basis of Lehigh Common Stock received by each FMC
stockholder will be the same as the aggregate tax basis of FMC Common Stock
surrendered in exchange therefor.
The holding period for each share of Lehigh Common Stock and Lehigh
Preferred Stock received by each stockholder of FMC in exchange for FMC Common
Stock will include the period for which such stockholder held the FMC Common
Stock exchanged therefor, provided such stockholder's FMC Common Stock is held
as a capital asset at the Effective Date of the Merger.
LIMITATIONS ON DESCRIPTION
The description of the tax consequences set forth above is subject to
certain assumptions and qualifications and is based on the truth and accuracy of
the representations of the parties in the Merger Agreement and in representation
letters to be delivered by the officers and directors of Lehigh and FMC. Of
particular importance is the assumption that the Merger will satisfy the
"continuity of interest" requirement.
In order for the continuity of interest requirement to be met, FMC
stockholders must not, pursuant to a plan or intent existing at or prior to the
Effective Time, dispose of an amount of the Lehigh Common Stock and Lehigh
Preferred Stock to be received in the Merger (including, under certain
circumstances, pre-merger dispositions of FMC Common Stock) such that the FMC
stockholders do not retain a meaningful continuing equity ownership in Lehigh.
Generally, so long as holders of FMC Common Stock do not plan to dispose of in
excess of 50 percent of the Lehigh Common Stock to be received as described
above (the "50 Percent Test"), such requirement will be satisfied. Management of
Lehigh and FMC have no knowledge of a plan or intention that would result in the
50 Percent Test not being satisfied.
A successful challenge by the Service to the above-described tax status
of the Merger would result in an FMC stockholder recognizing gain or loss with
respect to each share of FMC Common Stock surrendered equal to the difference
between such stockholder's basis in such share and the fair market value of the
Lehigh Common Stock and Lehigh Preferred Stock received in exchange therefor. In
such event, an FMC stockholder's aggregate basis in the shares of the Lehigh
Common Stock and Lehigh Preferred Stock received in the exchange would equal the
fair market value of such shares and the stockholder's holding period for such
shares would not include the period during which the stockholder held FMC Common
Stock.
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PROPOSAL NO. 2 -- THE CERTIFICATE AMENDMENTS
GENERAL
The Board of Directors of Lehigh has unanimously adopted a resolution
proposing and declaring it advisable to amend Lehigh's Restated Certificate of
Incorporation and By-laws: (A) changing the name of the corporation from "The
Lehigh Group Inc." to "First Medical Group, Inc."; (B) eliminating cumulative
voting for directors; (C) eliminating action by stockholders by written consent;
(D) fixing the number of members of the Board of Director at between seven and
eleven, as determined from time-to-time by the Board of Directors; and (E)
requiring any further amendment to the provisions of the Certificate of
Incorporation addressed by items (B) through (D) to require the vote of the
holders of at least 60% of the outstanding shares of Lehigh Common Stock
(collectively, the "Certificate Amendments"). Stockholders may vote for or
against, or abstain from voting with respect to, all of the parts of this
proposal as a group.
PART A -- CHANGING THE NAME OF THE CORPORATION FROM "THE LEHIGH GROUP INC." TO
"FIRST MEDICAL GROUP, INC."
The Lehigh Board has unanimously adopted a resolution proposing and
declaring it advisable to amend Lehigh's Restated Certificate of Incorporation
to change the name of Lehigh from "The Lehigh Group Inc." to "First Medical
Group, Inc."
The affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock is required for approval of the proposed amendment to change
Lehigh's name.
The Board recommends a vote FOR this proposed amendment and it is
intended that shares represented by the enclosed form of proxy will be voted in
favor of this proposed amendment unless otherwise specified in such proxy.
PART B -- ELIMINATING CUMULATIVE VOTING FOR DIRECTORS
In connection with the financial restructuring of Lehigh consummated in
1991 (the "1991 Restructuring"), Lehigh's Restated Certificate of Incorporation
and By-laws were amended to provide for cumulative voting in all elections of
directors, to eliminate the classification of the Board and to fix the number of
directors comprising the entire Board at seven. Such amendments were adopted to
ensure that, following the closing of such restructuring, the
predecessors-in-interest of Base Asset Trust, as liquidating agent of Executive
Life Insurance Company in Rehabilitation/Liquidation ("BAT"), by themselves,
would be able to elect at least one of Lehigh's directors at each annual meeting
of Lehigh's stockholders (so long as they continued to own at least one-sixth of
the outstanding shares of common stock). The adoption of such amendments was
required as a condition to such holders of Lehigh's outstanding subordinated
debentures and senior subordinated notes and such predecessors-in-interest of
BAT. Lehigh believes that such amendments are no longer required in light of the
financial restructuring of Lehigh consummated in May 1993 (the "1993
Restructuring") and as a result of BAT selling all of its stock in Lehigh on
July 2, 1996. For information as to these restructurings, see "Business
Information Regarding Lehigh and Merger Sub."
The Lehigh Board has unanimously approved, subject to stockholder
approval, adoption of amendments to Lehigh's Restated Certificate of
Incorporation and By-laws to eliminate the requirement for cumulative voting in
all future elections of directors of Lehigh by its stockholders. Currently, in
all
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elections of directors, each holder of shares of common stock is entitled to
cast such number of votes as shall equal the number of shares owned by such
holder multiplied by the number of directors to be elected by the holders of
common stock, and such holder may cast all of such holder's votes for a single
candidate or may distribute them among any two or more candidates in such
proportions as such holder may determine. The candidates receiving the highest
number of votes, up to the number of directors to be elected, shall be elected.
If the proposal to eliminate cumulative voting is adopted, cumulative
voting will not be available with respect to the election of directors in
connection with any future elections of directors by stockholders. The holder or
holders of shares representing a majority of the votes entitled to be cast in an
election of directors for Lehigh will be able to elect all directors.
In addition, currently no director may be removed by the stockholders
when the votes cast against his removal would be sufficient to elect him if
voted cumulatively (as described above) at an election of directors at which the
same number of votes were cast and the entire Board were then being elected. If
the proposal to eliminate cumulative voting is adopted, the holders of a
majority of the shares entitled to vote at an election of directors will be able
to remove any director or the entire Board with or without cause.
The absence of cumulative voting could have the effect of preventing
representation of minority stockholders on the Board. In addition, the
elimination of cumulative voting may have certain anti-takeover effects. It may,
under certain circumstances: discourage or render more difficult a merger,
tender offer proxy contest or acquisition of large blocks of Lehigh's shares by
persons who would not make such acquisition without assurance of the ability to
place a representative on the Board; deter or delay the assumption of control by
a holder of a large block of Lehigh's shares; or render more difficult the
replacement of incumbent directors and management.
The Board believes, however, that, in general, and especially in
publicly held corporations, each director should represent the interests of all
stockholders rather than the interests of a special constituency, and that the
presence on the Board of one or more directors representing such a constituency
could disrupt and impair the efficient management of Lehigh. Adoption of the
proposal to eliminate cumulative voting requires the affirmative vote of the
holders of a majority of the outstanding shares of common stock or the holders
of a least 80% of the outstanding shares of common stock voting at the Meeting,
whichever is greater.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
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PART C -- ELIMINATING ACTION BY STOCKHOLDERS BY WRITTEN CONSENT
The Board of Directors recommends that Lehigh's Certificate of
Incorporation be amended to provide that actions required or permitted to be
taken at any annual or special meeting of the stockholders may be taken only
upon the vote of the stockholders at a meeting duly called and may not be taken
by written consent of the stockholders.
Under the General Corporation Law of the State of Delaware (the
"DGCL"), unless otherwise provided in the Certificate of Incorporation, any
action required or permitted to be taken by stockholders of Lehigh may be taken
without a meeting, without prior notice and without a stockholder vote if a
written consent setting forth the action to be taken is signed by the holders of
shares of outstanding stock having the requisite number of votes that would be
necessary to authorize such action at a meeting of stockholders at which all
shares entitled to vote thereon were present and voted. Lehigh's Certificate of
Incorporation currently contains no provision restricting or regulating
stockholder action by written consent.
The adoption of this amendment would eliminate the ability of Lehigh
stockholders to act by written consent in lieu of a meeting. It is intended to
prevent solicitation of consents by stockholders seeking to effect changes
without giving all of Lehigh's stockholders entitled to vote on a proposed
action an adequate opportunity to participate at a meeting where such proposed
action is considered. The proposed amendment would prevent a takeover bidder
holding or controlling a large block of Lehigh's voting stock from using the
written consent procedure to take stockholder action unilaterally.
The Board of Directors does not believe that the elimination of
stockholder action by written consent will create a significant impediment to a
tender offer or other effort to take control of Lehigh. Nevertheless, the effect
of this proposal may be to make more difficult, or delay, certain actions by a
person or a group acquiring a substantial percentage of Lehigh's stock even
though such actions might be desired by, or beneficial to, the holders of a
majority the Lehigh's stock.
This amendment will ensure that all stockholders will have advance
notice of any attempted major corporate action by stockholders, and that all
stockholders will have an equal opportunity to participate at the meeting of
stockholders where such action is being considered. It will enable Lehigh to set
a record date for any stockholder voting, and should reduce the possibility of
disputes or confusion regarding the validity of purported stockholder action.
The amendment could provide some encouragement to a potential acquiror to
negotiate directly with the Board of Directors.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
PART D -- FIXING THE NUMBER OF DIRECTORS AT BETWEEN SEVEN AND ELEVEN
The Lehigh Board has unanimously approved, subject to stockholder
approval, adoption of amendments of Lehigh's Restated Certificate of
Incorporation and By-laws to provide that the number of directors comprising the
entire Board be not less than seven nor more than eleven, as determined from
time to time by the Board. Such amendments are intended to increase the
flexibility of the Board to vary its size depending on the needs of Lehigh, the
availability of qualified persons willing to serve as directors and other
relevant factors.
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Lehigh's Restated Certificate of Incorporation currently provides that
the number of directors constituting the entire Board shall be six. Although the
Board currently consists of six directors, seven directors have been nominated
for election at the Meeting. If the Merger is not approved by stockholders, the
Merger will not be effected and the current directors of Lehigh will continue to
serve.
If such proposed amendments are adopted, Lehigh's Restated Certificate
of Incorporation will be amended to provide that the number of directors
comprising the entire Board will be determined as set forth in Lehigh's By-laws
and such By-laws will be amended to provide that the number of directors
comprising the entire Board would be not less than seven nor more than eleven,
as determined from time to time by the Board. Adoption of these amendments
requires the affirmative vote of the holders of a majority of the outstanding
shares of Lehigh Common Stock or the holders of at least 80% of the outstanding
shares of Lehigh Common Stock voting at the Meeting, whichever is greater.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
PART E -- REQUIRING ANY FURTHER AMENDMENT TO THE PROVISIONS OF THE CERTIFICATE
OF INCORPORATION ADDRESSED BY PARTS (B) THROUGH (D) TO REQUIRE THE VOTE OF THE
HOLDERS OF AT LEAST 60% OF THE OUTSTANDING SHARES OF LEHIGH COMMON STOCK
The Board of Directors recommends that Lehigh's Certificate of
Incorporation be amended to require that in order to amend, repeal or adopt any
provision inconsistent with the amendments to the Certificate of Incorporation
described in Parts (B) through (D) the affirmative vote of at least 60% of the
outstanding shares of Lehigh Common Stock shall be required.
Under the DGCL of the State of Delaware, amendments to the Certificate
of Incorporation require the approval of the holders of a majority of the
outstanding stock entitled to vote thereon, but the law also permits a
corporation to include provisions in its Certificate of Incorporation which
require a greater vote than otherwise required by law for any corporate action.
With respect to such supermajority provisions, the DGCL requires that any
alteration, amendment or repeal thereof be approved by an equally large
stockholder vote.
The requirement of an increased stockholder vote is designed to prevent
a person holding or controlling a majority, but less than 60%, of the shares of
Lehigh from avoiding the requirements of the proposed amendments by simply
repealing them.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
34
<PAGE>
PROPOSAL NO. 3 -- ELECTION OF DIRECTORS
GENERAL
Lehigh's Restated Certificate of Incorporation and By-laws provide that
the number of directors constituting the entire Board of Directors of Lehigh
(the "Board") shall be six. Lehigh is proposing to amend its Restated
Certificate of Incorporation and By-laws to provide that the number of directors
comprising the entire Board be not less than seven nor more than eleven, as
determined from time to time by the Board. See "Proposal No. 2 -- The
Certificate Amendments". There are seven nominees for director. If the
stockholders fail to approve the proposed amendment to Lehigh's Restated
Certificate of Incorporation and By-laws to provide that the number of directors
comprising the entire Board shall be not less than seven nor more than eleven,
then the six nominees who receive the most votes shall serve as Lehigh's
directors.
Cumulative voting will be available with respect to the election of
directors at the Meeting. Each holder of shares of Lehigh Common Stock shall be
entitled to cast such number of votes as shall equal the number of shares owned
by such holder multiplied by the number of directors to be elected by the
holders of Common Stock, and such holder may cast all of such holder's votes for
a single candidate or may distribute them among any two or more candidates in
such proportions as such holder may determine. The candidates receiving the
highest number of votes, up to the number of directors to be elected, shall be
elected. Unless instructions to the contrary are given, the shares represented
by a proxy at the Meeting will be voted for any one or more of management's
nominees, to the exclusion of others, and in such order of preference as the
proxy holders determine in their sole discretion.
If for any reason any of Lehigh's nominees should be unable to serve or
refuse to serve as a director, an event which is not anticipated, the enclosed
proxies may be voted for a substituted nominee, in accordance with the judgment
of the proxy holders, and for the other nominees of management.
The table set forth below sets forth information with respect to each
nominee for director of Lehigh following the Merger, if approved. Information as
to age, occupation and other directorships has been furnished to Lehigh by the
individual named. Mr. Zizza is currently a director of Lehigh. Those directors
elected at the Meeting will serve until the next annual meeting of stockholders
of Lehigh (or until their respective successors are duly elected and qualified
or until their earlier death, resignation or removal).
PROPOSED DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- ----------------
<S> <C> <C>
Salvatore J. Zizza 51 Chairman of the Board, President, Chief
Executive Officer, Director of Lehigh
and Nominee for Director
Robert A. Bruno 40 Vice President and Secretary of Lehigh
Dennis A. Sokol 52 Chairman of the Board and Chief
Executive Officer of FMC and Nominee
for Director
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- ----------------
<S> <C> <C>
Charles J. Pendola 51 President and Director of FMC and
Nominee for Director
Elias M. Nemnom 46 Vice President and Chief Financial
Officer
Melvin E. Levinson, 68 Director of FMC and Nominee for
M.D. Director
Elliot H. Cole 64 Director of FMC and Nominee for
Director
Paul Murphy 49 Director of FMC and Nominee for
Director
Alain Lellouche 58 Nominee for Director
</TABLE>
Mr. Zizza has been a director of Lehigh since 1985 (except that he did
not serve as a director during the period from March 15, 1991 through April 16,
1991) and Chairman of the Board of Lehigh since April 16, 1991, and was Chief
Executive Officer of Lehigh from April 16, 1991 through August 22, 1991 and
President of NICO from 1983 through August 22, 1991. He also served as President
of Lehigh from October 1985 until April 16, 1991. He is also a director of the
Gabelli Equity Trust, Inc.; The Gabelli Asset Fund; The Gabelli Growth Fund; The
Gabelli Convertible Securities Funds, Inc. and The Gabelli Global MultiMedia
Trust Inc. On December 12, 1995, Mr. Zizza became Chairman of the Board of The
Bethlehem Corporation (an American Stock Exchange company). On November 18,
1992, Mr. Zizza also became Chairman of the Board, President and Treasurer of
Initial Acquisition Corp. (a Nasdaq-listed Company).
Mr. Bruno has served as Vice President and General Counsel since May 5,
1993 and as Secretary since August 22, 1994. He was appointed to the Board on
March 31, 1994. He also has served as General Counsel to NICO and its
subsidiaries since June 1983 (except he did not serve as General Counsel to NICO
during the period of January 1, 1992 through May 31, 1993).
Mr. Sokol has served as the Chairman of the Board and Chief Executive
Officer of FMC since its formation in January 1996. Prior to the formation of
FMC, Mr. Sokol served as the Chairman of the Board and Chief Executive Officer
of Hospital Corporation International, Plc., the former international division
of Hospital Corporation of America, Inc., which entity owned and operated
hospitals and primary care facilities in the United Kingdom, Central and Eastern
Europe, the Middle East and Pacific Rim, and American Medical Clinics, Ltd. Mr.
Sokol was the founder, and from 1984 to 1988 served as Chief Executive Officer
of Medserv Corporation, a multifaceted medical service company. Mr. Sokol was
the founder, and from 1989 to 1992 served as the Chief Executive Officer, of the
American-Soviet Medical Consortium whose members included Pfizer, Inc.,
Colgate-Palmolive Company, Hewlett-Packard Company, MedServ, Amoco Corporation
and Federal Express Corp. In all, Mr. Sokol has over 30 years experience in the
medical services industry.
Mr. Pendola has served as the President and a director of FMC since
July 1996. Prior to joining FMC, from April 1989 to June 1996, Mr. Pendola
served as the President and Chief Executive Officer of Preferred Health Network,
Inc., a not-for-profit company that manages a diversified group of health
36
<PAGE>
care providers and health related organizations including five acute care
hospitals and twenty ambulatory care centers. Mr. Pendola served as National
Director of Healthcare Reimbursement and as a director of the New York
Healthcare Advisory Services Group from 1985 to 1989.
Mr. Nemnom has served as the Chief Financial Officer of FMC since
joining the company in May 1996. Prior to joining FMC, from March 1995 to April
1996, Mr. Nemnom served as the Chief Financial Officer of MedE America
Corporation, an electronic data interchange company. From December 1985 to
January 1995, Mr. Nemnom served as the Chief Financial Officer of Medserv
Corporation, a multifaceted medical service company. Before joining Medserv, Mr.
Nemnom was a Senior Manager at Deloitte & Touche for over ten years specializing
in the healthcare industry. Mr. Nemnom is a Certified Public Accountant and a
member of the American Institute of Certified Public Accountants, the New York
State Society of Certified Public Accountants and the Healthcare Financial
Management Association.
Dr. Levinson has served as a Co-Vice Chairman of FMC's Board of
Directors since its formation in January 1, 1996. Dr. Levinson was a co-founder
of MedExec, Inc., a wholly-owned subsidiary of FMC ("MedExec"), for which he
served as Chairman of the Board and a director from March 1991 to January 1996.
Dr. Levinson was also a co-founder and former director of HealthInfusion, Inc.,
a publicly traded company engaged in the delivery of intravenous home therapy.
Dr Levinson is a founder and since January 1996 has served as the Chairman of
the Board of Scion International, Inc., a manufacturer of medical devises. Dr.
Levinson is currently an Associate Professor at the University of Miami School
of Medicine.
Mr. Cole has served as the Co-Vice Chairman of FMC's Board of Directors
since its formation in January 1996. Mr. Cole is a senior partner in the law
firm of Patton Boggs LLP, Washington, D.C., a firm of approximately 250 lawyers.
Mr. Cole has practiced corporation law and been engaged in Federal matters for
more than thirty-five years. Mr. Cole has served as a trustee of Boston
University since 1977 as well as being a member of numerous corporate and
not-for-profit boards.
Mr. Murphy has served as a director of FMC since its formation in
January 1996. Since 1994, Mr. Murphy has served as the Deputy Managing Director
of BMI Healthcare, the largest provider of health care in the United Kingdom.
From 1989 until its merger in 1994 with its affiliate, General Healthcare Group,
in connection with the formation of BMI Healthcare, Mr. Murphy served as the
Managing Director of GreatNorthern Health Management Ltd., a company which
managed up to ten hospitals within the United Kingdom. Prior to joining
GreatNorthern Health Management Ltd., from 1984 to 1989, Mr. Murphy served as
the Chief Executive Officer of Little Aston Hospital plc, a company which owned
and operated a hospital located in Birmingham, United Kingdom. In all, Mr.
Murphy has over 20 years experience in the United Kingdom health care industry.
Mr. Murphy currently sits on the boards of several hospital corporations and
other health care companies in the United Kingdom.
Mr. Lellouche has been nominated to serve as director upon consummation
of the Merger. Since March, 1992, Mr. Lellouche has served as the Chairman and
Chief Executive officer of General de Services Sante, Inc., N.A., a company
engaged in the management of hospital and day care centers located in Canada. In
addition, since January 1993, Mr. Lellouche has served as the Chairman and Chief
Executive Officer of Hospital Service GSS Inc., a health care related food
service and housekeeping maintenance management company and since January 1994,
has served as the Chairman and Chief Executive Officer of Residences Champlain,
Inc., a seniors residence management company.
No family relationship exists between any of the directors and
executive officers of Lehigh.
37
<PAGE>
All directors will serve until the annual meeting of stockholders of
Lehigh to be held in 1997 and until their respective successors are duly elected
and qualified or until their earlier death, resignation or removal. Officers are
elected annually by the Board and serve at the discretion thereof.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 22, 1994, Lehigh sold 2,575,000 shares of Lehigh Common Stock
pursuant to a private placement (the "Private Placement") at a purchase price of
$.40 per share, including 250,000 shares sold to Salvatore J. Zizza (Lehigh's
President, Chairman of the board and Chief Executive Officer), 62,500 shares
sold to Robert A. Bruno (Lehigh's Vice President, General Counsel and Secretary)
and 750,000 shares sold to Kenneth Godt as Trustee of the Orion Trust (which, by
virtue of such sale, became the owner of more than 5% of the outstanding Lehigh
Common Stock). Pursuant to a registration rights agreement dated as of August
22, 1994 among Lehigh and the investors that purchased Lehigh Common Stock
pursuant to the Private Placement (including Mr. Zizza, Mr. Bruno and Kenneth
Godt as Trustee for the Orion Trust), such investors have one demand
registration right (exercisable at any time after the first anniversary and
prior to the fifth anniversary of such date) and certain "piggyback"
registration rights with respect to such common stock. On August 22, 1994,
Lehigh also (i) issued to Goldis Financial Group Inc. warrants to purchase
402,187 shares of common stock at $.50 per share, as partial consideration for
its services as selling agent in connection with the Private Placement, and (ii)
granted to it certain piggyback registration rights as to such shares.
On August 22, 1994 (immediately prior to the closing under the Private
Placement), (i) Lehigh and Mr. Zizza entered into an employment agreement
providing for the employment of Mr. Zizza through December 31, 1999 as
President, Chairman of the Board and Chief Executive Officer of Lehigh at an
annual salary of $200,000 (subject to increase, in the discretion of the Board,
if Lehigh acquires one or more new businesses, to a level commensurate with the
compensation paid to the top executives of comparable businesses), and (ii)
Lehigh and Dominic Bassani entered into a consulting agreement providing for Mr.
Bassani to serve as a consultant to Lehigh for a five year period and to provide
during such period such financial advisory services and assistance as Lehigh may
request in connection with arranging for financing for Lehigh (including
pursuant to the Private Placement) and in connection with the selection and
evaluation of potential acquisitions. The consulting agreement with Mr. Bassani
was mutually terminated in July 1995. If Lehigh acquires any business with
annual revenues in the year immediately prior to such acquisition of at least
$25 million (an "Acquired Business"), Mr. Zizza will be entitled to a bonus for
each year of his employment following such acquisition (including the portion of
the year immediately following such acquisition), based on specified percentages
of the total pre-tax income of all Acquired Businesses for such year or portion
thereof ("Acquired Business Pre-Tax Income"). For this purpose, Acquired
Business Pre-Tax Income excludes any income earned by Acquired Businesses prior
to their acquisition by Lehigh, any earnings attributable to any minority
interest in Acquired Businesses, and any extraordinary items. The bonus for Mr.
Zizza for each such year (or portion thereof) will be an amount equal to
one-half of (i) 10% of the first $1,000,000 of all Acquired Business Pre-Tax
Income for such year (or portion thereof), (ii) 9% of all Acquired Business
Pre-Tax Income for such year (or portion thereof) above $1,000,000 up to but not
exceeding $2,000,000, PLUS (iii) 8% of all Acquired Business Pre-Tax Income for
such year (or portion thereof) above $2,000,000 up to but not exceeding
$3,000,000, PLUS (iv) 7% of all Acquired Business Pre-Tax Income for such year
(or portion thereof) above $3,000,000 up to but not exceeding $4,000,000, plus
(v) 6% of all Acquired Business Pre-Tax Income for such year above $4,000,000 up
to but not exceeding $5,000,000, (vi) 5% of all Acquired Business Pre-Tax Income
for such year above $5,000,000. Mr. Zizza and Lehigh have amended Mr. Zizza's
employment agreement which amendment effective as of the Effective Time. The
amendment provides that (i) Mr. Zizza may be entitled to a bonus at the
discretion of Lehigh in lieu of
38
<PAGE>
the current bonus formula, (ii) Mr. Zizza's options and warrants to purchase an
aggregate of 6,000,000 shares of Lehigh Common Stock at an exercise price of
$.75 per share and options and warrants to purchase an aggregate of 6,000,000
shares of Lehigh Common Stock at an exercise price of $1.00 per share shall be
converted into 3% of the total issued and outstanding stock of Lehigh, on a
fully diluted basis (after giving effect to the issuance and conversion of
Lehigh Common Stock) at a blended exercise price of $.875 per share and (iii)
extending the employment period for one additional year through December 31,
2000.
Lehigh also granted (i) to Mr. Zizza options to purchase a total of
10,250,000 shares of Lehigh Common Stock: 4,250,000 exercisable at $.50 per
share, 3,000,000 exercisable at $.75 per share, and 3,000,000 exercisable at
$1.00 per share; and (ii) to Mr. Bassani warrants to purchase a total of
7,750,000 shares of Common Stock: 1,750,000 exercisable at $.50 per share,
3,000,000 at $.75 per share, and 3,000,000 at $1.00 per share. In July 1995, Mr.
Zizza purchased all the warrants held by Mr. Bassani. At the time of such
purchase, the Board consented to the transaction and amended the Bassani
warrants to make their expiration date co-terminus with the other warrants which
had been issued to Mr. Zizza. The $.50 per share options are currently
exercisable; the $.75 and $1.00 per share options will not be exercisable until
such time as (i) Lehigh has raised at least $10 million of equity, (ii) Lehigh
has consummated an acquisition of a business with annual revenues in the year
immediately prior to such acquisition of at least $25 million, and (iii) the
fair market value of the Lehigh Common Stock (as measured over a period of 30
consecutive days) has equalled or exceeded $1.00 per share. The options and
warrants held by Mr. Zizza (including those purchased from Mr. Bassani) will
terminate on the fifth anniversary of the date of grant, subject to earlier
termination under certain circumstances in the event of his death or the
termination of his employment. Lehigh also granted to Mr. Zizza one demand
registration right (exercisable only if Lehigh is eligible to file a
registration statement on Form S-3 or a form substantially equivalent thereto)
and certain "piggyback" registration rights with respect to the shares of Lehigh
Common Stock purchasable upon exercise of the options or warrants granted to
him. An option to purchase 6,000,000 of the shares subject to the foregoing
options was granted to FMC on October 29, 1996 and was exercised by FMC in full
on January __, 1997. This exercise was effected through (i) the exercise by Mr.
Zizza of his options, and (ii) the subsequent sale of those shares to FMC. See
"Proposal No. 1 -- The Merger -- Background to the Merger," and "Security
Ownership of Certain Beneficial Owners of Lehigh."
In connection with the issuance by Lehigh of common stock pursuant to
the 1991 Restructuring to the former holders of the 13-1/2% Notes and 14-7/8%
Debentures and NICO's Senior Secured Notes (which holders included Southwicke,
FBL, Allstate and Teachers or their predecessors in interest), Lehigh granted to
such holders two demand and unlimited piggyback registration rights (which
remain in effect to the extent such Common Stock is not otherwise freely
transferable). For information as to the Lehigh Common Stock held by Southwicke,
FBL, Allstate and Teachers (which is covered by such registration rights), see
"Security Ownership of Certain Beneficial Owners of Lehigh."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the regulations of the SEC thereunder require Lehigh's
executive officers and directors, and persons who own more than ten percent of a
registered class of Lehigh's equity securities, to file reports of initial
ownership and changes in ownership with the SEC and the National Association of
Securities Dealers,
39
<PAGE>
Inc. Such officers, directors and ten-percent stockholders are also required by
SEC rules to furnish Lehigh with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no other reports
were required for such persons, Lehigh believes that, during or with respect to
the period from January 1, 1995 to December 31, 1995, all Section 16(a) filing
requirements applicable to its executive officers, directors and ten-percent
stockholders were complied with, except that Forms 3 were not timely filed for
the following Directors of Lehigh: Charles A. Gargano, Salvatore M. Salibello
and Anthony F.L. Amhurst. In addition, one Form 4 was not timely filed by each
of Mr. Zizza and Mr. Bruno. Lehigh and the above named persons have taken the
appropriate steps to file the necessary forms.
BOARD MEETINGS AND COMMITTEES OF THE BOARD
During 1995 the Board of Directors held one meeting which was attended
by all of the directors except Charles Gargano.
The Lehigh Board of Directors has a standing Audit Committee, Executive
Committee and Compensation Committee.
The Audit Committee did not meet during 1995. The current members of
the Audit Committee are Salvatore Salibello and Richard Bready. The functions of
the Audit Committee include recommending to the Board the appointment of the
independent public accountants for Lehigh; reviewing the scope of the audit
performed by the independent public accountants and their compensation therefor;
reviewing recommendations to management made by the independent public
accountants and management's responses thereto; reviewing internal audit
procedures and controls on various aspects of corporate operations and
consulting with the independent public accountants on matters relating to the
financial affairs of Lehigh.
The Executive Committee of the Board held no meetings in 1995. The
current members of the Executive Committee are Messrs. Zizza, Bready and Bruno.
The Executive Committee is authorized (except when the Board is in session) to
exercise all of the powers of the Board (except as otherwise provided by law).
The Compensation Committee did not meet in 1995. The current members of
the Compensation Committee are Anthony Amhurst and Charles Gargano. The
Compensation Committee is responsible for developing Lehigh's executive
compensation policies and determining the compensation paid to Lehigh's Chief
Executive Officer and its other executive officers.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation awarded to,
earned by or paid to the Chief Executive Officer and the other executive
officers of Lehigh whose total annual salary and bonus exceeded $100,000 for
services rendered in all capacities to Lehigh during each of the years ended
December 31, 1995, December 31, 1994 and December 31, 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
Awards
Securities
Underlying
Options
Other Annual (number of All Other
Name And Principal Position Year Salary Bonus Compensation(2) Shares) Compensation (3)
- --------------------------- ---- ------ ----- --------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salvatore J. Zizza (1) 1995 $200,000 0 0 0 $1,272
Chairman of the Board
1994 $200,000 0 0 10,250,000(1) $ 800
1993 $191,994 0 0 0 0
Robert A. Bruno (4) 1995 150,000 0 0 250,000(4) $1,272
Vice President and
General Counsel 1994 * 0 0 0 $ 822
1993 * 0 0 0 $ 318
1995 $110,784 $13,469 0 0 $1,272
Joseph Delowery (5)
President of HallMark 1994 $110,613 0 0 0 $1,272
1993 $109,024 0 0 0 $ 960
</TABLE>
* Mr. Bruno's compensation for 1994 and 1993 did not exceed $100,000 and
therefore no disclosure was required to be provided for those years.
(1) On August 22, 1994, Lehigh and Mr. Zizza entered into an employment
agreement providing for his employment through December 31, 1999 as
President, Chairman of the Board and Chief Executive Officer of Lehigh
at an annual salary of $200,000 (subject to increase, in the discretion
of the Board, if Lehigh acquires one or more new businesses, to a level
commensurate with the compensation paid to the top executives of
comparable businesses). Pursuant to such agreement, if Lehigh acquires
any business with annual revenues in the year immediately prior to such
acquisition of at least $25 million (an "Acquired Business"), Mr. Zizza
will be entitled to a bonus for each year of his employment following
such acquisition (including the portion of the year immediately
following such acquisition), in an amount equal to one-half of (i) 10%
of the first $1,000,000 of all Acquired Business Pre-Tax Income (as
hereinafter defined) for such year (or portion thereof), PLUS (ii) 9%
of all Acquired Business Pre-Tax Income for such year (or portion
thereof) above $1,000,000 up to but not exceeding $2,000,000, PLUS
(iii) 8% of all Acquired Business Pre-Tax Income for such year (or
portion thereof) above $2,000,000 up to but not exceeding $3,000,000,
PLUS (iv) 7% of all Acquired
41
<PAGE>
Business Pre-Tax Income for such year (or portion thereof) above
$3,000,000 up to but not exceeding $4,000,000, plus (v) 6% of all
Acquired Business Pre-Tax Income for such year above $4,000,000 up to
but not exceeding $5,000,000, PLUS (vi) 5% of all Acquired Business
Pre-Tax Income for such year above $5,000,000. For the purposes hereof,
"Acquired Business Pre-Tax Income" for any year (or portion thereof)
means the total pre-tax income of all Acquired Businesses for such year
(or portion thereof), excluding any income earned by Acquired
Businesses prior to their acquisition by Lehigh, any earnings
attributable to any minority interest in Acquired Businesses, and any
extraordinary items.
Mr. Zizza and Lehigh have amended the terms of Mr. Zizza's employment
agreement effective as of the Effective Time of the Merger. In general,
the amendment provides that (i) Mr. Zizza may be entitled to a bonus,
at the discretion of the Lehigh, in lieu of the current bonus formula,
(ii) Mr. Zizza's options an warrants exercisable at $.75 per share into
an aggregate of 6,000,000 shares of Lehigh Common Stock and options and
warrants exercisable at $1.00 per share into an aggregate of 6,000,000
shares of Lehigh Common Stock shall be converted into 3% of the total
issued and outstanding shares of Lehigh Common Stock, on a fully
diluted basis (after giving effect to a conversion of all of the shares
of Lehigh Preferred Stock issued in connection with the Merger) at a
blended exercise price of $.875 per share and (iii) the term of Mr.
Zizza's employment agreement be extended for an additional year through
December 31, 2000.
(2) As to each individual named, the aggregate amount of personal benefits
not included in the Summary Compensation Table does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported
for the named executive officer.
(3) Represents premiums paid by Lehigh with respect to term life insurance
for the benefit of the named executive officer.
(4) On January 1, 1995, Lehigh and Mr. Bruno entered into an employment
agreement providing for his employment through December 31, 1999 as
Vice President and General Counsel for Lehigh at an annual salary of
$150,000. Pursuant to such agreement, Mr. Bruno has deferred one-third
of his annual salary until such time as Lehigh's annual revenues exceed
$25 million. In April 1995, Lehigh granted Mr. Bruno an option to
purchase 250,000 shares of common stock at an exercise price of $.50
per share. The option is (i) immediately exercisable as to 100,000
shares subject to such option, (ii) exercisable December 31, 1995 as to
an additional 75,000 shares subject to such option, and (iii)
exercisable December 31, 1996 as to the remaining 75,000 shares subject
to such option. The option will expire December 31, 1999.
Mr. Bruno and Lehigh have amended the terms of Mr. Bruno's employment
agreement effective as of the Effective Time of the Merger. In general,
the amendment provides that (i) Mr. Bruno's salary be reduced from
$150,000 to $120,000 per year, (ii) no part of Mr. Bruno's salary be
deferred and (iii) the term of the employment agreement be extended for
an additional year through December 31, 2000.
(5) Mr. Delowery may be deemed to be an executive officer of Lehigh by
virtue of his position with HallMark. HallMark became Lehigh's
principal operating subsidiary following the 1993 Restructuring.
COMPENSATION OF DIRECTORS
Lehigh directors receive no compensation for serving on the Board other
than the reimbursement of reasonable expenses incurred in attending meetings. In
April 1995, Lehigh granted options to purchase 15,000 shares of common stock at
an exercise price of $.50 per share to Mr. Bready and options to purchase 10,000
shares of common stock at an exercise price of $.50 per share to each of Messrs.
Gargano, Amhurst and Salibello.
The following table provides information on options granted during 1995
to the executive officers of Lehigh named in the Summary Compensation Table.
42
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN 1995
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
Percent of
Total
Options Options
Original Granted Granted to Exercise Expiration
Date of (number Employees Price Date
Name Grant* Of Shares In 1995 ($/Share) 0%($) 5%($) 10%($)
- ---- ------ --------- ------- --------- --------- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Bruno 4/21/95 100,000(1) 40% $0.50 12/31/99 0 $13,800 $36,000
Robert A. Bruno 4/21/95 75,000(2) 30% 0.50 12/31/99 0 $10,350 $22,950
Robert A. Bruno 4/21/95 75,000(3) 30% 0.50 12/31/99 0 $10,350 $22,950
</TABLE>
* On April 21, 1995, the closing price per share of the Common Stock on
the New York Stock Exchange was $.50.
(1) Immediately exercisable.
(2) Exercisable December 31, 1995.
(3) Exercisable December 31, 1996.
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<PAGE>
The following table sets forth the number of options exercised and the
dollar value realized thereon by the executive officers of Lehigh named in the
Summary Compensation Table, along with the number and dollar value of any
options remaining unexercised on December 31, 1995.
AGGREGATED OPTION EXERCISES IN
1995 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Year-End Year-End(1)
------------------------------- -----------------------------------
Shares
Acquired Value
Name On Exercise Realized(2) Exercisable Unexercisable Exercisable(2) Unexercisable(2)
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore Zizza $ 0 $ 0 6,000,000 6,000,000 $ 0 $ 0
Robert Bruno $ 0 $ 0 175,000 75,000 $ 0 $ 0
</TABLE>
(1) On December 31, 1995, the average of the high and low prices per share
of the Common Stock on the New York Stock Exchange was $0.27.
(2) Represents the difference between the market value of the Common Stock
underlying the option and the exercise price of such option upon
exercise or year-end, as the case may be.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Both Anthony Amhurst and Charles Gargano are members of Lehigh's
Compensation Committee and are directors. There are no compensation committee
interlock relationships to be disclosed pursuant to Item 402 of Regulation S-K.
BOARD REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for developing Lehigh's
executive compensation policies and determining the compensation paid to
Lehigh's Chief Executive Officer and its other executive officers.
The Compensation Committee considers the current executive compensation
(other than for Mr. Delowery) to be below the standard for executives performing
comparable services (such as debt restructurings, work-outs, negotiations with
bondholders and various creditors, restructuring bank credit lines for more
favorable terms, pursuing opportunities to raise working capital, etc.).
Lehigh entered into an employment agreement with Mr. Zizza in August
1994 providing for his employment through December 31, 1999 as President,
Chairman of the Board and Chief Executive Officer of Lehigh at an annual salary
of $200,000 (the same salary previously paid to him). His salary is subject to
increase, in the Board's discretion, if Lehigh acquires one or more new
businesses, to a level
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commensurate with the compensation paid to the top executives of comparable
businesses. If Lehigh acquires any business with annual revenues in the year
immediately prior to such acquisition of at least $25 million, Mr. Zizza will be
entitled to a bonus for each year of his employment following such acquisition
(including the portion of the year immediately following such acquisition),
based on specified percentages of the total pre-tax income of all such acquired
businesses for such year or portion thereof. See "Certain Relationships and
Related Transactions", above. Pursuant to such employment agreement, Lehigh also
granted to Mr. Zizza options to purchase 10,250,000 shares of Common Stock at
exercise prices ranging from $.50 to $1.00 per share. For information as to the
terms and conditions of exercisability of such options, see "Certain
Relationships and Related Transactions" and "Executive Compensation," above.
PROPOSAL NO 4 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors of Lehigh has selected BDO Seidman, LLP to be
the independent auditors of Lehigh for the year ending December 31, 1996.
Although the selection of auditors does not require ratification, the Board of
Directors of Lehigh has directed that the appointment of BDO Seidman, LLP be
submitted to stockholders for ratification due to the significance of their
appointment to Lehigh. If stockholders do not ratify the appointment of BDO
Seidman, LLP, the Board of Directors of Lehigh will consider the appointment of
other certified public accountants. A representative of BDO Seidman, LLP is
expected to be available at the Meeting to make a statement if such
representative desires to do so and to respond to appropriate questions.
VOTE REQUIRED
Ratification of the appointment of BDO Seidman, LLP requires the
affirmative vote of a majority of the votes cast by all stockholders represented
and entitled to vote thereon. An abstention, withholding of authority to vote or
broker non-vote, therefore, will not have the same legal effect as an "against"
vote and will not be counted in determining whether the proposal has received
the requisite stockholder vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF LEHIGH
THE BOARD OF DIRECTORS OF LEHIGH RECOMMENDS A VOTE FOR THE RATIFICATION
OF THE APPOINTMENT OF BDO SEIDMAN, LLP AS LEHIGH'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1996.
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BUSINESS INFORMATION REGARDING LEHIGH AND MERGER SUB
LEHIGH
GENERAL
Lehigh (formerly The LVI Group Inc.) through its wholly owned
subsidiary, HallMark Electrical Supplies Corp. ("HallMark"), is engaged in the
distribution of electrical supplies for the construction industry both
domestically (primarily in the New York Metropolitan area) and for export.
Prior to 1994, Lehigh, through its wholly owned subsidiaries, had been
engaged in the following other businesses: (i) through certain of its operating
subsidiaries ("NICO Construction"), interior construction; (ii) through its
wholly owned subsidiary, LVI Environmental Services Group Inc. ("LVI
Environmental") and subsidiaries thereof, asbestos abatement; (iii) through
Riverside Mfg., Inc. ("Riverside"), the design, production and sale of
electrical products; (iv) through Mobile Pulley and Machine Works, Inc. ("Mobile
Pulley"), the manufacture and sale of dredging equipment and precision machined
castings; and (v) through LVI Energy Recovery Corporation ("LVI Energy"), energy
recovery and power generation and landfill closure services. All of such other
businesses were transferred or sold prior to 1994.
Riverside and Mobile Pulley were transferred to a liquidating trust in
connection with Lehigh's financial restructuring of its outstanding debt and
preferred stock on March 15, 1991 (the "1991 Restructuring"). During the third
quarter of 1991, Lehigh discontinued its interior construction business operated
through its NICO Construction subsidiaries due to the general economic slowdown,
particularly as it related to the real estate market. In the third quarter of
1990, Lehigh discontinued its LVI Energy business which was prompted by
technical problems at the LVI Energy power plant facility. Both the NICO
Construction and LVI Energy subsidiaries were sold on December 31, 1991.
Lehigh consummated a restructuring on May 5, 1993 (the "1993
Restructuring"). Pursuant to the 1993 Restructuring, Lehigh, through NICO Inc.,
a wholly owned subsidiary ("NICO"), sold LVI Environmental to LVI Holding
Corporation ("LVI Holding"), a newly formed company organized by the management
of LVI Environmental, which had a minority interest in LVI Holding. The owners
of LVI Holding were certain holders of the 9.5% Class A Senior Secured
Redeemable Notes due March 15, 1997 and the 8% Class B Senior Secured Redeemable
Notes due March 15, 1999 issued by NICO and guaranteed by Lehigh (the "Class A
Notes" and "Class B Notes," respectively) and members of the management of LVI
Environmental. As a result of the 1993 Restructuring, 100% of the Class A Notes
and over 97% of the Class B Notes (together, the "Notes"), of NICO were
surrendered to Lehigh, together with 3,000,000 shares of its common stock, par
value $.001 per share (the "NICO Common Stock") (27% of all common stock then
outstanding), and, in exchange therefor, participating holders of the Notes
acquired, through LVI Holding, all of the stock of LVI Environmental. Lehigh's
consolidated indebtedness was thereby reduced from approximately $45.9 million
to approximately $3.6 million (excluding approximately $431,217 of indebtedness
under Class B Notes that LVI Holding agreed to pay in connection with the 1993
Restructuring, but for which Lehigh remains liable). LVI Holding paid $1.5
million to Lehigh during 1993 and 1994 in connection with the 1993 Restructuring
to fund operating expenses and working capital requirements.
Since 1994, Lehigh has been investigating the feasibility of acquiring
or investing in one or more other businesses that management of Lehigh believes
may have a potential for growth and profit. Lehigh would need to obtain
additional financing to effect any such acquisition or investment (except to the
extent
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Lehigh Common Stock or other securities of Lehigh were used to effect such
acquisition or investment, which would likely result in dilution to the existing
holders of Lehigh Common Stock). No assurance can be given that Lehigh will be
able to (i) identify any satisfactory business to be acquired or in which to
invest, (ii) obtain the requisite financing for any such acquisition or
investment, (iii) acquire or invest in any such business on terms favorable or
otherwise satisfactory to Lehigh, or (iv) profitably operate any such business.
The Board of Directors believes that the proposed Merger gives it this ability.
Lehigh was incorporated under the laws of the State of Delaware in
1928. Lehigh's principal executive offices are located at 810 Seventh Avenue,
New York, NY 10019 and its telephone number at that address is (212) 333-2620.
ELECTRICAL SUPPLIES
HallMark was acquired by Lehigh in December 1988. HallMark's sales
include electrical conduit, armored cable, switches, outlets, fittings, panels
and wire which are purchased by HallMark from electrical equipment manufacturers
in the United States. Approximately 60% of HallMark's sales are domestic and 40%
are export.
Domestic sales are made by HallMark employees. Nine customers accounted
for approximately 61%, 72% and 44% (including one customer which accounted for
approximately 25%, 18% and 12%) of HallMark's total domestic sales in 1995, 1994
and 1993, respectively. The loss of any of these customers could have a material
adverse effect on its business. Export sales are made by sales agents retained
by HallMark. Distribution is made in approximately 26 countries. Since November
1, 1992, HallMark's export business has been conducted primarily from Miami,
Florida.
Management believes that many companies (certain of which are
substantially larger and have greater financial resources than HallMark) are in
competition with HallMark. Management believes that the primary factors for
effective competition between HallMark with its competitors are price, in-stock
merchandise and a reliable delivery service. As a result, orders for merchandise
are received daily and shipped daily; hence, backlog is insignificant.
Management believes that HallMark is generally in compliance with
applicable governmental regulations and that these regulations have not had and
will not have a material adverse effect on its business or financial condition.
EMPLOYEES
As of September 30, 1996, Lehigh had 3 employees and HallMark had 37.
Approximately 75% of such employees are compensated on an hourly basis.
Lehigh and HallMark comply with prevailing local contracts in the
respective geographic locations of particular jobs with respect to wages, fringe
benefits and working conditions. Most employees of HallMark are unionized. The
current collective bargaining agreement for HallMark, which is with the
International Brotherhood of Electrical Workers, Local Union #3, expires on
April 30, 1999.
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MERGER SUB
Merger Sub is a Delaware corporation organized and wholly-owned by
Lehigh. Merger Sub has not conducted any activities other than those related to
its formation, the preparation of this Proxy Statement/Prospectus and the
negotiations of the Merger Agreement and its obligations thereunder.
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LEHIGH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter of 1996 in Comparison
with Third Quarter of 1995
Sales for the third quarter of 1996 were $2.4 million, a decrease of
$0.6 million or 20% compared to the third quarter of 1995. Most of the decrease
in sales occurred in the HallMark export operation due in part to the departure
of certain clients of HallMark that left when there was a change in the sales
force and a change in market conditions that resulted when certain clients of
HallMark decided to purchase supplies directly from the manufacturers instead of
through HallMark. In June, 1996, the person in charge of HallMark's export
operation in Miami and another employee were terminated. HallMark is currently
in negotiations to sell its export operation in Miami. Management does not
believe the closure of the Miami export operation will have a material adverse
effect on the Company. HallMark may continue its export operation from its home
office in New York.
Gross profit as a percentage of sales increased from 27.7% in the third
quarter of 1995, to 33% in the third quarter of 1996. This increase is primarily
due to rebates obtained by HallMark.
Selling, general and administrative expenses decreased by approximately
$48,000 or 4.9% in the third quarter of 1996 as compared to the third quarter of
1995. This decrease was primarily the result of a reduction in legal fees and
over-head associated with the export operation.
The factors discussed above resulted in an operating loss in the third
quarter of 1996 of $133,000 as compared to an operating loss of $92,000 in the
third quarter of 1995.
Included in the results for the third quarter of 1995 and 1996 is other
income of approximately $260,000 and $359,000, respectively which represents a
net adjustment to the value of certain items which predominantly relate to the
Company's 1991 Restructuring.
Results of Operations Nine Months of 1996
in Comparison With Nine Months of 1995
Sales for the first nine months of 1996 were $8.4 million, a decrease
of $0.4 million or (0.04%) compared with the first nine months of 1995. Most of
the decrease in sales occurred in the HallMark export operation due in part to
the departure of certain clients of HallMark that resulted when certain clients
of HallMark decided to purchase supplies directly from the manufacturers instead
of through HallMark and also the departure of a member of HallMark's sales force
in the export sector and the departure of certain clients that have been
obtained by such person. In June, 1996, the person in charge of HallMark's
export operation in Miami and another employee were terminated. HallMark is
currently in negotiations to sell its export operation in Miami. Management does
not believe the closure of the Miami export operation will have a material
adverse effect on the Company. HallMark may continue its export operation from
its home office in New York.
Gross profit as a percentage of sales increased from 29.9% in the nine
months ended September 30, 1995 to 30.75% in the nine months ended September 30,
1996.
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Selling, general and administrative expenses decreased by approximately
$232,000 or 7.41% in the first nine months of 1996 as compared to the first nine
months of 1995. This decrease was due in part to a decrease in the over-head
associated with the HallMark export operation and a reduction in the Company's
legal fees.
The factors discussed above resulted in an operating loss in the nine
months ended September 30, 1996 of $316,000 as compared to an operating loss of
$503,000 in the nine months of September 1995.
Included in the nine months ended September 30, 1995 and 1996 is other
income of approximately $260,000 and $366,000, respectively which represents a
net adjustment to the value of certain items which predominantly relate to the
Company's 1991 Restructuring.
1995 in Comparison with 1994
Revenues earned for 1995 were $12.1 million, a decrease of $.1 million
or 1% compared with 1994. A slight increase in Lehigh's domestic sales was more
than offset by a decrease in export sales. As to the export business, Lehigh has
been unable to fully replace those sales lost due to the departure of one of its
key sales people approximately two years ago. Gross profit as a percentage of
revenues decreased from 30% in 1994 to 29% in 1995. The slight decrease was
again attributable to weakened margins in export. Selling, general and
administrative expenses for 1995 decreased by approximately $200,000, or 5%,
compared with 1994. The reduction was primarily a result of decreased sales and
certain cost cutting initiatives instituted by Lehigh during the year.
The net result of the factors discussed above resulted in no change in
operating loss in 1995 compared to 1994.
Interest expense increased by $35,000 to $433,000 in 1995 from $398,000
in 1994. A decrease in interest expense due to the continued reductions of long
term debt was more than offset by an increase in interest rates.
There was no federal income tax for 1995, due to Lehigh's operating
loss.
On December 31, 1991, Lehigh sold its right, title and interest in the
stock of the various subsidiaries which made up its discontinued interior
construction and energy recovery business segments subject to existing security
interests. The excess of liabilities over assets of subsidiaries sold amounted
to approximately $9.6 million. Since 1991, Lehigh has reduced this deferred
credit (the reduction is shown as income from discontinued operations) due to
the successful resolution of the majority of the liabilities for amounts
significantly less than was originally recorded. The deferred credits were
reduced as follows: 1995 - $250,000, 1994 - $5,000,000, 1993 - $1,760,000, 1992
- - $2,376,000. The remaining deferred credit of approximately $250,000 at
December 31, 1995 is, in the opinion of management, sufficient to cover any
remaining future claims relating to the 1991 transaction.
1994 in Comparison with 1993
Revenues earned for 1994 were $12.2 million, a decrease of $.6 million
or 5.0% compared with 1993. The decrease in revenues was due largely to a
departure of a member of the sales force in HallMark's export operations and the
departure of certain clients of HallMark that had been obtained by such person.
Gross profit as a percentage of revenues increased from 29.0% in 1993 to 30.0%
in 1994
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due to increased profit margins in HallMark's domestic operation. Selling,
general and administrative expenses for 1994 represented a decrease of
approximately $34,000, or 8%, compared with 1993.
The factors discussed above resulted in an increase of $104,000 in the
operating loss, from $413,000 in 1993 to an operating loss of $517,000 in 1994.
Interest expense decreased by $26,000 to $398,000 in 1994 from $424,000
in 1993. This decrease was primarily a result of the continued reduction of
long-term debt.
There was no federal income tax expense for 1994, due to Lehigh's
operating loss.
Liquidity and Capital Resources
At September 30, 1996, the Company had working capital of approximately
$1.8 million (including cash and cash equivalents of $193,000), compared to
working capital of $2.4 million at December 31, 1995.
Lehigh's principal capital requirements have been to fund working
capital needs, capital expenditures and the payment of long term debt. Lehigh
has recently relied primarily on internally generated funds and private
placement proceeds to finance its operation.
Net cash provided by (used in) operating activities was $(267,000),
$(160,000) and $72,000 in 1995, 1994 and 1993, respectively. The decrease from
1993 to 1994 was primarily due to a reduction in net income after the addback of
the deferred credit income. The decrease from 1994 and 1995 was primarily due to
the net loss after the addback of the deferred credit income only being
partially offset by a decrease in receivables and an increase in accrued
expenses.
Net cash (used in) provided by investing activities was ($21,000),
($39,000) and $726,000 in 1995, 1994 and 1993, respectively. Due to the amount
of cash used in operating activities, Lehigh has expended very little with
respect to property and equipment. Lehigh currently has no material commitments
for capital expenditures.
Net cash provided by (used in) financing activities was $(290,000),
$656,000 and ($449,000) in 1995, 1994 and 1993, respectively. The increase from
1993 to 1994 was primarily due to private placement proceeds, net of issuing
costs, more than offsetting principal payments made under Lehigh's long term
debt agreement. The decrease from 1994 to 1995 was primarily due to the fact
that in 1995 Lehigh did not receive any outside funds whereas in 1994 it did.
Lehigh is unable to borrow from its bank under the current credit agreement.
On August 22, 1994, pursuant to a private placement, Lehigh sold
2,575,000 shares of Common Stock at an aggregate purchase price of $1,030,000
($.40 per share). On November 18, 1994, Lehigh sold an additional 106,250 shares
of Common Stock at an aggregate price of $42,500 ($.40 per share) pursuant to
such private placement. On December 12, 1995 Lehigh filed a registration
statement to register for resale the shares of Common Stock sold in such private
placement.
On March 28, 1996, Lehigh issued a $300,000 subordinated debenture to
Macrocom Investors, LLC. The debenture includes interest at 2% per annum over
the prime lending rate of Chase Manhattan Bank, N.A. payable monthly commencing
May 1996. The principal balance is payable April 1, 1998. In connection with
this financing the lender was granted a five year warrant to purchase a number
of shares of Common Stock equal to $300,000 divided by the average closing bid
price of Lehigh's common
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stock for the ten business days prior to the date of closing of the financing.
The debenture contains various restrictions on Lehigh and is secured by 100% of
the outstanding common stock of Lehigh's wholly-owned subsidiary, HallMark
Electrical Supplies Corp. Lehigh has entered into an agreement with a financial
services company to use its best efforts to raise an additional $450,000 under
the same terms and conditions. Management believes that the proceeds of the
$300,000 subordinated debenture combined with current working capital will be
sufficient to fund Lehigh's operations for the balance of 1996.
On June 11, 1996, Lehigh and DHB executed a letter of intent providing
for the merger of DHB with a subsidiary of Lehigh (which resulted in the
execution of a definitive merger agreement on July 8, 1996). Concurrent with the
execution of the letter of intent, DHB made a loan to Lehigh in the amount of
$300,000 pursuant to the terms of a Debenture. The Debenture includes interest
at the rate of two percent per annum over the prime lending rate of Chase
Manhattan Bank, N.A., payable monthly, commencing on the 1st day of each
subsequent months next ensuing through and including June 1, 1998 when the
entire principal balance plus all accrued interest is due and payable. The
proceeds of the loan from DHB were used to satisfy the loan which Lehigh
previously obtained from Macrocom Investors, LLC on March 28, 1996.
On October 29, 1996 in connection with the execution of a definitive
merger agreement between Lehigh and FMC, Lehigh issued a convertible debenture
in the amount of $300,000 plus interest at two percent per annum over the prime
lending rate of Chase Manhattan Bank, N.A. payable on the 1st day of each
subsequent month next ensuing through and including 24 months thereafter. On the
24th month, the outstanding principal balance and all accrued interest shall
become due and payable.
The proceeds of the loan from FMC were used to satisfy the loan Lehigh
previously obtained from DBH on June 11, 1996.
On November 6, 1996, HallMark paid off its installment loan with Banca
Nazionale Del Lavoro, SPA and entered into a new three year new revolving loan
with The CIT Group/Credit Finance, Inc. in the amount of $5 million.
Lehigh continues to be in default in the payment of interest
(approximately $761,000 interest was past due as of September 30, 1996) on the
$500,000 aggregate principal amount of its 13-1/2% Senior Subordinated Notes due
May 15,1998 ("13-1/2% Notes") and 14-7/8% Subordinated Debentures due October
15, 1995 ("14-7/8% Debentures") that remain outstanding and were not surrendered
to Lehigh in connection with its financial restructuring consummated in 1991.
Lehigh has been unable to locate the holders of the 13-1/2% Notes and 14-7/8%
Debentures. Lehigh does not presently have sufficient funds to repay its
outstanding indebtedness under the 13-1/2% Notes and 14-7/8% Debentures.
Lehigh has experienced liquidity problems recently due to poor
operating results, a weakened electrical supply market and an inability to
borrow funds. Additionally, Lehigh continues to be in default on certain
obligations and is currently appealing a court ruling which if denied would have
an adverse effect on Lehigh. Lehigh has accrued approximately $350,000 relating
to this Court ruling.
IMPACT OF INFLATION
Inflation has not had a significant impact on Lehigh's operations over
the past three years.
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NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
which requires that certain long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The adoption of this pronouncement is not anticipated to
have a significant impact on Lehigh's financial statements.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," which allows a choice of either the intrinsic value method or the
fair value method of accounting for employee stock options. Lehigh expects to
select the option to continue the use of the current intrinsic value method.
Both standards are effective for fiscal years that begin after December
15, 1995.
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DESCRIPTION OF LEHIGH'S CAPITAL STOCK
OUTSTANDING SHARES AND RECORD DATE
On January ___, 1997 (the "Lehigh Record Date"), there were 16,339,250
shares of Lehigh Common Stock, outstanding and entitled to vote at the Meeting.
Shareholders of record at the close of business on the Lehigh Record Date shall
be entitled to vote at the Meeting.
The following is a summary of certain provisions of the Lehigh
Certificate of Incorporation, as amended, and rights accorded to holders of
Lehigh Common Stock generally and as a matter of law, and does not purport to be
complete. It is qualified in its entirety by reference to Lehigh's Restated
Certificate of Incorporation, Lehigh's By-Laws, and the Delaware General
Corporation Law.
PREFERRED STOCK
GENERAL. Lehigh's Certificate of Incorporation authorizes the issuance
of 5,000,000 shares of preferred stock, $.001 par value, and approval of the
Merger Agreement will also constitute approval of an amendment to the Lehigh
Certificate of Incorporation providing for "blank check" preferred stock, with
such designations, rights and preferences as may be determined from time to time
by the Lehigh's Board. Accordingly, Lehigh's Board will be authorized, without
action by stockholders, to issue preferred stock from time to time with
dividend, liquidation, conversion, voting and any other rights and restrictions.
As of the date hereof, no preferred stock is issued or outstanding.
Lehigh's Board expects to approve the issuance of 951,211 shares of
Lehigh Preferred Stock to be issued pursuant to the Merger. The terms of the
Lehigh Preferred Stock will be included in a Certificate of Designation of the
Lehigh Preferred Stock (the "Certificate of Designation"), expected to be
approved by the Lehigh Board of Directors and filed with the Delaware Secretary
of State immediately prior to the effectiveness of the Merger. The Lehigh
Preferred Stock shall possess all those rights and privileges as are afforded to
capital stock by applicable law in the absence of any express grant of rights or
privileges in Lehigh's Certificate of Designation. The Lehigh Preferred Stock
will not have any preemptive rights. The Company will not seek to have the
Lehigh Preferred Stock listed on any national securities exchange. Set forth
below is a description of the rights and preferences of the Lehigh Preferred
Stock.
DIVIDEND RIGHTS. Each share of Lehigh Preferred Stock will be entitled
to dividends, pari passu with dividends declared and paid with respect to the
Lehigh Common Stock, equal to 250 times the amount declared and paid with
respect to each share of Lehigh Common Stock.
VOTING RIGHTS. Each share of Lehigh Preferred Stock will be entitled to
250 votes on any matter submitted to a vote of Lehigh stockholders, to be voted
together with the Lehigh Common Stock. The Lehigh Preferred Stock shall have no
right to vote separately, as a class, except as provided by law.
CONVERSION RIGHTS. Each share of Lehigh Preferred Stock shall be
convertible at any time into 250 shares of Lehigh Common Stock, subject to
adjustment in certain circumstances. In order to exercise the conversion
privilege, the holder of a share of Lehigh Preferred Stock shall surrender the
certificate representing such share at the office of the transfer agent for the
Lehigh Common Stock and shall give written notice to the Company at said office
that such holder elects to convert the same, specifying the name or names and
denominations in which such holder wishes the certificate or certificates for
the Lehigh Common Stock to be issued.
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The number of shares of Lehigh Common Stock issuable upon the
conversion of shares of Lehigh Preferred Stock is subject to adjustment under
certain circumstances, including (a) the distribution of additional shares of
Lehigh Common Stock to all holders of Lehigh Common Stock; (b) the subdivision
of shares of Lehigh Common Stock; (c) a combination of shares of Lehigh Common
Stock into a smaller number of shares of Lehigh Common Stock; (d) the issuance
of any securities in a reclassification of the Lehigh Common Stock; and (e) the
distribution to all holders of Lehigh Common Stock of any shares of Lehigh's
capital stock (other than Lehigh Common Stock) or evidence of its indebtedness,
assets (other than certain cash dividends or dividends payable in Lehigh Common
Stock) or certain rights, options or warrants (and the subsequent redemption or
exchange thereof).
LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Company, no distribution will be permitted to
be made to holders of Lehigh Common Stock unless, prior thereto, the holders of
the Lehigh Preferred Stock shall have received $.01 per share, plus an amount
equal to unpaid dividends thereon if any, including accrued dividends, whether
or not declared, to the date of such payment. With regard to rights to receive
dividends and distributions upon dissolution, the Lehigh Preferred Stock shall
rank prior to the Lehigh Common Stock and junior to any other Preferred Stock
issued by Lehigh, unless the terms of such other Preferred Stock provide
otherwise.
LEHIGH COMMON STOCK
GENERAL. Under Lehigh's Delaware charter and applicable law, the Board
of Directors has broad authority and discretion to issue convertible preferred
stock, options and warrants, which, if issued in the future, may impact the
rights of the holders of the Lehigh Common Stock.
DIVIDENDS. Holders of Lehigh Common Stock may receive dividends if, as
and when dividends are declared on Lehigh Common Stock by Lehigh's Board of
Directors. If the Board of Directors hereafter authorizes the issuance of
preferred shares, and such preferred shares carry any dividend preferences,
holders of Lehigh Common Stock may have no right to receive dividends unless and
until dividends have been declared and paid. At the present time, there is no
preferred stock outstanding. The ability of Lehigh to lawfully declare and pay
dividends on Lehigh Common Stock is also limited by certain provisions of
applicable state corporation law. It is not expected that dividends will be
declared on the Lehigh Common Stock in the foreseeable future.
DISTRIBUTIONS IN LIQUIDATION. If Lehigh is liquidated, dissolved and
wound up for any reason, distribution of Lehigh's assets upon liquidation would
be made first to the holders of preferred shares, if any, and then to the
holders of Lehigh Common Stock. If Lehigh's net assets upon liquidation were
insufficient to permit full payment to the holders of shares of preferred stock,
if any, then all of the assets of Lehigh would be distributed pro rata to the
holders of shares of preferred stock and no distribution will be made to the
holders of Lehigh Common Stock. There are no shares of preferred stock issued or
outstanding at this time. A consolidation or merger of Lehigh with or into any
other company, or the sale of all or substantially all of Lehigh's assets, is
not deemed a liquidation, distribution or winding up for this purpose.
VOTING RIGHTS
The holders of record of Lehigh Common Stock , Lehigh's only class or
series of voting stock currently outstanding, are entitled to one vote for each
share held, except that, as more fully described under "Proposal No. 3 --
Election of Directors," Lehigh's Restated Certificate of Incorporation provides
for cumulative voting in all elections of directors. Lehigh has proposed to
amend its Restated Certificate of Incorporation to eliminate the requirement for
cumulative voting in all future elections of directors by
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stockholders. See "Proposal No. 2 -- The Certificate Amendments", Abstentions
and broker non-votes with respect to any proposal will be counted only for
purposes of determining whether a quorum is present for the purpose of voting on
that proposal and will not be voted for or against that proposal. The presence,
in person or by proxy, of the holders of one-third of the outstanding Common
Stock entitled to vote at the Meeting will constitute a quorum.
DELAWARE LAW
Lehigh is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly-held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the affirmative vote of the holders of 66-2/3% of the outstanding
vote stock of the corporation not owned by the interested stockholder. A
"business combination" includes mergers, stock or asset sales and other
transactions resulting in a financial benefit to the interested stockholder. In
connection with its approval of the Merger Agreement, due to the existence of
the option between Mr. Zizza and FMC, the Lehigh Board of Directors exempted the
Merger from the requirements of Section 203.
The provisions authorizing the Board of Directors to issue preferred
stock without stockholder approval and the provisions of Section 203 of the DGCL
could have the effect of delaying, deferring or preventing a change in control
of Lehigh.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Lehigh Common
Stock is American Stock Transfer & Trust Company, New York, New York.
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BUSINESS INFORMATION REGARDING FMC
First Medical Corporation ("FMC" or the "Company") is an international
provider of management, consulting and financial services to physicians,
hospitals and other health care delivery organizations and facilities. FMC's
diversified operations are currently conducted through three divisions: (i) a
physician practice management division which provides physician management
services including the operation of clinical facilities and management services
to Medical Service Organizations, (ii) an international division which currently
manages western style medical centers in Eastern Europe and the CIS and (iii) a
recently formed hospital services division which provides a variety of
administrative and clinical services to proprietary acute care hospitals and
other health care providers.
INDUSTRY BACKGROUND
Physician Practice Management Services Division. The role of the
primary care physician is changing dramatically. Historically, the health care
services industry was based on a model in which physician specialists played a
predominant role. This model contributed to over-utilization of specialized
health care services and, in turn, increases in health care costs at rates
significantly higher than inflation. In response, third-party payers have been
implementing measures to contain costs and improve the availability of medical
services. These measures, which include managing the utilization of specialized
health care services and alternative methods of reimbursement, have caused the
health care industry to evolve toward models that contain health care costs more
efficiently. In these models, the primary care physician and physician
management organization are playing increasingly important roles.
FMC believes that two important trends contributing to the evolution of
the health care services industry define its business opportunities. First,
physicians are increasingly abandoning traditional private practices in favor of
affiliations with larger organizations such as the Company that can provide
enhanced management capabilities, information systems and capital resources.
This transformation of physician practice is based on an increasingly
competitive health care environment characterized by intense cost containment
pressure, increased business complexity and uncertainty regarding the impact of
health care reform on physicians.
The second trend is that many payers and their intermediaries,
including HMOs, are increasingly looking to outside providers of physician
services to manage their professional medical requirements and to share the risk
of providing services through capitation arrangements. As these payers seek to
limit their health care costs by reducing the fee-for-service component paid to
their medical service providers, there is additional pressure on smaller
providers to consolidate and realize the efficiencies that can be achieved by
operating in larger practice groups.
Domestic Operations.
Cost containment, industry consolidation and changes in reimbursement
methods are causing difficulties for health care providers, particularly
not-for-profit hospitals. As a result of intense competition from large
for-profit hospitals, not-for-profit hospitals must develop effective plans for
attracting and retaining patient flow. Such plans may include, among other
things, (i) reducing or changing the services provided in order to better
utilize current facilities, equipment and space, (ii) entering into new
contracts with physician groups, HMOs, and other third party payors, and (iii)
various cost-cutting measures. Ultimately, a facility's ability to adapt to
changing environments requires access to capital and management expertise,
services which the Company is willing and able to provide.
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International Operations.
The western-style health care delivery system and its related services
remain a valuable export and continue to be perceived as the best in the world.
The internationally recognized level of training, technology and services
associated with western health care systems and their professionals continues to
enjoy increasing demand among both expatriates and wealthy nationals in the
Company's expanding markets. The Company's perceived value is reflected in the
premium prices which its clients are willing to pay for access to comprehensive
western-style health care and related services.
STRATEGY OF FMC
FMC's strategy with respect to its physician practice management division
is to develop its business by addressing significant changes in the role and
practice patterns of the primary care physician in the health care services
industry. Elements of this strategy include:
Development of Additional Primary Care Centers and Physician Resources. A
major priority for FMC is the development of additional primary care centers and
physician resources. In furtherance of this goal, the Company will continue to
identify and evaluate potential acquisitions and relationships which complement
its existing business operations and increase its market share and develop a
competitive position in all areas of its business. In addition, the Company
believes that its experienced management team and operational systems will
afford the Company the opportunity to be successful in recruiting and managing
physicians, in integrating new physician practices and in managing the
utilization of health care services.
Expanding Presence in Capitated Medical Services. The Company believes that
managed care will continue to be a rapidly growing segment of the health care
services industry that offers one of the best long-term solutions to controlling
health care costs. The Company plans to develop its physician practice
management services division by expanding the services provided to existing
clients and obtaining new HMO contracts. The Company plans to build on this
experience to develop and enlarge integrated networks of health care providers
that will contract with intermediaries and payers on a capitated basis.
Developing and Expanding Management Consulting and Financial Services
Through FMC Healthcare Services, Inc. A priority for the Company is the
development of its management, consulting and financial services division by
continuing to provide creative solutions to complex financial and management
related health care delivery issues. The Company believes that there are
numerous organizations, including payor-owned physician practices, hospital
owned physician practices and not-for-profit providers which are experiencing
financial or operational distress which could benefit from the Company's
expertise. The Company believes that its strong management team, which has over
75 years in managing health care delivery systems, situates and enables the
Company to assist troubled health care providers, including not-for-profit and
proprietary acute care hospitals, long-term care facilities and specialty care
facilities, with direct management services, including "turn key" and
departmental or program management, transitional or turn-around management,
strategic planning and marketing, financial and general business consulting
services.
The Company plans to offer health care providers a full array of advanced
management services including, but not limited to: utilization management;
information systems; human resources management; financial control systems;
outcomes measurement and monitoring; customer service programs; training and
education; financial services; strategic planning; network development; and risk
contracting. These services will be offered as a comprehensive package or
individually, but through one point of contact, creating a "one-stop shop" for
management services.
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Integration of Domestic Operations. In addition to sharing management
services expertise and resources, the Company anticipates that its physician
practice management and management, consulting and financial services divisions
will eventually be consolidated into one division. It is expected that the
cross-selling opportunities and other synergies will create a relationship
between the two divisions warranting a consolidation. A primary objective of the
Company is to provide management services on a long-term contractual basis for
an entire integrated delivery system in a number of local markets.
The Company's management believes that nationwide concerns over escalating
health care costs and the possibility of legislated reforms are increasing the
emphasis on managed care, integrated networks of health care providers and
prepaid, capitated arrangements. Increased managed care penetration is
generating more recognition of the benefits of organized physician groups
serving large patient populations as well as reducing the reimbursement rates
for services rendered. In anticipation of such changes in the health care
environment, the Company continues to review and revise its business mix.
Continued Development of the International Division. The Company will
continue the development and expansion of its international division. The
Company believes that through its continuing development efforts, the Company
will be positioned to become a premier owner, operator and manager of
international primary care clinics, acute care hospitals and other health care
delivery organizations. The Company expects that it will benefit from exporting
the expertise and capabilities developed by its domestic operations to its
international operations. The Company has entered into an agreement to open a
western-style medical facility in Abu Dhabi, United Arab Emirates in March 1997,
and anticipates opening additional facilities throughout Europe, the Middle
East, Latin American and the Pacific Rim as part of its expansion program.
The Company, in addition to providing the highest level of quality
possible, strives to deliver a comprehensive range of diverse medical services
to meet the specific needs of its clients in each of the Company's unique
markets. In response to demands for western style hospitals in the CIS, the
Company commenced development of the American Hospital of Moscow project
pursuant to which the Company will establish the first western-style hospital in
the CIS.
An integral part of the Company's strategy is to provide an environment for
medical education and training of local medical professionals and health care
administrators. In this regard, the Company will continue to be active in
sponsoring exchange programs with western facilities and teaching institutions
such as the Baylor College of Medicine in Houston, Texas. The Company has also
organized an in-house mentor program to expose local medical professionals and
aspiring physicians to the western health care system.
DIVISIONS OF FMC
PHYSICIAN PRACTICE MANAGEMENT DIVISION
FMC's physician practice management operations are currently conducted
through MedExec. MedExec functions in three management capacities: (i) owning
and operating primary care centers with full risk contracts; (ii) managing
medical practices that have partial risk contracts for a fee; and (iii) owning
and operating multi-specialty groups with fee-for-service and risk contracts.
The Company currently owns, operates and manages 17 primary care centers
located in Florida, Texas and the Midwest. In order to better serve its existing
markets and potential markets, the Company is in the process of establishing
five geographic operating regions. In connection with the operation of such
primary care centers, the Company contracts with physicians who agree to provide
the necessary
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clinical skills required in such centers. The Company maintains a proprietary
data base for physicians who might be available to be employed at the Company's
owned and operated clinics in particular specialties and locations, and expects
to create an in-house recruiting department. The Company generates fees at these
primary care centers on a fee-for-service basis or capitated basis. Under
fee-for-service arrangements, the company bills and collects the charges for
medical services rendered by contracted or employed health care professionals
and also assumes the financial risks related to patient volume, payor mix,
reimbursement and collection rates. Under capitated arrangements, FMC receives
revenues from HMOs at contractually agreed-upon per member per month rates. A
substantial portion of the patients seeking clinical services from the company's
primary care centers are members of HMOs with which the Company maintains a
contractual relationship.
In addition, the Company contracts with primary care medical practices
pursuant to which the Company provides a variety of management services. In
particular, the Company provides management services which improve physician
practices' operating efficiencies through standardization of operating
processes, including the installation of information technology and billing
systems, and assist such practices in contracting on a network basis to
insurers, HMOs and other payors. In consideration for such management services,
the Company receives an annual management fee and participates in profits.
Additionally, the Company contracts with HMOs to manage the delivery of
comprehensive medical services to enrollees at Company clinics located in
Florida, Texas and the Midwest. The Company provides primary care physician
services directly and typically provides for other services with hospitals and
medical specialists on a subcapitated or discounted fee-for-service basis.
Because the Company is at risk for the cost of providing health care services,
it carefully manages utilization of primary care, hospital and medical
specialist services.
The Company believes that it will have significant opportunities to grow
its managed care business primarily because physician practice management
organizations are better qualified than most third-party payors to recruit,
manage and retain physicians, deliver services on a cost-effective basis and
control medical malpractice costs.
Under its HMO contracts, the Company receives a fixed, prepaid monthly
fee for each covered life in exchange for assuming responsibility for the
provision of medical services, subject to certain limitations. To the extent
that enrollees require more frequent or extensive care than was anticipated by
the Company, the revenue to the Company under a contract may be insufficient to
cover the costs of the care that was provided.
CEDA CONTRACT
The Company has been awarded an exclusive contract to provide health care
services to organizations operating under the Community Economic Development Act
(CEDA) in Cook County, Illinois and certain areas in northeastern Illinois. CEDA
is an organization designed to provide communities with access to various
government assistance programs by creating places where individuals can receive
assistance directly and conveniently. The contract designates the Company's
clinics as the exclusive referral sites for recipients of CEDA assistance,
although it does not guarantee that all of the estimated 60,000 recipients will
use the Company's clinics for their health care needs.
As a result of being awarded such agreement, the Company plans to develop
eight to ten clinics on or near CEDA sites. The Company anticipates that certain
of such clinics will be operational by the end of 1997. The CEDA contract
requires that reimbursements must flow through a fully licensed and
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accredited HMO. Accordingly, the Company has recently selected an HMO to
participate with and is currently negotiating the terms of a partnership
agreement.
HOSPITAL SERVICES DIVISION
The Company, through FMC Healthcare Services, Inc. ("FMC Healthcare
Services") will provide management, consulting and financial services to
troubled not-for-profit hospitals and other health care providers. FMC
Healthcare Services, which was incorporated in June 1996, will offer creative
solutions to complex health care delivery issues. FMC Healthcare Services'
primary target groups include: (i) individual hospitals (not-for-profit,
municipal and proprietary), (ii) long-term care facilities, (iii) provider
networks and systems, and (iv) alternate delivery systems (i.e., free standing
diagnostic and treatment and ambulatory surgery centers).
The scope of services to be provided are determined following an
individualized assessment of the target facility and include, but are not
necessarily limited to, (i) full service and direct management of health care
organizations including (a) "turn-key" management of a facility, (b)
supplemental support to existing management and (c) management of specific
departments, programs or systems; (ii) transitional management or turnaround
services including (a) assisting in the development of a comprehensive
turnaround plan and (b) supporting a restructured management team in reaching
financial and operational objectives through the implementation of turnaround
plan; and (iii) general business and consulting services including the
furnishing of (a) financial services, (b) feasibility studies, (c) capital
development and (d) necessary capital and other resources or arranging for the
provision of such resources to enable the facility to restructure existing debt.
The management consulting services to be provided by FMC Healthcare
Services will range from four to 24 months and will involve a minimum of three
health care professionals. Ideally, senior level professionals retained by FMC
Healthcare Services will oversee general operations, medical staff and nursing
at the subject medical facility. These individuals will be situated on site at
the respective facility. Other personnel employed by FMC Healthcare Services
will be furnished as need or as requested. FMC Healthcare Services will be paid
on a fee for services basis.
INTERNATIONAL WESTERN-STYLE MEDICAL CLINICS DIVISION
The Company's international division currently specializes in developing
and managing western-style health care facilities in Eastern Europe, the CIS and
other developing countries. Currently, the Company operates facilities in
Moscow, St. Petersburg and Kiev of the CIS; Warsaw, Poland; and Prague, Czech
Republic. The Company has recently entered into an agreement to open and operate
a western-style medical clinic in Abu-Dhabi, United Arab Emirates, which is
expected to commence operations in March 1997. The Company has also entered into
a letter of intent with American International Medical System Inc., which in
turn has an agreement with the Peoples Hospital of Beijing to open the American
Medical Center of Beijing.
Revenues of the Company's international division are primarily derived
from fee-for-service charges and annual non-refundable membership fees charged
to corporations, families and individuals. A variety of diverse membership plans
are available and can be tailored to meet the unique needs of corporate clients.
Generally, corporations are required to pay an annual membership fee as
well as placing an advance deposit with the Company for future services rendered
based on the selected membership plan and size
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of the respective organizations. Membership plans offer a wide range of benefits
including 24-hour emergency access, monthly medical newsletters and specials,
fee discounts and cross membership with other clinics. The Company also offers
an insurance processing service for corporate members. The Company's corporate
membership currently includes approximately five hundred international
corporations.
In order to meet the changing needs of the Company's corporate clients and
to provide expanded access to western health care to potential clients, the
Company has recently developed and implemented a variety of comprehensive
managed care plans. These plans range from individual and family plans to
corporate plans covering up to 2,000 employees in various and sometimes remote
locations.
Based upon its experience, the Company's management believes that a
significant and increasing portion of the international division's revenues will
be derived from local customers who seek medical services on a fee-for-service
basis.
COMPETITION
The provision of physician management services is a highly competitive
business in which the Company competes for contracts with several national and
many regional and local providers of physician management services. Furthermore,
the Company competes with traditional managers of health care services, such as
hospitals, which directly recruit and manage physicians. Certain of the
Company's competitors have access to substantially greater financial resources
than the Company.
Although there exist a number of companies which offer one or more of the
services which are offered by FMC Healthcare Services, the Company believes that
Hospital Services Group is unique in that it offers a variety of management,
consulting and financial services "under one roof." Certain companies which
compete with the Company have access to substantially greater resources than FMC
Healthcare Services.
Internationally, the Company has relatively little competition on a
multinational scale, but faces strong competition in local markets from small
entrenched and start-up health care providers.
While the bases for competition vary somewhat between business lines,
competition is generally based on cost and quality of care. More particularly,
in the area of managed care, the Company believes the market for developing and
providing management of primary care networks in the United States which
contract with HMOs and employers will increasingly be based on patient access,
quality of care, outcomes management and cost.
MARKETING
The Company's physician practice management division has developed two
marketing methods. The primary method is to conduct joint marketing efforts with
HMOs. These efforts focus on customer service, quality and access programs and
are designed to attract new members to the HMO, retain current members and
enroll members at the company's medical centers. The second method focuses on
development of local market awareness and creating a positive image of the
Company among the physician community in order to create opportunities for
additional physician management contracts.
The management, consulting and financial services division currently relies
on the ability of the management team to leverage their reputations, experience
and network of contacts to develop new clients or arrange for new contracts with
existing clients.
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International marketing is done at a local level through traditional media
advertising and promotional activities. The image and status of the clinics
themselves and the medical personnel are carefully cultivated through an
intensive public relations campaign. The network of international clinics is
also collectively marketed to multinational corporations through representatives
who maintain relationships and develop new contracts with the benefits managers.
GOVERNMENT REGULATION OF DOMESTIC OPERATIONS
The Company's domestic operations and relationships are subject to a
variety of governmental and regulatory requirements. A substantial portion of
the company's revenue is derived from payments made by government-sponsored
health care programs (primarily Medicare). These programs are subject to
substantial regulation by the federal and state governments which are
continually revising and reviewing the programs and their regulations. Any
determination of material noncompliance with such regulatory requirements or any
change in reimbursement regulations, policies, practices, interpretations or
statutes that places material limitations on reimbursement amounts or practices
could adversely affect the operations of the Company.
In addition to current regulation, the public and state and federal
governments have recently focused significant attention on reforming the health
care system in the United States. A broad range of health care reform measures
have been introduced in Congress and in certain state legislatures. Among the
proposals under consideration are cost controls on hospitals, insurance market
reforms to increase the availability of group health insurance to small
businesses, requirements that all businesses offer health insurance coverage to
their employees and the creation of a single government health insurance plan
that would cover all citizens. It is not clear at this time what proposals will
be adopted, if any, or, if adopted, what effect, if any, such proposals would
have on the Company's business. Certain proposals, such as cutbacks in Medicare
programs and containment of health care costs that could include a freeze on
prices charged by physicians and other health care providers could adversely
affect the company. There can be no assurance that currently proposed or future
health care legislation or other changes in the administration or interpretation
of governmental health care programs will not have a material adverse effect on
the Company's operating results. See "Risk Factors-- Health Care Reform
Proposals."
Continuing budgetary constraints at both the federal and state level and
the rapidly escalating costs of health care and reimbursement programs have led,
and may continue to lead, to relatively significant reductions in government and
other third-party reimbursements for certain medical charges. The company's
health care professionals are subject to periodic audits by government
reimbursement programs to determine the adequacy of coding procedures and the
reasonableness of charges.
All Medicare and Medicaid providers and practitioners are subject to
claims review, audits and retroactive adjustments, recoupments, civil monetary
penalties, criminal fines and penalties, and/or suspension or exclusion from
payment programs for improper billing practices. Federal regulations also
provide for withholding payments to recoup amounts due to the programs.
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for the referral of Medicare or state health care
program (e.g., Medicaid) patients or patient care opportunities, or in return
for the purchase, lease, order or recommendation of items or services that are
covered by Medicare or state health care programs. Violations of this law are
felonies and may subject violators to penalties and exclusion from Medicare and
all state health care programs. In addition, the Department of Health and Human
Services may exclude individuals and entities from participation in Medicare and
all state health care programs based on a finding in administrative proceedings
that the individual or entity has violated the antikickback statute.
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Every state imposes licensing requirements on individual physicians and
on health care facilities. In addition, federal and state laws regulate HMOs and
other managed care organizations with which the Company may have contracts. Many
states require regulatory approval before acquiring or establishing certain
types of health care equipment, facilities or programs.
The laws of many states prohibit physicians from splitting fees with
nonphysicians and prohibit business corporations from providing or holding
themselves out as providers of medical care. While the Company believes it
complies in all material respects with state fee splitting and corporate
practice of medicine laws, there can be no assurance that, given varying and
uncertain interpretations of such laws, the Company would be found to be in
compliance with all restrictions on fee splitting and the corporate practice of
medicine in all states. The Company currently operates in certain states through
professional corporations, and has recently formed professional corporations or
qualified professional corporations to do business in several other states where
corporate practice of medicine laws may require the company to operate through
such a structure. A determination that the Company is in violation of applicable
restrictions on fee splitting and the corporate practice of medicine in any
state in which it has significant operations could have a material adverse
effect on the company.
PROFESSIONAL LIABILITY INSURANCE
Over the last twenty years, the health care industry has become subject
to an increasing number of lawsuits alleging medical malpractice and related
legal theories, including the withholding of approval for necessary medical
services. Often, such lawsuits seek large damage awards, forcing health care
professionals to incur substantial defense costs. Due to the nature of its
business, the Company, from time to time, becomes involved as a defendant in
medical malpractice lawsuits, some of which are currently ongoing, and is
subject to the attendant risk of substantial damage awards. The most significant
source of potential liability in this regard is the negligence of health care
professionals employed or contracted by the company.
One part of the Company's management services involves the provision of
professional liability insurance ("PLI") coverage for its physicians. The
Company currently provides this coverage through an umbrella PLI policy with
Zurich American Insurance Group maintained for substantially all of the
company's employees and independent contractors. This PLI policy generally
provides coverage in the amount of $1,000,000 per physician and per claim,
subject to an aggregate per physician limit of $3,000,000 per year. In its
insurance policy, the Company also maintains the right to purchase extended
coverage beyond the expiration of the policy period for an agreed upon premium
to cover the costs of claims asserted after the expiration of the effective
policy. In addition, the company books reserves against those claims in which
the amount of coverage provided could possibly be insufficient in the event of a
relatively large award. The Company maintains professional liability insurance
on a claims made basis in amounts deemed appropriate by management, based upon
historical claims and the nature and risks of its business. However, there can
be no assurance that a future claim or claims will not exceed the limits of
available insurance coverage, that any insurer will remain solvent and able to
meet its obligations to provide coverage for any claim or claims or that
coverage will continue to be available or available with sufficient limits to
adequately insure the Company's operations in the future.
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LEGAL PROCEEDINGS
FMC is involved in various legal proceedings incidental to its business,
substantially all of which involve claims related to the alleged malpractice of
employed and contracted medical professionals and to the failure to render care
resulting in a violation or infringement of civil rights. In the opinion of
management, no individual item of litigation or group of similar items of
litigation, taking into account the insurance coverage available to FMC, is
likely to have a material adverse effect on FMC's financial position.
Additionally, on November 20, 1996, a discharged employee and shareholder
of FMC filed a Demand For Arbitration alleging breach of contract, defamation
and interference with business relationships. Thereafter, on November 26, 1996,
this same employee, who was terminated by FMC for cause, filed an action in Dade
County, Florida alleging what is essentially a breach of fiduciary duties by
FMC's Board of Directors. As of the date hereof, FMC had not filed an answer. In
the opinion of FMC's management, the claims asserted by this former employee are
without substantive merit and in any event, would be unlikely to have a material
adverse effect on FMC's financial position.
FMC's principal executive office is located at 1055 Washington Boulevard,
Stamford, Connecticut 06901, and its telephone number is (203) 327-0900.
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FMC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of FMC's financial condition and results of
operations should be read in conjunction with the financial statements,
including the notes thereto, contained elsewhere in this Prospectus. The
financial data contained herein for periods prior to 1996 refers to the combined
financial statements of MedExec, Inc. and subsidiaries, SPI Managed Care, Inc.,
and SPI Managed Care of Hillsborough County, Inc. and are not the financial
statements of FMC.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Revenue. Revenue increased by $23.3 million or 127% to $41.6 million
for the nine months ended September 30, 1996, from $18.3 million for the same
period in 1995. The majority of the change results from an increase in HMO
revenue for the nine months ended September 30, 1996 of $16.9 million, or 99%,
to $34.0 million from $17.1 million for the same period in 1995. The HMO revenue
growth was primarily a result of the Company's acquisition during January 1996
of controlling ownership of Broward Managed Care, Inc. ("the Broward
acquisition"), which has Humana affiliated provider agreements ("provider
agreement") to manage two primary care centers in Broward County, Florida
("Broward"), a new provider agreement, as of February 1996, to manage a center
in Houston, Texas ("Texas"), and a new provider agreement, as of September 1996,
to manage a center in New Port Richey, Florida ("New Port Richey"). Also, $4.9
million or 21% of the increase is due to fee for service revenue generated by
the American Medical Clinics ("AMC"), located in the CIS, which were obtained
through the MedExec and American Medical Clinics, Inc. reorganization in January
1996. The $23.3 million increase in the Company's revenue is also net of a $1.4
million or 7% decrease in existing provider agreements.
Medical Expenses. Medical expenses increased $18.9 million, or 132%, to
$33.2 million for the nine months ended September 30, 1996 from $14.3 million
for the same period in 1995. The majority of the increase ($16.1 million or 87%)
resulted from medical services provided under the new Broward, Texas, and New
Port Richey provider agreements. Medical expenses related to the AMC clinics
accounted for $3.9 million or 21% of the increase. There was also a decrease of
$.9 million or 5% for medical services provided to Humana members under existing
provider agreements. Medical expenses as a percentage of HMO and fee for service
revenue ("medical loss ratio") decreased to 81% for the nine months ended
September 30, 1996 from 83% for the same period in 1995.
Operating Expenses. Operating expenses increased by $3.2 million, or
86%, to $6.9 million, for the nine months ended September 30, 1996 from $3.7
million for the same period in 1995. The increase was primarily due to new
employees to staff the primary care centers in Broward, Texas, and New Port
Richey. As a percentage of revenue, however, operating expenses decreased to 16%
from 20% for the same period in 1995.
Net Income. Net income increased by $.76 million, or 507%, to $.91
million for the nine months ended September 30, 1996 from $.15 million for the
same 1995 period primarily due to the factors set forth above.
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1995 COMPARED TO 1994
Revenue. Revenue increased by $1.4 million, or 7%, to $22.7 million in
1995, from $21.3 million in 1994 due to increased revenue from existing provider
agreements offset by the termination during August 1995 of the provider
agreement to manage the center in Brandon, Florida.
Medical Expenses. Medical expenses increased $1.8 million, or 11%, to
$18.4 million in 1995 from $16.6 million in 1994 primarily as a result of an
increase in medical services rendered. The medical loss ratio was 81% for the
year ended December 31, 1995 compared to 78% for the year ended December 31,
1994.
Operating Expenses. Operating expenses increased $1.2 million, or
35%, to $4.6 million in 1995 from $3.4 million in 1994 due mainly to the
additional $1.1 million of expenses incurred by the Company during 1995. These
expenses relate primarily to additional compensation to former officers of the
Company, development cost incurred relating to the Chicago market, repricing
adjustments from Humana related to previous years and legal and professional
fees incurred in connection with a proposed merger with another company. As a
percentage of revenue, operating expenses for the year ended December 31, 1995
increased to 20% from 16% for the year ended December 31, 1994 .
(Loss) before tax per December 31, 1995
Financial statements $ (364,000)
Adjustments -
Income in earnings as a result of the change in the Company's 264,000
investment in Broward Managed Care, Inc. and SPI Managed Care
of Broward, Inc. as if it had occurred January 1, 1995
Additional expenses (as described above) 1,085,000
Adjusted net income for 1995 $ 985,000
===========
Net Income (Loss). Net loss for 1995 was $(.4) million compared to net
income in 1994 of $1.4 million, a decrease of $1.8 million, which is primarily
due to the increase in medical services rendered, the write-off of certain
receivables and additional compensation to shareholders under employment
agreements.
1994 COMPARED TO 1993
Revenue. Revenue increased by $10.2 million, or 92%, to $21.3 million
in 1994, from $11.1 million in 1993 primarily due to two new full-risk Humana
affiliated provider agreements to manage primary care centers in Brandon and
Plant City, Florida.
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Medical Expenses. Medical expenses increased $8.2 million, or 98%, to
$16.6 million in 1994 from $8.4 million in 1993 primarily as a result of medical
services provided under the new Brandon and Plant City provider agreements. The
medical loss ratio was 78% for the year ended December 31, 1994 compared to 76%
for the year ended December 31, 1993.
Operating Expenses. Operating expenses increased $1.7 million, or 100%,
to $3.4 million in 1994 from $1.7 million in 1993 primarily as a result of new
employees to staff the primary care centers in Brandon and Plant City, Florida.
As a percentage of revenue, operating expenses for the year ended December 31,
1994 increased to 16% from 15% for the year ended December 31, 1993.
Other Expenses. Other expenses in 1993 were $.2 million relating
primarily to losses incurred on certain equity investments.
Net Income . Net income increased $.6 million, or 75%, to $1.4 million
from $.8 million in 1993 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
FMC had cash of $73,887 at September 30, 1996 compared to $198,763 at
December 31, 1995.
To date, the Company's principal uses of cash have been to support its
operating activities and to fund acquisitions. FMC has met its cash requirements
in recent years primarily from its operating activities, advances from Humana
and bank borrowings.
At September 30, 1996, FMC has an unsecured loan with an international
bank in the amount of $.2 million at September 30, 1996 bearing interest at 10%.
The principal balance on this loan has been paid off as of December 1, 1996.
Proceeds from the loan were used primarily for international working capital
needs.
FMC also maintains an unsecured line of credit with a domestic bank for
$ .2 million bearing interest at prime. The $ .2 million drawn under this line
of credit at September 30, 1996 has been used by FMC in connection with the
satisfaction of development costs relating to FMC's Midwest operations. The line
of credit is personal guaranteed by several stockholders of the Company and
other individuals. The principal balance was originally due October 1, 1996, but
extended until January 2, 1997 and interest payable on a monthly basis.
The Company also has a credit facility for $1.5 million bearing
interest at 1/2% above prime. The $.2 million drawn under this facility at
September 30, 1996 was used primarily for FMC organization costs. $.9 million of
the line is secured by the Company's cash, accounts receivable, and certain
other assets. The principal balance is due on May 31, 1997 and interest is due
monthly. In order to borrow the additional $.6 million (unsecured portion of
line), the bank would require the personal guaranty of FMC's Chairman and Chief
Executive Officer. FMC recently obtained a loan commitment in the amount of
$3,300,000 from the same bank which provided the $1,500,000 line of credit. The
commitment is for a 120 day loan bearing interest at the prime plus .5%. The
purpose of the loan is to provide financing for the Merger. The loan is secured
by all of the assets of FMC, 50% of the shares of FMC Common Stock owned by
FMC's Chairman and Chief Executive Officer and any and all shares of Lehigh
Common Stock issuable to FMC upon exercise of the option granted to FMC by Mr.
Zizza and is personally guaranteed up to $600,000 by the Chairman and Chief
Executive Officer of FMC.
68
<PAGE>
FMC's existing $1,500,000 line of credit is capped so that the maximum of
$900,000 may be outstanding at any time until the $3,300,000 loan is repaid in
full. Accordingly, an aggregate of $4,200,000 is available under this new
facility.
Nine Months Ended September 30, 1996.
Net cash provided by operating activities was $11,838 for the nine
months ended September 30, 1996.
Net cash used in investing activities of ($.8) million was primarily
the result of ($.2) in capital expenditures, ($.3) in costs related to the
merger transaction, ($.7) million for acquisitions and expansion into new
markets, net of $.3 million for the proceeds from the sale of MedExec's
investment in HCO Networks.
Net cash provided by financing activities of $.6 million was the result
of $.4, $.2, and $.2 million in proceeds received from loans payable to Humana,
banks, and certain shareholders, respectively, a $.2 million capital
contribution to AMC-D, and ($.3) repayment on notes due to shareholders.
FMC believes that cash from operations and borrowings under existing
credit facilities will be sufficient to satisfy its contemplated cash
requirements for at least the next twelve months .
69
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LEHIGH
The following table sets forth information as of December 26, 1996
(except as otherwise noted below) with respect to each person (including any
"group", as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) known to Lehigh to be the beneficial owner of more than 5%
of the Common Stock.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1)(2) of Class (2)
------------------- --------------------------- -------------
<S> <C> <C>
Southwicke Corporation (a 2,670,757 (4) [25.8% (4)]
wholly owned subsidiary of
Halton House, Ltd. of which The
Halton Declaration of Trust is
beneficial owner and over which
Bahamas Proctors, Ltd. exercises
all power with respect to
investment or voting of securities
beneficially owned by said Trust
("Southwicke")
1430 Broadway
New York NY 10018
Fidelity Bankers Life Insurance 799,921 [7.7%]
Company Trust (a subsidiary of
First Dominion Mutual Life
Insurance Company) ("FBL")
1011 Boulder Springs Drive
Richmond, Virginia 23225 (2)
Allstate Life Insurance Company 743,878 [7.2%]
("Allstate")
Allstate Plaza South G4B
2880 Sanders Road
Northbrook, IL 60062 (2)
Teachers Insurance and Annuity 533,280 5.2%
Association ("Teachers")
730 Third Ave.
New York, NY 10017 (2)
Kenneth Godt as Trustee for The 750,000 (4) 7.3% (4)
Orion Trust (The "Godt Trust")
c/o Siegel & Godt
666 Old Country Road
Garden City, NY 11530 (2)
Salvatore J. Zizza 12,255,502 (3) [4.2% (3)]
c/o The Lehigh Group Inc.
810 Seventh Ave.
New York, NY 10019 (3)
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
The Equitable Life Assurance 637,113 [6.2%]
Society of the United States
("Equitable")
787 Seventh Ave.
New York, NY 10019 (2)
First Medical Corporation 6,000,000 (3 & 5) 37.0% (5)
("FMC")
1055 Washington Boulevard,
Stamford, Connecticut 06901 (5)
</TABLE>
(1) Except as otherwise indicated each of the persons listed above has sole
voting and investment power with respect to all of the shares shown in
the table as beneficially owned by such person.
(2) Based on information set forth on Schedules 13G and Schedules 13D filed
with the SEC by Southwicke dated July 12, 1996; Sears, Roebuck and Co.
(parent of Allstate) dated September 22, 1994; Equitable on February 9,
1996, The Godt Trust on September 26, 1994, Teachers on April 23, 1992
and DHB on July 17, 1996 (assuming, in each case, no change in
beneficial ownership since such date except in connection with the 1993
Restructuring). Information as to FBL was obtained from an investment
specialist at FBL on November 14, 1994.
(3) Includes (i) 4,250,000 shares issuable upon the exercise of immediately
exercisable options at a price of $.50 per share, (ii) 382 shares owned
by trust accounts for the benefit of Mr. Zizza's minor children, as to
which he disclaims beneficial ownership and (iii) 7,750,000 shares
issuable upon the exercise of immediately exercisable warrants at a
price of $.50 per share as to 1,750,000 such shares, $.75 per share as
to 3,000,000 such shares and $1.00 per share as to 3,000,000 such
shares. Excludes 6,000,000 shares of common stock issuable upon the
exercise of options held by Mr. Zizza at exercise prices of $.75 per
share, in the case of 3,000,000 shares, and $1.00 per share, in the
case of 3,000,000 shares. These options are not currently exercisable
or expected to become exercisable within the next 60 days, and will not
be exercisable until such time as (i) Lehigh receives aggregate net
cash proceeds of at least $10 million from the sale (whether public or
private) of its equity securities, (ii) Lehigh consummates an
acquisition of a business with annual revenues during the year
immediately preceding such acquisition of at least $25 million, and
(iii) the fair market value (determined over a 30-day period) of the
Common Stock shall have equalled or exceeded $1.00 per share. All of
the options granted to Mr. Zizza will terminate on the fifth
anniversary of the date of grant, subject to earlier termination under
certain circumstances in the event of his death or the termination of
his employment. Lehigh also granted to him one demand registration
right (exercisable only if Lehigh is eligible to file a registration
statement on Form S-3 or a form substantially equivalent thereto) and
certain "piggyback" registration rights with respect to the shares of
the common stock purchasable upon exercise of such options. On October
29, 1996, Mr. Zizza sold to FMC an option to purchase up to 6,000,000
shares at $.50 per share from Lehigh under Mr. Zizza's existing options
and warrants.
71
<PAGE>
(4) On July 2, 1996, Kenneth Godt as Trustee for The Orion Trust granted an
irrevocable proxy to Southwicke to vote all of its 750,000 shares with
respect to the election of directors and the approval of a business
combination. Said irrevocable proxy will expire June 30, 1997. The
shares shown as beneficially owned by Southwicke include these 750,000
shares.
(5) On October 29, 1996, FMC purchased an option from Mr. Zizza to purchase
6,000,000 shares of Lehigh's common stock at $.50 per share. That
option was exercised on January __, 1997.
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the number of shares of Lehigh Common
Stock beneficially owned as of December __, 1996 by (i) each director of Lehigh,
(ii) each of the executive officers named in the Summary Compensation Table set
forth above and (iii) all directors and executive officers of Lehigh as a group.
<TABLE>
<CAPTION>
Name of Beneficial Amount and Nature of
Owner Beneficial Ownership(1) Percent of Class
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
Salvatore J. Zizza 12,255,502(2) 54.2(2)
Richard L. Bready 15,000(5) *
Robert A. Bruno 237,760(3) *
Charles A. Gargano 10,000(5) *
Salvatore M. Salibello 10,000(5) *
Anthony F. L. Amhurst 10,000(5) *
Joseph Delowery 0 *
All executive officers
and directors as a group
(7 persons) 12,538,262 (4) 5.5(4)
</TABLE>
- ----------------------
* Less than 1%.
(1) Except as otherwise indicated, each of the persons listed above has
sole voting and investment power with respect to all shares shown in
the table as beneficially owned by such person.
(2) See note 3 of the table under the caption "Security Ownership of
Certain Beneficial Owners of Lehigh," above.
(3) Includes options to purchase 175,000 shares of common stock at $.50 per
share. Excludes options to purchase 75,000 shares of common stock at
$.50 per share which become exercisable December 31, 1996. Subject to
the effectiveness of the Merger, on July 8, 1996, Mr. Bruno agreed to
exchange his options to purchase 250,000 shares of Lehigh Common Stock
at an
72
<PAGE>
exercise price of $.50 per share, for an option to purchase 92,000
shares of Lehigh's Common Stock exercisable at $1.00 per share, over a
four year period, with 25% of said options vesting on each consecutive
anniversary of the Effective Date of the Merger. Mr. Bruno and Lehigh
have amended Mr. Bruno's employment contract which amendment shall
become effective on the Effective Time. The amendment provides that (i)
Mr. Bruno's salary shall be reduced from $150,000 to $120,000 per year,
(ii) no part of Mr. Bruno's salary shall be deferred and (iii) the term
of the employment agreement shall be extended for one additional year
through December 31, 2000.
(4) Includes and excludes shares as indicated in notes (2) and (3) above.
(5) Represents options to purchase common stock at $.50 per share. During
1996, Lehigh expects to issue options to purchase an additional 10,000
shares of Lehigh Common Stock to Messrs. Bready, Gargano, Amhurst and
Salibello at an exercise price of $.50 per share in lieu of cash
compensation for 1996.
LEGAL MATTERS
The validity of the shares of the Lehigh Common Stock and Lehigh
Preferred Stock to be issued in connection with the Merger and certain other
legal matters relating thereto will be passed upon for Lehigh by Olshan Grundman
Frome & Rosenzweig LLP, New York, New York. Greenburg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A. is acting as counsel to FMC in connection with certain
legal matters relating to the merger and the transactions contemplated thereby.
EXPERTS
The financial statements and schedule of Lehigh included in this Proxy
Statement/Prospectus and the Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The audited combined financial statements of MedExec Inc. &
Subsidiaries; SPI Managed Care Inc.; & SPI Managed Care of Hillsborough County,
Inc., as of December 31, 1995 and 1994, and for each of the years then ended,
which are included in this Proxy Statement/Prospectus, have been so included in
reliance on the reports in the three year period ended December 31, 1995 of KPMG
Peat Marwick LLP, as independent certified public accountants, appearing
elsewhere herein, and upon the authority of such firm as experts in auditing and
accounting.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MEDEXEC, INC. AND SUBSIDIARIES; SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.:
Independent Auditors' Report....................................... F-3
Combined Balance Sheets as of December 31, 1995 and 1994........... F-4
Combined Statements of Operations for Each of The Years in The
Three-Year Period Ended December 31, 1995........................ F-5
Combined Statements of Stockholders' Equity For Each of The
Years in The Three-Year Period Ended December 31, 1995........... F-6
Combined Statements of Cash Flows for Each of The Years
in The Three-Year Period Ended December 31, 1995................. F-7
Notes to Combined Financial Statements............................. F-8
THE LEHIGH GROUP INC. ("LEHIGH") AND SUBSIDIARIES:
Report of Independent Certified Public Accountants................. F-21
Consolidated Balance Sheets as of 12/31/95 and 12/31/94............ F-22 - F23
Consolidated Statements of Operations for the Years
Ended 12/31/95, 12/31/94, and 12/31/93........................... F-24
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Years Ended
12/31/95, 12/31/94, and 12/31/93................................. F-25
Consolidated Statements of Cash Flows for the Years
Ended 12/31/95, 12/31/94, and 12/31/93........................... F-26
Notes to Consolidated Financial Statements......................... F-27 - F35
Schedule of Valuation and Qualifying Accounts for the
Years Ended 12/31/95, 12/31/94, and 12/31/93..................... F-36
INTERIM FINANCIAL INFORMATION
FMC:
Balance Sheets as of 09/30/96 and 9/30/95.......................... F-37
Statements of Operations for the Nine Months Ended
09/30/96 and 09/30/95............................................ F-38
Statements of Cash Flows for the Nine Months Ended
09/30/96 and 09/30/95............................................ F-39 - F40
Statements of Stockholders' Equity for the Nine Months
Ended 9/30/96 and 9/30/95........................................ F-41
Notes to Financial Statements...................................... F-42 - F46
LEHIGH:
Consolidated Balance Sheets as of 09/30/96 and 12/31/95............ F-47 - F48
Consolidated Statements of Operations for the Three
Months and Nine Months Ended 09/30/96 and 9/30/95................ F-49
Consolidated Statements of Changes in Shareholders' Deficit
for the Nine Months Ended 09/30/96 and 09/30/95.................. F-50
Consolidated Statements of Cash Flows for the Nine Months
Ended 09/30/96 and 09/30/95...................................... F-51
Notes to Consolidated Financial Statements......................... F-52
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction....................................................... F-53
Combined MedExec, Inc. and Subsidiaries; SPI Managed Care, Inc.,
SPI Managed Care of Hillsborough County, Inc., AMC Clinics, AMC,
Inc., Broward Managed Care, Inc., SPI Managed Care of Broward,
and The Lehigh Group Inc.
Pro Forma Combined Balance Sheet as of December 31, 1995......... F-54 - F55
Combined MedExec, Inc. and Subsidiaries SPI Managed Care, Inc.,
SPI Managed Care of Hillsborough County, Inc., AMC Clinics, AMC,
Inc., Broward Managed Care, Inc., SPI Managed Care of Broward,
and The Lehigh Group Inc.
F-1
<PAGE>
Pro Forma Combined Statements of Operations for the Year
Ended December 31, 1995....................................... F-56
FMC and Subsidiaries and Lehigh and Subsidiaries Pro Forma
Combined Balance Sheets as of September 30, 1996.............. F-57
FMC and Subsidiaries and Lehigh and Subsidiaries Pro Forma
Combined Statement of Operations for the Nine Months
Ended September 30, 1996...................................... F-58
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors
MedExec, Inc.;
SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.:
We have audited the accompanying combined balance sheets of MedExec, Inc. and
subsidiaries; SPI Managed Care, Inc.; and SPI Managed Care of Hillsborough
County, Inc. as of December 31, 1995 and 1994, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements referred to above present
fairly, in all material respects, the combined financial position of MedExec,
Inc. and subsidiaries; and SPI Managed Care, Inc.; and SPI Managed Care of
Hillsborough County, Inc. as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic combined
financial statements taken as a whole. The supplementary information included in
Schedule 1 is presented for purposes of additional analysis and is not a
required part of the basic combined financial statements. Such information has
not been subjected to the auditing procedures applied in the audits of the basic
combined financial statements and, accordingly, we express no opinion on it.
KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996, except as to note 15,
which is as of December 23, 1996
F-3
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES ;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
Combined Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------- ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 198,763 468,528
Humana IBNR receivable 2,062,924 2,848,518
Due from affiliates and related parties, net 54,565 196,745
Claims reserve funds 116,212 126,357
Prepaid expenses and other current assets 82,413 37,269
Deferred income taxes (note 12) -- 51,713
--------------------- -----------------------
Total current assets 2,514,877 3,729,130
Property and equipment, net (note 4) 298,060 207,199
Deferred income taxes (note 12) -- 8,287
Investments in other affiliated entities (note 3) 229,094 178,968
Intangible assets, net 2,547 4,896
--------------------- -----------------------
$ 3,044,578 4,128,480
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses 594,822 556,366
Accrued medical claims, including amounts incurred
but not reported 1,880,318 2,484,258
Due to Humana 192,143 56,152
Loan payable to Humana 50,000 --
Loan payable to bank 100,000 --
Income taxes payable -- 60,000
--------------------- -----------------------
Total current liabilities 2,817,283 3,156,776
--------------------- -----------------------
Stockholders' equity (notes 8 and 9):
Capital stock 1,500 1,500
Additional paid-in capital 1,200 1,200
Retained earnings 224,595 969,004
--------------------- -----------------------
Total stockholders' equity 227,295 971,704
Commitments and contingencies (note 13)
--------------------- -----------------------
$ 3,044,578 4,128,480
===================== =======================
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES ;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF OPERATIONS
For each of the years in the three year period ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- --------------------
<S> <C> <C> <C>
Revenue (note 9) $ 22,671,902 21,317,887 11,086,690
Medical expenses 16,426,804 14,597,604 7,527,064
---------------------- ---------------------- --------------------
Gross profit 6,245,098 6,720,283 3,559,626
---------------------- ---------------------- --------------------
Operating expenses (note 9):
Salaries and related benefits 4,231,434 3,229,451 1,547,993
Depreciation and amortization 68,499 50,408 46,676
Other 2,351,585 2,111,667 944,237
---------------------- ---------------------- --------------------
Total operating expenses 6,651,518 5,391,526 2,538,906
---------------------- ---------------------- --------------------
Operating income (loss) (406,420) 1,328,757 1,020,720
---------------------- ---------------------- --------------------
Other (expense) income:
Gain (loss) on equity investments (note 3) 50,126 28,260 (149,295)
Interest income 11,310 9,593 4,071
Loss on Dominion Healthnet, Inc. (note 3) -- -- (80,009)
Other, net (19,425) (2,948) 7,356
---------------------- ---------------------- --------------------
Other income (expense), net 42,011 34,905 (217,877)
---------------------- ---------------------- --------------------
Net income (loss) $ (364,409) 1,363,662 802,843
====================== ====================== ====================
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES ;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For each of the years in the three year period ended December 31, 1995
<TABLE>
<CAPTION>
Capital Additional paid- Total
stock in capital Retained Due to stockholders'
(note 8) (note 8) earnings stockholders equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 900 1,200 143,701 37,000 182,801
Net income -- -- 802,843 -- 802,843
Dividend distributions -- -- (170,745) -- (170,745)
Issuance of stock 100 -- -- -- 100
Proceeds from due to stockholders -- -- -- 583,112 583,112
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1993 1,000 1,200 775,799 620,112 1,398,111
Net income -- -- 1,363,662 -- 1,363,662
Distribution of Midway Airlines stock, at cost -- -- (200,444) (599,556) (800,000)
Dividend distributions -- -- (970,013) -- (970,013)
Issuance of stock 500 -- -- -- 500
Repayment of due to stockholders, net -- -- -- (20,556) (20,556)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 1,500 1,200 969,004 -- 971,704
Net loss -- -- (364,409) -- (364,409)
Dividend distributions -- -- (380,000) -- (380,000)
---------- ---------- ----------
Balance, December 31, 1995 $ 1,500 1,200 224,595 -- 227,295
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF CASH FLOWS
For each of the years in the three year period ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (364,409) 1,363,662 802,843
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 68,499 50,408 46,676
Deferred income taxes -- (60,000) --
Loss on disposal of fixed assets -- -- 801
(Gain) loss on equity investments (50,126) (28,260) 149,295
Write-off of investments -- 597 --
(Increase) decrease in assets:
Humana IBNR receivable 785,594 (1,547,044) (764,831)
Due from affiliates and related parties 142,180 (177,572) 53,369
Claims reserve funds 10,145 13,217 (115,742)
Prepaid expenses and other current assets 14,856 (33,076) (3,653)
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses 38,456 393,636 85,077
Accrued medical claims, including amounts incurred
but not reported (603,940) 1,359,770 583,266
Due to Humana 135,991 2,822 14,779
Income taxes payable (60,000) 60,000 --
---------- ----------
Net cash provided by operating activities 117,246 1,398,160 851,880
----------
Cash flows from investing activities:
Capital expenditures (157,011) (95,559) (133,922)
Proceeds from sale of fixed assets -- -- 19,900
Purchase of investments -- -- (1,100,600)
---------- ----------
Net cash used in investing activities (157,011) (95,559) (1,214,622)
---------- ---------- ----------
Cash flows from financing activities: --
Proceeds from issuance of stock -- 500 100
Proceeds from loan payable to Humana 50,000 -- --
Proceeds from loan payable to bank 100,000 -- --
Dividend distributions (380,000) (970,013) (170,745)
Due to stockholders -- (20,556) 583,112
----------
Net cash (used in) provided by financing activities
(230,000) (990,069) 412,467
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents (269,765) 312,532 49,725
Cash and cash equivalents, beginning of year 468,528 155,996 106,271
----------
Cash and cash equivalents, end of year $ 198,763 468,528 155,996
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 60,000 -- --
==========
</TABLE>
Supplemental schedule of noncash investing and operating activities:
Noncash investing activity:
MedExec, Inc. distributed its $800,000 investment in Midway Airlines stock
as a dividend to its shareholders during the year ended December 31, 1994.
See accompanying notes to combined financial statements.
F-7
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) ORGANIZATION AND OPERATIONS
(a) ORGANIZATION
The accompanying combined financial statements include the
accounts of MedExec, Inc. and subsidiaries ("MedExec"); SPI
Managed Care, Inc. ("SPI"); and SPI Managed Care of
Hillsborough County, Inc. ("SPI Hillsborough") (collectively,
the "Company"), which are affiliated through common ownership
and management.
MedExec was incorporated on March 14, 1991.
Dominion Healthnet, Inc. ("Dominion") was incorporated on
September 13, 1991. MedExec owned 55 percent of Dominion at
December 31, 1995, and 1994.
HCO Miami, Inc. ("HCO Miami") was incorporated on June 18,
1993. MedExec owned 70 percent and SPI owned 20 percent of HCO
Miami at December 31, 1995 and 1994.
Midwest Managed Care, Inc. ("Midwest") was incorporated on
March 29, 1995. MedExec owned 66.67 percent of Midwest at
December 31, 1995.
SPI, formerly known as Surgical Park, Inc. was incorporated on
February 19, 1988. Surgical Park, Inc. changed its name
pursuant to an amendment to its Articles of Incorporation on
May 7, 1990.
SPI Hillsborough was incorporated on April 20, 1993.
(b) NATURE OF OPERATIONS
SPI and SPI Hillsborough operate in the state of Florida and
Midwest (which commenced operations during 1995) operates in
the states of Illinois and Indiana. SPI and SPI Hillsborough
provide health care services subject to affiliated provider
agreements entered into with Humana Medical Plan, Inc.; Humana
Health Plan of Florida, Inc.; Humana Health Insurance Company
of Florida, Inc. and their affiliates. Midwest provides health
care services subject to affiliated provider agreements
entered into with Humana Health Plan, Inc.; Humana Health
Chicago, Inc.; Humana Health Chicago Insurance Company; Humana
Insurance Company and their affiliates. All of the Humana
entities will collectively be known as "Humana". The Company
is dependent on Humana for the majority of its operations. For
the years ended December 31, 1995, 1994 and 1993, 96 percent,
95 percent, and 95 percent, respectively of the Company's
revenue are from such agreements with Humana. Health services
are provided to Humana members through SPI, SPI Hillsborough
and Midwest's primary care medical centers and its network of
physicians and health care specialists.
SPI operates two centers in Dade County, Florida: in Kendall
("Kendall") and Cutler Ridge ("Cutler Ridge") at December 31,
1995 and 1994.
F-8
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
At December 31, 1994, SPI Hillsborough operated two centers in
Hillsborough County, Florida: in Brandon ("Brandon") and Plant
City ("Plant City"). Effective August 31, 1995, Humana
terminated its Brandon contract with SPI Hillsborough.
Included in accrued medical claims at December 31, 1995, is
approximately $103,000 pertaining to Brandon's open claims
through the termination date. The Brandon center had revenue
of approximately $3,521,000, $3,943,000, and $208,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Midwest operates one center in Hammond, Indiana ("Hammond").
Dominion provides networks of hospitals and doctors to
international travel assistance companies outside the United
States. At December 31, 1995, Dominion had one contract with a
Canadian insurance company to care for its insureds traveling
to the United States.
HCO Miami provides utilization review and case management
services for HMO and PPO members of affiliated companies.
(c) AFFILIATED PROVIDER AGREEMENTS
Effective April 1, 1990 and September 1, 1990, SPI through the
Cutler Ridge and Kendall centers, respectively, entered into
provider agreements with Humana, which will continue
indefinitely unless terminated according to certain provisions
of the agreements. Such agreements specify that either party
may elect to terminate the agreements, with or without cause,
at any time upon giving 60 days written notice. In addition,
these agreements may be terminated by mutual written consent
of both parties at any time. Amendments to the original
provider agreements with Humana were entered into effective
September 1, 1991 and January 1, 1993 for the Cutler Ridge and
Kendall centers, respectively under full-risk agreements.
The Brandon and Plant City centers entered into five-year
non-risk provider agreements with Humana effective June 1,
1993 and January 1, 1994, respectively. Under these
agreements, the Brandon and Plant City centers are responsible
only for primary (in-office) medical services. These
agreements allow for similar termination provisions to the
agreements for the other centers, except that either party may
elect to terminate the agreements without cause after the
first two years upon giving six months written notice.
Amendments to the aforementioned provider agreements with
Humana were entered into effective May 1, 1994 under full-risk
agreements. The Brandon agreement with Humana was terminated
effective August 31, 1995.
The Hammond center entered into a three-year risk provider
agreement with Humana effective October 1, 1995 with an
automatic three-year renewal. However, the Hammond center is
operating under a non-risk amendment ("Amendment") to this
agreement and is responsible only for primary (in-office)
medical services. The Hammond center will continue to operate
under the Amendment until the earlier of the date on which
Midwest achieves a certain membership level or one calendar
year from the commencement date
F-9
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
of the agreement, October 1, 1996. This agreement allows for
similar termination provisions to the agreements for the other
centers, except that either party may elect to terminate the
agreement at any anniversary date of the agreement upon giving
at least six months written notice.
Services to be provided by the SPI, SPI Hillsborough and
Midwest centers include medical and surgical services,
including all procedures furnished in a physician's office
such as X-rays, nursing services, blood work and other
incidentals, drugs and medical supplies. SPI, SPI Hillsborough
and Midwest centers are responsible for providing all such
services and for directing and authorizing all other care,
including emergency and inpatient care for Humana members. The
SPI and SPI Hillsborough centers are financially responsible
for all out-of-area care rendered to a member and provides
direct care as soon as the member is able to return to the
designated medical center.
Humana has agreed to pay the SPI and SPI Hillsborough centers
monthly for services provided to members based on a
predetermined amount per member ("capitation"), comprised of
in-hospital services and other services defined by contract
("Part A"), in-office ("Primary") and other medical services
defined by the agreements ("Part B"). Humana has agreed to pay
the Midwest center a guaranteed monthly amount ("guaranteed
payment") to cover the costs of providing primary care
services and to cover Midwest's other operating costs. The
guaranteed payments will be made until the earlier of the date
on which the Midwest center achieves a certain membership
level or one calendar year from the commencement date of the
agreement at which point Humana will pay Midwest capitation.
Midwest shall not be at risk for Parts A and B until Midwest
has been assigned certain membership.
(d) HUMANA IBNR RECEIVABLE
Humana withholds a certain amount each month from the SPI and
SPI Hillsborough centers' Part A, Part B and supplemental
funding in order to cover claims incurred but not reported or
paid. This amount is to be used to pay the centers Part A,
Part B and supplemental costs.
(e) DUE FROM AFFILIATES AND RELATED PARTIES
Due from affiliates and related parties represents current
amounts receivable from affiliates to cover their operating
expenses.
(f) CLAIMS RESERVE FUNDS
Humana withholds a certain amount each month from the SPI and
SPI Hillsborough centers' Part A capitation funding. This
amount represents a "catastrophic reserve fund" to be utilized
for the payment of the center's Part A costs in the event a
center ceases operations and the incurred but not reported
reserves are not adequate to reimburse providers for Part A
services rendered. This amount is calculated monthly by
Humana.
F-10
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(g) DUE TO HUMANA
Due to Humana represents amounts advanced to SPI and SPI
Hillsborough by Humana to cover certain operating expenses. No
interest is charged by Humana. No due date is specified on the
amounts advanced.
(h) PHYSICIAN CONTRACTS
SPI, SPI Hillsborough and Midwest have entered into employment
agreements with its primary care physicians and into contracts
with various independent physicians to provide specialty and
other referral services both on a prepaid and a negotiated
fee-for-service basis. Midwest has also entered into a
consulting agreement with a physician. Prepaid physicians'
service costs are based upon a fixed fee per member, payable
on a monthly basis. Such costs are included in the
accompanying combined statements of income as salaries and
related benefits.
(i) MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance on a
claims-made basis through July 1996, including retrospective
coverage for acts occurring since inception of its operations.
Incidents and claims reported during the policy period are
anticipated to be covered by the malpractice carrier. The
Company intends to keep such insurance in force throughout the
foreseeable future.
At December 31, 1995, there are no asserted claims against the
Company that were not covered by the policy. Management of the
Company has accrued approximately $181,100 for incidents which
may have occurred but have yet to be identified under its
incident reporting system, based on industry experience.
Physicians providing medical services to members are provided
malpractice insurance coverage (claims-made basis), including
retrospective coverage for acts occurring since their
affiliation with the Company.
(j) MEMBERSHIP
Humana members assigned to SPI and SPI Hillsborough centers
include approximately 3,100, and 4,200 Medicare members,
respectively, and 3,400, and 5,300 commercial members,
respectively, at December 31, 1995 and 1994. At December 31,
1995, Humana members assigned to the Midwest center include
approximately 60 commercial and 200 Medicare members.
(k) STOP-LOSS FUNDING
The SPI and SPI Hillsborough centers are charged a stop-loss
funding fee by Humana for the purpose of limiting a center's
exposure to Part A costs and certain Part B costs
F-11
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
associated with a member's health services. At December 31,
1995, Midwest was under a non-risk agreement with Humana, and
as such no stop-loss funding fees were charged to the Midwest
center.
For the year ended December 31, 1993, the stop-loss threshold
which applies to Part A costs only, for Medicare members of
SPI and SPI Hillsborough, was $20,000 and $25,000,
respectively, per hospital stay within certain admitting-time
criteria. For commercial members, the threshold is $15,000 for
SPI and SPI Hillsborough per calendar year for both Part A and
Part B costs. For the year ended December 31, 1994, the
stop-loss threshold, which applies to Part A costs only, for
Medicare members was $28,000 for SPI and $32,600 for SPI
Hillsborough per calendar year. For commercial members, the
threshold is $20,000 for SPI and $28,000 for SPI Hillsborough
per calendar year for both Part A and Part B costs. For the
year ended December 31, 1995, the stop-loss threshold for both
Part A and Part B costs for Medicare members was $40,000 per
member per calendar year for both SPI and SPI Hillsborough.
For commercial members, the stop-loss threshold for both Part
A and Part B costs was $20,000 and $15,000 for SPI and SPI
Hillsborough, respectively.
Since the SPI and SPI Hillsborough centers are not responsible
for claims in excess of the threshold, income and the
corresponding expense, both equal to the stop-loss funding are
recognized by SPI and SPI Hillsborough. These amounts are
included in revenue and medical expenses, respectively, in the
accompanying combined statements of income. Stop-loss funding
for the SPI and SPI Hillsborough centers for the years ended
December 31, 1995, 1994 and 1993 was approximately $2,115,000,
$1,919,000, and $956,000, respectively.
(l) MATERNITY FUNDING
The SPI and SPI Hillsborough centers are charged a maternity
funding fee on commercial membership for the purpose of
limiting the centers' exposure to Part A and Part B costs
associated with a commercial member's pregnancy or related
illness. Since the SPI and SPI Hillsborough centers are not
responsible for claims in excess of the amount contributed to
the maternity fund, income and expenses both equal to the
maternity funding are recognized by SPI and SPI Hillsborough
and are included in revenue and medical expenses,
respectively, in the accompanying combined statements of
income. Maternity funding for the SPI and SPI Hillsborough
centers for the years ended December 31, 1995, 1994 and 1993
was approximately $825,000, $917,000, and $499,000,
respectively. At December 31, 1995, Midwest was under a
non-risk agreement with Humana and as such no maternity
funding fees were charged to the Midwest center.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying combined financial statements include the
accounts of the companies listed in note 1(a) which are
related through common ownership and management. All
F-12
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
significant intercompany balances and transactions have been
eliminated in the consolidation of MedExec, Inc. and
subsidiaries, and the subsequent combination of MedExec, SPI
and SPI Hillsborough.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the combined statements of cash flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on
property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
(d) INVESTMENTS IN OTHER AFFILIATED ENTITIES
The Company accounts for equity investments with a percentage
of ownership between 20 percent and 50 percent under the
equity method of accounting, which requires the recognition by
the Company of its pro rata share of the investee's income or
loss. Equity investments of less than 20 percent are carried
at cost.
(e) INTANGIBLE ASSETS
Intangible assets arose in business acquisitions. These
intangibles are being amortized on a straight-line basis over
five years. At December 31, 1995 and 1994, accumulated
amortization was approximately $9,200 and $6,600,
respectively.
(f) INCOME TAXES
MedExec, Inc. qualified as an S corporation for income tax
purposes at December 31, 1995, and 1994. MedExec, Inc. uses
accelerated depreciation methods for reporting taxable income
or losses which are passed through to stockholders under the
Company's S Corporation status. As stated in footnote 14 to
these combined financial statements, effective January 1, 1996
MedExec's tax status automatically changed from an S
Corporation to a C Corporation. The effect of this change will
result in additional state and federal deferred income taxes
attributable to the temporary differences at the time of
change to be recorded as a deferred tax liability with a
corresponding reduction in income. The deferred tax
liabilities at December 31, 1995 and 1994 were approximately
$13,500 and $126,000. The amount of the liability at December
31, 1995 would be payable in future years as the net
cumulative temporary differences reverse.
SPI qualified as an S corporation for income tax purposes at
December 31, 1993. In May 1994, the stockholders of SPI
voluntarily revoked SPI's election to be treated as an S
corporation pursuant to the Internal Revenue Code Section
1362(d).
F-13
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Effective January 1, 1993, SPI Hillsborough and Dominion
adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Effective May 1994, SPI adopted the provisions of SFAS
No. 109. The adoption of SFAS No. 109 had no cumulative effect
on the combined statements of income for the years ended
December 31, 1994 and 1993. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to be applied to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Under federal income tax principles, the Company cannot file a
consolidated income tax return. Thus, losses of one entity may
not offset income of another entity within the controlled
group.
(g) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and
supplemental funds are recognized monthly on the basis of the
number of Humana members assigned to the SPI and SPI
Hillsborough centers and the contractually agreed-upon rates.
The SPI and SPI Hillsborough centers receive monthly payments
from Humana after all expenses paid by Humana on behalf of the
SPI and SPI Hillsborough centers, estimated claims incurred
but not reported and claims reserve fund balances have been
determined. During 1995, Midwest recognizes revenue based on
the gross monthly guaranteed payment amount. The Midwest
center receives a net monthly payment from Humana after all
expenses paid by Humana on behalf of the Midwest center have
been determined. In addition to Humana payments, the SPI, SPI
Hillsborough and Midwest centers receive copayments from
commercial members for each office visit, depending upon the
specific plan and options selected and receive payments from
non-Humana members on a fee-for-service basis.
Medical services are recorded as expenses in the period in
which they are incurred. Accrued medical claims for SPI and
SPI Hillsborough as reflected in the combined balance sheets
are based upon costs incurred for services rendered prior to
and up to the combined balance sheet date. Included are
services incurred but not reported as of the combined balance
sheet date based upon actual costs reported subsequent to the
combined balance sheet date and a reasonable estimate of
additional costs.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
F-14
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(i) RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 financial statements have
been reclassified to conform with the 1995 presentation.
(3) INVESTMENTS IN OTHER AFFILIATED ENTITIES
At December 31, 1993, MedExec had a 30 percent investment in HCO
Networks, Inc. ("HCON"), a claims management company. MedExec has
accounted for its initial investment of $300,000 under the equity
method. For the years ended December 31, 1995, 1994 and 1993, MedExec's
equity interest in the net income (loss) of HCON was approximately
$50,000, $28,000 and ($150,000), respectively.
At December 31, 1993, MedExec had an $800,000 investment in Midway
Airlines ("Midway"), which represented approximately 16 percent
ownership in Midway. The Company has accounted for its investment in
Midway under the cost method. During the year ended December 31, 1994,
the Company distributed as a dividend to its stockholders its
investment in Midway. The recorded value of the investment approximated
the fair value at the time of distribution.
At December 31, 1995 and 1994, MedExec had a 55 percent interest in
Dominion. Dominion has been consolidated in the accompanying combined
financial statements.
MedExec also has a 50 percent investment in SPI Managed Care of
Broward, Inc. ("SPI Broward"), a health care management company, and a
23.75 percent investment in Broward Managed Care, Inc. ("BMC"), which
operates two Humana primary care health centers. At December 31, 1995
and 1994, MedExec's investment in SPI Broward and BMC is $0 under the
equity method of accounting.
F-15
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
Estimated
useful
1995 1994 lives
-------- -------- --------
<S> <C> <C> <C>
Medical and office equipment $ 453,035 267,578 5 years
Furniture and fixtures 32,276 68,426 7 years
-------- --------
485,311 336,004
Less accumulated 187,251 128,805
-------- --------
depreciation
Property and equipment, net $ 298,060 207,199
======== ========
</TABLE>
(5) LOAN PAYABLE TO HUMANA
Loan payable to Humana represents funds advanced to Midwest for the
purchase and installation of a computer system and related training.
The loan is due by September 30, 2000 and is payable in monthly
installments beginning the first month during which Midwest is at full
risk under the terms of the Humana provider agreement. Monthly
installments to Humana will be a minimum of 10 percent of any positive
balance in Midwest's Part A fund. In the event no positive balance
exists in the Part A fund on or at any time after September 30, 1996,
Midwest shall make a minimum monthly payment of $1,268 until the loan
is repaid. Interest is payable at 10 percent per year unless the note
is paid in full by Midwest by September 30, 1996 at which point any
interest owed to Humana will be waived. Management believes that it
will repay the loan before September 30, 1996 and as such has not
accrued any interest at December 31, 1995. The loan is secured by the
computer equipment which has a book value of approximately $55,000 at
December 31, 1995.
(6) LOAN PAYABLE TO BANK
At December 31, 1995, Midwest had a $200,000 unsecured line of credit
bearing interest at prime. The line of credit is personally guaranteed
by all of the stockholders of MedExec at December 31, 1995. The
principal balance is due October 1, 1996, and interest is due monthly.
At December 31, 1995, $100,000 was drawn under this line of credit and
was used primarily for development costs relating to Midwest.
F-16
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(7) LEASES
Future minimum lease payments required under non cancelable operating
leases at December 31, 1995 are as follows:
Year ended Operating
December 31, leases
------------ ------
1996 $ 182,327
1997 188,584
1998 193,875
1999 3,968
Thereafter --
-------
Total minimum lease payments $ 568,754
=======
Rent expense incurred under an assigned office lease agreement for
the years ended December 31, 1995, 1994 and 1993 amounted to
approximately $186,000, $70,000, and $54,000, respectively.
(8) Capital Stock
The shares' authorized, issued, related par value and additional
paid-in capital for each of the combined companies at December 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
Stock Stock Stock total Additional
authorized Issued par value paid-in capital
---------- ------ --------- ---------------
<S> <C> <C> <C> <C>
MedExec, Inc. 500 500 $ 500 700
SPI Managed Care, Inc. 500 500 500 500
SPI Managed Care of Hillsborough
County, Inc. 1,000 500 500 --
------
$ 1,500 1,200
===== =====
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company paid salaries to stockholders of approximately
$1,389,000, $772,600, and $652,000 which are included in the combined
statements of income for the years ended December 31, 1995, 1994 and
1993, respectively.
The Company recorded $111,459 and $225,288 in administration fee
revenue from SPI Broward during the years ended December 31, 1995 and
1994, respectively.
F-17
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
The Company recorded approximately $162,000 and $116,000 in utilization
revenue from BMC during the years ended December 31, 1995 and 1994,
respectively.
The Company had receivables from affiliates and related parties of
$59,023 and $196,745 at December 31, 1995 and 1994, respectively, and a
payable to related parties of $4,458 at December 31, 1995.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, accounts
receivable, prepaid expenses and other current assets, accounts payable
and other accrued expenses, loan payable to Humana and loan payable to
bank approximate fair value at December 31, 1995 because of the short
maturity of these instruments.
(11) RETIREMENT PLANS
The Company sponsors 401(k) plans (the "Plans"). Employees who have
worked a minimum of six months or 1,000 hours and are at least 21 years
of age may participate in the Plans. Employees may contribute up to 14
percent of their annual salary, not to exceed $9,240 in 1995 and 1994,
and $8,994 in 1993, to the Plans. The Company's matching contribution
is 25 cents for each dollar of the employee's elected contribution, up
to four percent of the employee's annual salary. The Company's matching
contribution was approximately $21,000, $14,000, and $8,000 in 1995,
1994 and 1993, respectively.
(12) INCOME TAXES
Income tax expense consists of the following:
1995 1994 1993
------- ------ ------
Current expense (benefit):
federal and state $(120,279) 60,000 --
Deferred expense (benefit) 120,279 (60,000) --
------- ------ ------
$ -- -- --
======= ====== ======
A reconciliation of income tax expense and the amount that would be
computed using the statutory federal income tax rate is as follows:
F-18
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- -------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at the statutory rate $ (137,839) (34%) 463,645 34% 272,967 34%
S corporation income taxed at the stockholder
level 95,277 23% (532,270) (39)% (292,767) (37)%
Change in the beginning-of-the year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense 42,562 11% 68,625 5% 19,800 3%
------ ------- ------ ------- ------ -------
$ -- -- -- -- -- --
====== ======= ====== ======= ====== =======
</TABLE>
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and deferred tax
liabilities of those entities for which no Subchapter S election is in
effect at December 31, 1995 and 1994, are presented as follows:
1995 1994
--------- ---------
Deferred tax assets:
Revenue and expenses recognized for financial
reporting purposes in a different period than
for income tax purposes $ 7,646 127,925
Net loss carryforward 123,341 20,500
--------- ---------
Total deferred tax assets 130,987 148,425
Less valuation allowance (130,987) (88,425)
--------- ---------
Net deferred tax asset -- 60,000
Deferred tax liabilities -- --
--------- ---------
Net deferred tax asset $ -- 60,000
========= =========
The valuation allowance for deferred tax assets as of January 1, 1994
was $19,800. The net change in the valuation allowance for the years
ended December 31, 1995 and 1994 is $42,562 and $68,625, respectively.
The Company reclassed $60,000 of its deferred tax asset as of December
31, 1995 to current tax receivable upon utilization of its net
operating loss.
At December 31, 1995, the companies not qualifying as S corporations,
collectively had a net operating loss carryforward of approximately
$486,000 for tax purposes, which expire in 2009.
(13) COMMITMENTS AND CONTINGENCIES
(a) GOVERNMENTAL REGULATION
The Company's operations have been and may continue to be
affected by various forms of governmental regulation and other
actions. It is presently not possible to predict the
likelihood of any such actions, the form which such actions
may take, or the effect such actions may have on the Company.
F-19
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(b) STOCKHOLDER AGREEMENTS
The Company entered into employment agreements and change in
control severance agreements with the stockholders during
1994. Such agreements are in effect through April 1, 1999.
(14) SUBSEQUENT EVENTS
Effective January 1, 1996, the Company entered into an agreement with
First Medical Corporation ("FMC"). All of the outstanding shares of the
Company were converted into shares of FMC. In exchange for and in
conversion of all of the issued and outstanding shares of the Company,
FMC has issued and delivered common shares of FMC to the stockholders
of the Company.
Effective January 2, 1996, the Company acquired an additional one
percent interest in SPI Broward from Broward Medical Management ("BMM")
for $1.00 and an equal split of the profits of SPI Broward. Effective
January 2, 1996, the Company acquired an additional 27.25 percent
interest in Broward Managed Care from BMM for $100,000.
Effective January 1, 1996, the MedExec tax status automatically changed
from an S Corporation to a C Corporation as a result of its merger into
FMC. See Note 2(f) above.
On April 4, 1996, the Company sold its investment in HCON for $300,000,
resulting in a gain of $40,967.
Effective February 1, 1996, the Company began operations in its Durham
center located in Houston, Texas.
The Company has entered into various employment and management services
agreements throughout 1996.
(15) OTHER MATTERS
In October, 1996 FMC entered into a merger agreement with The Lehigh
Group, Inc. ("Lehigh") whereby upon merger FMC would control
approximately 96 percent of the merged company. In connection with the
proposed merger, which is subject to stockholder approval of Lehigh,
FMC and Lehigh have been named in a lawsuit. In the opinion of the FMC
and its legal counsel, such suit will not have a material effect on the
financial statements of FMC, if not resolved favorably.
In June, 1996 FMC entered into a subscription agreement with Generale
De Sante International, PLC ("GDS") by which GDS has the right to
purchase various percentages of interest in both FMC and its
subsidiaries.
F-20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
The Lehigh Group Inc.:
We have audited the accompanying consolidated balance sheets of The Lehigh Group
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1995. We have
also audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Lehigh Group
Inc. and subsidiaries at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
BDO Seidman, LLP
New York, New York
March 4, 1996, except as to Note 3,
which is as of March 28, 1996
F-21
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1995 1994
- --------------------------------------------------------------------------------
(in thousands except for per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 347 $ 925
Accounts receivable, net of allowance for 4,335 4,611
doubtful accounts of $174 and $275
Inventories, net 1,823 1,745
Prepaid expenses and other current assets 22 22
------ ------
Total current assets 6,527 7,303
Property, plant and equipment, net of 61 105
accumulated depreciation and amortization
(Note 5)
Other assets 34 33
------ ------
Total assets $6,622 $7,441
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-22
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1995 1994
- --------------------------------------------------------------------------------
(in thousands except for per share data)
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current maturities of long-term debt (Note 6) $ 510 $ 519
Note payable-bank (Note 6) 360 360
Accounts payable 1,839 1,911
Accrued expenses and other current liabilities 1,381 1,280
------ ------
Total current liabilities 4,090 4,070
------ ------
Long-term debt, net of current maturities 2,080 2,361
------ ------
(Note 6)
Deferred credit applicable sale of discontinued 250 500
------ ------
operations (Note 4)
Commitments and Contingencies (Notes 3, 6 and 8)
Shareholders' equity (Note 7):
Preferred stock, par value $.001; authorized
5,000,000 shares, none issued -- --
Common stock, par value $.001 authorized
shares 100,000,000, in 1995 and 1994; shares
issued 10,339,250 in 1995 and 1994 which
excludes 3,016,249 and 3,015,893 shares held
as treasury stock in 1995 and 1994,
respectively 11 11
Additional paid-in capital (Note 10) 106,594 106,594
Accumulated deficit from January 1, 1986 (104,749) (104,441)
Treasury stock - at cost (1,654) (1,654)
------ ------
Total shareholders' equity 202 510
------ ------
Total liabilities and shareholders' equity $6,622 $7,441
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-23
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(in thousands except for per share data)
<S> <C> <C> <C>
Revenues earned $ 12,105 $ 12,247 $ 12,890
Costs of revenues earned 8,628 8,577 9,150
------------ ------------ ------------
Gross Profit 3,477 3,670 3,740
Selling, general and administrative expenses 3,994 4,187 4,153
------------ ------------ ------------
Operating loss (517) (517) (413)
------------ ------------ ------------
Other income (expense):
Interest expense (433) (398) (424)
Interest and other income (Note 6) 392 505 587
------------ ------------ ------------
(41) 107 163
------------ ------------ ------------
Loss before discontinued operations and
extraordinary item (558) (410) (250)
Income from discontinued operations (Note 4) 250 5,000 2,074
------------ ------------ ------------
Income (loss) before extraordinary item (308) 4,590 1,824
Extraordinary item:
Gain on early extinguishment of debt (Note
6) -- -- 1,997
------------ ------------ ------------
Net income (loss) $ (308) $ 4,590 $ 3,821
============ ============ ============
Earnings per share - Primary and Fully Diluted
- ----------------------------------------------
Loss before discontinued operations and
extraordinary item $ (0.05) $ (0.04) $ (0.03)
Income from discontinued operations 0.02 0.49 0.24
Income (loss) before extraordinary item (0.03) 0.45 0.21
Net Income (loss) (0.03) 0.45 0.43
Weighted average Common Shares
And share equivalents outstanding
- ---------------------------------
Primary and Fully diluted 10,339,250 10,169,000 8,825,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-24
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years Ended December 31, 1995, 1994 and 1993
- ------------------------------------------------------------------------------------------------------------------------------
(in
thousands)
Preferred
Stock Common Stock
---------- -----------------
Additional Treasury
Number of Number Paid-In Deficit From Stock At
Shares Amount of Shares Amount Capital Jan. 1, 1986 Cost Total
--------- ------ -------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 -- -- 10,978 11 69,454 (112,852) (1,654) (45,041)
Exchange of Class A and B
notes in connection with sale of
subsidiary (3,320) 36,121 36,121
Net Income -- -- -- -- 3,821 3,821
--- --- ------ --------- --------- --------- ------- ---------
Balance December 31, 1993 -- -- 7,658 $ 11 $ 105,575 $(109,031) $(1,654) $ (5,099)
Issuance of common stock in
connection with private
placement 2,681 1,019 1,019
Net Income -- -- -- -- 4,590 -- 4,590
--- --- ------ --------- --------- --------- ------- ---------
Balance December 31, 1994 -- -- 10,339 11 $ 106,594 $(104,441) $(1,654) $ 510
=== === ====== ========= ========= ========= ======= =========
Net Loss -- -- -- -- $ (308) -- $ (308)
--- --- ------ --------- --------- --------- ------- ---------
Balance December 31, 1995 -- -- 10,339 11 $ 106,594 $(104,749) $(1,654) $ 202
=== === ====== ========= ========= ========= ======= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-25
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 11)
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (308) $ 4,590 $ 3,821
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on early extinguishment of debt -- -- (1,997)
Depreciation and amortization 65 59 95
Provision for doubtful accounts receivable -- -- (85)
Deferred credit applicable to sale of discontinued
operations (250) (5,000) (1,760)
Changes in assets and liabilities:
Accounts receivable 276 93 (493)
Inventories (78) (108) 255
Prepaid expenses and other current assets 55 423
Other assets (1) 6 12
Net assets applicable to discontinued operations -- -- 713
Accounts payable (72) 64 (217)
Accrued expenses and other current liabilities 101 81 (695)
------- ------- -------
Net cash provided by (used in) operating
activities (267) (160) 72
------- ------- -------
Cash flows from investing activities:
Capital expenditures (21) (39) (24)
Net proceeds from the sale of subsidiary -- -- 750
------- ------- -------
Net cash provided by (used in) investing
activities (21) (39) 726
------- ------- -------
Cash flows from financing activities:
Repayment of capital leases (20) (3) (19)
Net payments under bank debt (270) (360) (430)
Net proceeds from sale of stock -- 1,019 --
------- ------- -------
Net cash provided by (used in) financing
activities (290) 656 (449)
------- ------- -------
Net change in cash and cash equivalents (578) 457 349
Cash and cash equivalents at beginning of period 925 468 119
------- ------- -------
Cash and cash equivalents at end of period $ 347 $ 925 $ 468
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-26
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
1 - General
The Lehigh Group Inc. (the "Company"), through its wholly owned
subsidiary, HallMark Electrical Supplies Corp. ("HallMark"), is engaged in the
distribution of electrical supplies for the construction industry both
domestically (primarily in the New York Metropolitan area) and for export.
HallMark was acquired by the Company in December 1988. HallMark's sales include
electrical conduit, armored cable, switches, outlets, fittings, panels and wire
which are purchased by HallMark from electrical equipment manufacturers in the
United States. Approximately 60% of HallMark's sales are domestic and 40% are
export. Export sales are made by sales agents retained by HallMark, and since
November 1, 1992, HallMark's export business has been conducted primarily from
Miami, Florida.
EXPORT SALES AS A PERCENTAGE OF TOTAL SALES ARE SUMMARIZED AS FOLLOWS:
December 31,
1995 1994 1993
Central America 16% 14% 27%
South America 18% 16% 3%
Caribbean 6% -- --
West Indies -- 6% 4%
Other -- 2% 4%
- -------------------------------------- ---- ---- ----
Total 40% 38% 38%
==== ==== ====
2 - Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include all
of the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
INVENTORIES - Inventories are stated at the lower of cost or market using a
first-in, first-out basis to determine cost. Inventories consist of electrical
supplies held for resale.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost. Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements are
provided over the life of each respective lease.
INCOME TAXES - In 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," which requires the use of the
liability method of accounting for deferred income taxes. The provision for
income taxes typically includes Federal, state and local income taxes currently
payable and those deferred because of temporary timing differences between the
financial
F-27
<PAGE>
statement and tax bases of assets and liabilities. The financial statements do
not include a provision for income taxes due to the Company's net operating
losses.
EARNINGS PER SHARE - Earnings per common share is calculated by dividing net
income (loss) applicable to common shares by the weighted average number of
common shares and share equivalents outstanding during each period. Excluded
from fully diluted computations are certain stock options granted (12,000,000
options which are contingently exercisable pending the occurrence of certain
future events).
TREASURY STOCK - Treasury stock is recorded at net acquisition cost. Gains and
losses on disposition are recorded as increases or decreases to capital with
losses in excess of previously recorded gains charged directly to retained
earnings.
STOCK OPTIONS - During 1995, Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" was issued. The Company has not
elected early adoption which allows a choice of either the intrinsic value
method or the fair value method of accounting for employee stock options. The
Company expects to select the option to continue the use of the current
intrinsic value method.
ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
LONG-LIVED ASSETS - During 1995, Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long
Lived-Assets to be Disposed Of," was issued. The adoption of this pronouncement
is not expected to have a significant impact on the Company's financial
statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of financial
instruments including cash and cash equivalents, accounts receivable and
accounts payable approximate fair value at December 31, 1995, because of the
relative short maturities of these instruments. It is not possible to presently
determine the market value of the long term debt and notes payable given the
Company's current financial condition.
STATEMENTS OF CASH FLOWS - Cash equivalents include time deposits with original
maturities of three months or less.
REVENUE RECOGNITION - Revenue is recognized when products are shipped or when
services are rendered.
PRESENTATION OF PRIOR YEARS DATA - Certain reclassifications have been made to
conform prior years data with the current presentation.
3 - Sale of Subordinated Debenture
On March 28, 1996, the Company issued a $300,000 subordinated debenture
to Macrocom Investors, LLC. The debenture includes interest at 2% per annum over
the prime lending rate of Chase Manhattan Bank, N.A. payable monthly commencing
May 1996. The principal balance is payable April 1, 1998. The debenture granted
the lender a five year warrant to purchase a number of shares equal to
F-28
<PAGE>
$300,000 divided by the price equal to the average closing bid price of the
Company's common stock for the ten business days prior to the date of closing of
the financing. The debenture contains various restrictions on the Company and is
secured by 100% of the outstanding common stock of the Company's wholly-owned
subsidiary, HallMark Electrical Supplies Corp. The Company has entered into an
agreement with a financial services company to use its best efforts to raise an
additional $450,000 under the same terms and conditions. Management believes
that the proceeds of the $300,000 subordinated debenture combined with current
working capital will be sufficient to fund the Company's operations for the
balance of 1996.
4 - Discontinued Operations
On December 31, 1991, the Company sold its right, title and interest in
the stock of the various subsidiaries which made up its discontinued interior
construction and energy recovery business segments subject to existing security
interests. The Company did not retain any of the liabilities of the sold
subsidiaries. The excess of liabilities over assets of subsidiaries sold
amounted to approximately $9.6 million. Since 1991, the Company has reduced this
deferred credit (the reduction is shown as income from discontinued operations)
due to the successful resolution of the majority of the liabilities for amounts
significantly less than was originally recorded. The deferred credits were
reduced as follows:
1992 $ 2,376
1993 $ 1,760
1994 $ 5,000
1995 $ 250
5 - Property, Plant and Equipment
December 31
---------------------------
Estimated
1995 1994 Useful Lives
--------- ---------- --------------
Machinery and equipment $ 475 $ 469 3 to 5 years
Leasehold improvements 285 270 Term of leases
----- -----
760 739
Less accumulated depreciation and
amortization (699) (634)
------ ------
$ 61 $ 105
===== =====
6 - Long-Term Debt
December 31,
--------------------
INTEREST RATE 1995 1994
-------------
Subordinated Debentures 14-7/8% $ 400 $ 400
F-29
<PAGE>
Senior Subordinated Notes 13-1/2% 100 100
Note Payable 10.56% 2,440 2,710
Other Long-Term Debt Various 10 30
------- -------
2,950 3,240
Less Current Portion (870) (879)
------- -------
Total Long-Term Debt $ 2,080 $ 2,361
======= =======
Subordinated Debentures and Senior Subordinated Notes
On March 15, 1991, pursuant to a restructuring done by the Company (the
"1991 Restructuring"), the holders of $8,760,000 principal amount of the 14-7/8%
Debentures exchanged such securities, together with the accrued but unpaid
interest thereon, for $2,156,624 principal amount of Class B Notes and
53,646,240 shares of Common Stock. Additionally, the holders of $33,840,000
principal amount of the 13-1/2% Notes exchanged such securities, together with
the accrued but unpaid interest thereon, for $8,642,736 principal amount of
Class B Notes and 212,650,560 shares of Common Stock.
The Company was in default of certain covenants to the holders of Class
A Notes and Class B Notes (the "Notes") at December 31, 1992 and 1991 and, as a
consequence, the Notes were classified as current in the 1992 and 1991 Financial
Statements. The Company continues to be in default in the payment of interest
(approximately 635,000 and $482,000 of interest is past due as of December 31,
1995 and 1994) on the $500,000 principal amount of 13-1/2% Notes and 14-7/8%
Debentures that were not tendered in the Company's 1991 Restructuring. In May
1993 the Company reached an agreement (the "1993 Restructuring") whereby
participating holders of the Notes ("Noteholders") surrendered their Notes,
together with a substantial portion of their Common Stock, and, in exchange
therefore, the Noteholders acquired, through a newly formed corporation ("LVI
Holding"), all of the stock of LVI Environmental Services Group Inc. ("LVI
Environmental"), a subsidiary of the Company that conducted its asbestos
abatement operations. Management of LVI Environmental have a minority equity
interest in LVI Holding. As a consequence, the Company's outstanding
consolidated indebtedness was reduced from approximately $45.9 million to
approximately $3.6 million (excluding approximately $120,944 of indebtedness
under Class B Notes that LVI Holding agreed to pay in connection with the 1993
Restructuring but for which the Company remains liable). Since the Noteholders
were also principal stockholders of the Company, the gain from this transaction,
net of the carrying value of LVI Environmental, was credited directly to
additional paid-in capital.
In accordance with Statement of Financial Accounting Standards No. 15,
the Class A Notes and the Class B Notes were carried on the consolidated balance
sheet at the total expected future cash payments (including interest and
principal) specified by the terms of the Notes. A gain on early extinguishment
of debt occurred as a result of the carrying amounts of the 13-1/2% Notes,
14-7/8% Debentures and Senior Secured Notes (including accrued but unpaid
interest and unamortized deferred financing costs) being greater than the fair
market value of the common stock issued, the net assets transferred to a
liquidating trust, and total expected future cash payments of the Class A Notes
and Class B Notes, net of direct restructuring costs.
Included in interest and other income in 1995 is approximately $380,000
of other income which represents an adjustment to the value of certain items
which relate to the Company's 1991 Restructuring.
F-30
<PAGE>
The Company continues to be in default in the payment of interest
(approximately $635,000 and $482,000 at December 31, 1995 and 1994,
respectively) and principal of the $500,000 on the 13-1/2 Notes and 14-7/8
Debentures not tendered in the Company's 1991 Restructuring. The principal of
$500,000 is included as current maturities of long term debt and the unpaid
interest is included in accrued expenses and other current liabilities.
Note Payable
On June 30, 1993, HallMark restructured its revolving credit facility
as an installment loan. The loan is collateralized by the inventory and
receivables at HallMark. Monthly principal payments of $30,000 are due through
December 31, 1998 and the final payment is due on January 31, 1999.
Payments on the Note are due as follows:
1996 360
1997 360
1998 360
1999 1,360
7 - Income Taxes
At December 31, 1995 and 1994, the Company had a net deferred tax asset
amounting to approximately $1.6 million and $1.4 million, respectively. The net
deferred tax asset consisted primarily of net operating loss ("NOL")
carryforwards, and temporary differences resulting from inventory and accounts
receivable reserves, and it is fully offset by a valuation allowance of the same
amount. The following is a summary of the significant components of the
Company's deferred tax assets and liabilities:
DECEMBER 31, 1995 1994
- ------------
Deferred tax assets:
Nondeductible accruals and allowances $ 65 $ 70
Net operating loss carryforward 1,575 1,400
------ ------
1,640 1,470
Deferred tax liabilities:
Depreciation and amortization 30 25
------ ------
Net deferred tax asset $1,610 $1,445
Less: Valuation Allowance 1,610 1,445
------ ------
Deferred Income Taxes -- --
====== ======
The Company did not have Federal taxable income in 1995, 1994, and 1993
and, accordingly, no Federal taxes have been provided in the accompanying
consolidated statements of operations. As of
F-31
<PAGE>
December 31, 1995, the Company had NOL carryforwards of approximately $4.5
million expiring through 2010.
8 - Commitments and Contingencies
Leases
The Company and its subsidiaries lease machinery, office and warehouse
space, as well as certain data processing equipment and automobiles under
operating leases. Rent expense aggregated $177,336, $148,000, and $191,000 for
the years ended December 31, 1995, 1994, and 1993, respectively.
F-32
<PAGE>
Future minimum annual lease commitments, primarily for office and
warehouse space, with respect to noncancellable leases are as follows:
1996 103
1997 104
1998 105
1999 114
2000 118
Thereafter 433
------
$ 977
======
In addition to the above, certain office and warehouse space leases
require the payment of real estate taxes and operating expense increases.
Employment Agreements
On August 22, 1994 the Company and Mr. Salvatore Zizza entered into an
employment agreement providing employment to Mr. Zizza through December 31, 1999
as President, Chairman of the Board and Chief Executive Officer of the Company
at an annual salary of $200,000.
On January 1, 1995 the Company and Mr. Robert Bruno entered into an
employment agreement providing employment to Mr. Bruno through December 31, 1999
as Vice President and General Counsel of the Company at an annual salary of
$150,000. The agreement calls for deferral of $50,000 of Mr. Bruno's salary each
year until the Company's annual revenues exceed $25 million. The $50,000
deferral has not been accrued due to uncertainty regarding the Company achieving
$25 million in sales.
Litigation
The State of Maine and Bureau of Labor Standards commenced an action
against the Company and Dori Shoe Company (an indirect former subsidiary) to
recover severance pay under Maine's plant closing law. The case was tried
without a jury on December 12 and 13, 1994 in Maine Superior Court. Under that
law, an "employer" who shuts down a large factory is liable to the employees for
severance pay at the rate of one week's pay for each year of employment.
Although the law did not apply to the Company at the time that the Dori Shoe
plant was closed it was amended so as to arguably apply to the Company
retroactively.
In a prior case brought against the Company (then known as Lehigh
Valley Industries) and its former subsidiary under the Maine severance pay
statute prior to its amendment the Company was successful against the State of
Maine (see CURTIS V. LOREE FOOTWEAR AND LEHIGH VALLEY INDUSTRIES, 516 A. 2d 558
(Me. 1986)).
The Superior Court by decision docketed April 10, 1995 entered
judgement in favor of the former employees of Dori Shoe Company against Dori
Shoe and the Company in the amount of $260,969. plus prejudgment interest and
reasonable attorneys' fees and costs to the Plaintiff upon their application
pursuant to Maine Rules of Civil Procedure 54(b) (3) (d). Interest and other
fees are approximately $100,000 at December 31, 1995. The Company filed a timely
appeal appealing the decision and the
F-33
<PAGE>
matter was argued before the Maine Supreme Judicial Court on December 7, 1995.
The Company's attorneys in Maine believe that the application of Maine's amended
severance pay statute is unconstitutional under both the Maine and United States
constitutions. Since the Company's appeal, no further action has taken place.
Approximately $350,000 has been accrued for by the Company relating to this
judgement.
9 - Stock Options
The following table contains information on stock options for the three
year period ended December 31, 1995:
Exercise price Weighted average
Option shares range per share price
- -------------------------------------------------------------------------------
Outstanding, January 1, 1993 0 0 0
Granted 0 0 0
Exercised 0 0 0
- -------------------------------------------------------------------------------
Outstanding, December 31, 1993 0 0 0
Granted 10,250,000* $0.50 to $1.00 $0.72
Exercised 0 0 0
Forfeited 0 0 0
- -------------------------------------------------------------------------------
Outstanding, December 31, 10,250,000 $0.50 to $1.00 $0.72
1994**
Granted 295,000 $0.50 $0.50
Exercised 0 0 0
Forfeited 0 0 0
- -------------------------------------------------------------------------------
Outstanding, December 31, 1995 295,000 $0.50 $0.50
- -------------------------------------------------------------------------------
* Excludes warrants to purchase 7,750,000 shares of stock.
Exercisable at year end
1993 0
1994 4,250,000*
1995 4,545,000*
F-34
<PAGE>
* Excludes warrants to purchase 1,750,000 shares of stock.
** Excludes 402,187 warrants issued to Goldis.
Twelve million of the eighteen million options and warrants granted in 1994 are
contingently exercisable pending the occurrence of certain future events. These
events include the Company acquiring any business with annual revenues in the
year immediately prior to such acquisition of at least $25 million dollars. The
occurrence of this event as well as certain other events will constitute the
measurement date for those options and the Company will recognize as
compensation the difference between measurement date price and the granted
price.
10 - Significant Customer
Sales to a customer accounted for approximately 25%, 22%, and 12% for years
ended December 31, 1995, 1994 and 1993, respectively. This customer accounted
for approximately 21% and 15 % of accounts receivable on December 31, 1995 and
1994, respectively.
11 - Supplementary Information
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
----------------------------
1995 1994 1993
---- ---- ----
Cash paid during the year for:
Interest $278 $264 $269
Income taxes 12 78 5
Supplemental disclosure of non-cash financing activities:
DECEMBER 31, 1995
Accounts payable and operating loss were both reduced by approximately $380,000
relating to an adjustment to the value of certain items which relate to the
Company's 1991 Restructuring.
DECEMBER 31, 1993
As a result of the 1993 Restructuring, 100% of the Class A Notes and over 97% of
the Class B Notes (the "Notes") of NICO Inc., a wholly owned subsidiary of the
Company, were surrendered to the Company together with 3 million shares of
common stock and, in exchange therefore, participating holders of such Notes
acquired through a newly formed corporation, all of the stock of LVI
Environmental Services Group Inc. The Company's consolidated indebtedness was
thereby reduced from approximately $45.9 million to approximately $3.6 million.
F-35
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Charged to Other Charges Balance at
DEC. 31, DESCRIPTION of Year Expenses Other Accounts Add (Deduct) End of Year
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 Allowance for doubtful
accounts $ 275 -- -- (101) $ 174
Inventory obsolescence reserve $ 158 -- -- $ 158
1994 Allowance for doubtful
accounts $ 300 -- -- (25) $ 275
Inventory obsolescence reserve $ 182 -- -- (24) $ 158
1993 Allowance for doubtful
accounts $ 385 (85) -- -- $ 300
Inventory obsolescence reserve $ 406 -- -- (224) $ 182
</TABLE>
F-36
<PAGE>
FIRST MEDICAL CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1995
1996 (predecessor-
(successor) see note 1)
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 73,887 $ 68,219
Accounts Receivable, net 1,175,731 0
Humana IBNR Receivable and claims reserve funds 4,395,035 2,703,392
Due from affiliates and related parties 821,935 511,709
Prepaid expenses and other current assets 83,755 111,628
------------------------
Total current assets 6,550,343 3,394,948
Property and equipment, net 490,757 238,759
Investments in other affiliated entities -- 205,406
Intangible assets, net (note 4) 3,432,841 3,134
Minority interest 5,017 --
------------------------
Total $10,478,958 $ 3,842,247
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,875,818 $ 475,757
Accrued medical claims, including amounts 3,634,436 2,296,050
incurred but not reported
Corporate deposits 686,221 --
Due to Humana 269,471 198,839
Loan payable to Humana (note 5) 375,000 --
Loans payable to banks (note 6 and 11) 502,500 --
Obligations to certain stockholders (notes 7) 696,600 --
Income taxes payable (note 8) 600,903 101,102
Minority interest 146,510 27,040
------------------------
Total current liabilities 8,787,459 3,098,788
Obligations to certain stockholders (notes 7) 402,000 --
------------------------
Total liabilities 9,189,459 3,098,788
------------------------
Stockholders' equity:
Common stock 1,000 1,500
Additional paid-in capital 155,190 1,200
Retained earnings 1,133,309 740,759
------------------------
Total stockholders' equity 1,289,499 743,459
------------------------
Total $10,478,958 $ 3,842,247
========================
See accompanying notes to financial statements.
F-37
<PAGE>
FIRST MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1995
1996 (predecessor-
(successor) see note 1)
----------- -----------
Revenue:
HMO $ 34,045,983 $ 17,059,709
Fee for service 6,910,064 139,586
MSO 461,064 433,173
Other revenue 229,998 641,289
------------------------------
Total revenue 41,647,109 18,273,757
Medical expenses 33,223,780 14,296,262
------------------------------
Gross Profit 8,423,329 3,977,495
------------------------------
Operating expenses:
Salaries and related benefits 2,900,306 1,958,314
Other operating expenses 3,961,788 1,766,425
------------------------------
Total operating expenses 6,862,094 3,724,739
------------------------------
Income before interest and taxes 1,561,235 252,756
------------------------------
Interest expense 59,611 --
Other nonoperating income (12,900) --
------------------------------
Income before taxes 1,514,524 252,756
Provision for income taxes (note 8) 605,818 101,102
------------------------------
Net income $ 908,714 $ 151,654
==============================
See accompanying notes to financial statements.
F-38
<PAGE>
FIRST MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 908,714 $ 151,654
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of equipment and intangibles 282,409 48,620
Gain on equity investments (78,259) (26,438)
Minority interest in net loss of consolidated subsidiaries 175,477 27,040
( Increase)decrease in assets, net of assets acquired:
Accounts receivable (1,175,731) --
Humana IBNR receivable and claims reserve funds 569,884 271,483
Due from affiliates and related parties (817,052) (314,964)
Prepaid expenses and other current assets 932 (14,359)
Increase (decrease) in liabilities, net of liabilities assumed:
Accounts payable and other accrued expenses 859,411 (39,507)
Accrued medical claims, including amounts incurred (577,984) (188,208)
but not reported
Corporate deposits (64,054) --
Due to Humana (71,909) 142,687
--------------------------
Net cash provided by operating activities 11,838 58,008
--------------------------
Cash flows from investing activities:
Capital expenditures (187,678) (78,418)
Organization costs related to merger transaction (286,875) --
Pre-opening costs for new international centers (524,463) --
Pre-opening costs for new hospital division (110,307) --
Pre-opening costs incurred for new domestic centers (62,623) --
Acquisition of controlling ownership interest in BMC 121,442 --
and SPI Broward, net of cash acquired
Proceeds from sale of investment 300,000 --
--------------------------
Net cash used in investing activities (750,504) (78,418)
--------------------------
Cash flows from financing activities:
Proceeds from loan payable to Humana 375,000 --
Proceeds from loans payable to banks 200,000 --
Dividend distributions (151,654)
Repayment of loans payable to banks (47,500) --
Proceeds from payable to certain shareholders 200,000 --
Repayment of payable to certain shareholders (266,200) --
Contribution to capital of international subsidiary, AMCD 152,490 --
--------------------------
Net cash provided by (used in) financing activities 613,790 (151,654)
--------------------------
Decrease in cash and cash equivalents (124,876) (172,064)
--------------------------
Cash and cash equivalents, beginning of period 198,763 468,528
--------------------------
Cash and cash equivalents, end of period $ 73,887 $ 296,464
==========================
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
Supplemental cash flow data:
Cash paid during the nine months ended September 30, 1996 and 1995 for:
1996 1995
---- ----
Interest $ 30,884 --
Income taxes $ 10,100 --
Supplemental schedule on non-cash investing and financing transactions:
As described in note 1, AMCMC acquired from a related party a customer list
and other intangibles of $1,020,275 and assumed liabilities of $20,000 for
accounts payable, $750,275 for corporate deposits, and $250,000 for a bank
loan.
MedExec purchased a 27.25% and 1% interest, respectively for $100,000 and $1,
respectively to achieve controlling interest of 51% in two of its equity
investments. The fair value of assets acquired and liabilities assumed were
as follows:
BMC SPI Broward Total
--- ----------- -----
Fair value of assets acquired $3,207,602 $ 71,702 $3,279,304
Fair value of liabilities assumed 3,107,602 71,701 3,179,303
------------------------------------------
Net cash payments $ 100,000 $ 1 $ 100,001
==========================================
The Company entered into a non-compete agreement with a shareholder (and former
employee) in the amount of $200,000.
See accompanying notes to financial statements.
F-40
<PAGE>
FIRST MEDICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained stockholders'
stock capital earnings equity
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 1,500 $ 1,200 $ 969,004 $ 971,704
Dividend distributions (379,899) (379,899)
Net income for the nine months ended September 30, 1995 151,654 151,654
------------------------------------------------------------
Balance at September 30, 1995 $ 1,500 $ 1,200 $ 740,759 $ 743,459
------------------------------------------------------------
Balance at January 1, 1996 $ 1,500 $ 1,200 $ 224,595 $ 227,295
FMC corporate reorganization (500) 1,500 1,000
Capital contribution to AMC-D, international subsidiary 152,490 152,490
Net income for the nine months ended September 30, 1996 908,714 908,714
------------------------------------------------------------
Balance at September 30, 1996 $ 1,000 $ 155,190 $1,133,309 $1,289,499
============================================================
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. Organization And Operation
The accompanying financial statements of First Medical Corporation ("the
Company") include the accounts of MedExec, Inc. and subsidiaries ("MedExec");
American Medical Clinics Management Company, Inc. ("AMCMC"); American Medical
Clinics Development Corporation, Limited ("AMCD") and FMC Healthcare Services,
Inc. (collectively, the "Company").
Effective January 1, 1996, MedExec and American Medical Clinics, Inc. ("AMC")
entered into a reorganization agreement ("the reorganization") whereby First
Medical Corporation ("FMC") was incorporated and all of the outstanding shares
of MedExec and AMC were converted into shares of FMC. Also in connection with
the reorganization, the shares of AMC and its subsidiaries, American Medical
Clinic-Moscow, American Medical Clinic-St. Petersburg and American Medical
Clinic-Kiev (collectively, "the clinics") were distributed to the stockholders
of the FMC. AMCMC assumed approximately $1.0 million of liabilities of the
clinics. For financial reporting purposes, MedExec was considered the acquiror.
The transaction was accounted as a purchase pursuant to Accounting Principles
Board Opinion No. 16 "Business Combinations" ("APB#16.") The historical
financial statements prior to January 1, 1996 represent the historical financial
statements of MedExec.
Pro forma revenue and net loss for the nine months ended September 30, 1995
approximates $41,275,000 and ($262,000), respectively, assuming the
aforementioned reorganization had occurred effective January 1, 1995.
(a) Physician Practice Management Division - Medexec
Effective January 1, 1996, the Company acquired 22.75% and 49% percent
interests, respectively, in Broward Managed Care, Inc. ("BMC") and SPI Broward,
respectively for $50,000 plus a multiple of the average earnings before income
taxes of these two entities during the years ended December 31, 1996 and 1997.
The multiple is three for cash consideration, four for FMC stock consideration,
and 3.5 for a combination of stock and cash. Based upon the earnings of BMC for
the nine months ended September 30, 1996 and assuming that the multiple used is
3.5, the purchase price for the acquisition would approximate $2,000,000.
Because the value of the consideration is not yet determinable, the cost of this
acquisition is not reflected in the financial statements in accordance with
APB#16. Effective January 2, 1996, the Company acquired the remaining 27.25
percent interest in Broward Managed Care for $100,000. Effective January 2,
1996, the Company acquired the remaining one percent interest in SPI Broward for
$1.00. These two transactions give FMC a 100 percent interest in BMC and SPI
Broward.
Effective February 1, 1996, First Medical Corporation-Texas Division
("FMC-Texas") began operations at the Durham center located in Houston, Texas.
FMC-Texas was incorporated on January 22, 1996. Durham provides multi-specialty
and primary health care services to fee for service and managed care patients.
Managed care patients are primarily from Humana's health maintenance
organization. Humana membership assigned to Durham consisted of 837 Medicare and
109 commercial members as of August 1996.
F-42
<PAGE>
During September, 1996, the Company entered into an affiliated provider
agreement with Humana to operate a center in New Port Richey, Florida and during
October, 1996 entered into affiliated provider agreements with Humana to operate
centers in Lutz, Florida and South Dale Mabry, Florida. The Company also agreed
to establish a new primary care medical center in a suburb of Tampa.
(b) Hospital Services Division - "FMC Healthcare Services, Inc."
FMC Healthcare Services, Inc. was incorporated on June 13, 1996 and is a
wholly-owned subsidiary of the Company. FMC Healthcare Services, Inc. will
provide management, consulting, and financial services to troubled
not-for-profits and other health care providers.
(c) International Western-style Medical Clinics Division - AMCMC and AMCD
AMCMC is a wholly-owned subsidiary of the Company, effective January 2, 1996. In
connection with the reorganization , the Company incorporated AMCMC which
purchased certain assets and assumed certain liabilities of the clinics
amounting to approximately $1.0 million of the clinics for $20,010. The Company
has entered into a management services agreement with the clinics located in the
Commonwealth of Independent States (the former Soviet Union) "CIS".
On January 20, 1996, the Company entered into agreement with General de Sante
International, plc ("GDS") to form AMCD, an Irish Company. AMCD was established
to develop and operate medical clinics throughout the world with the exception
of within the Commonwealth of Independent States (the former Soviet Union). The
Company and GDS's shareholdings in AMCD Common stock, as revised, are 51% and
49%, respectively. The authorized share capital of AMCD is comprised of 1,000 of
Common stock, $1.00 par value. As consideration for the shares, the Company
agreed to contribute certain assets. GDS agreed to contribute $299,999 to AMCD
and provide a credit facility of up to $1.2 million to be used for the
development of new clinics. GDS has an option to purchase up to 51% of AMCD's
Common stock in the event certain changes in management control occur. The
additional consideration will be determined by the Company and GDS.
2. Summary of Significant Accounting Policies
(a) Principles Of Consolidation and Combination
The accompanying financial statements include the accounts of the
companies listed in note 1(a). All significant intercompany balances and
transactions have been eliminated in the consolidation of MedExec, AMCMC,
AMCD, and FMC Healthcare Services, Inc.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
F-43
<PAGE>
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets.
(d) Revenue and Medical Cost Recognition
Revenue from Humana for primary care, Part A, Part B and supplemental
funds are recognized monthly on the basis of the number of Humana members
assigned to each respective center and the contractually agreed-upon
rates. The centers receive monthly payments from Humana after all expenses
paid by Humana on behalf of the centers, estimated claims incurred but not
reported and claims reserve fund balances have been determined, Midwest
recognizes revenue based on the gross monthly guaranteed payment amount.
The Midwest center receives a net monthly payment from Humana after all
expenses paid by Humana on behalf of the Midwest center have been
determined. In addition to Humana payments, the centers receive copayments
from commercial members for each office visit, depending upon the specific
plan and options selected and receive payments from non-Humana members on
a fee-for-service basis.
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims for the centers as reflected in the
balance sheets are based upon costs incurred for service rendered prior to
and up to the balance sheet date. Included are services incurred but not
reported as of the balance sheet date based upon actual costs reported
subsequent to the balance sheet date and a reasonable estimate of
additional costs.
(e) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from estimates.
3. Subscription Agreement
On June 11, 1996, the Company entered into a subscription agreement with
Generale de Sante International, PLC, ("GDS") whereby, GDS subscribes and agrees
to purchase a number of shares of common stock of the Company. At the Effective
Time of the Merger GDS will pay $5 million in order to acquire a variety of
ownership interests in Lehigh and its subsidiaries.
4. Intangible Assets
Intangible assets at September 30, 1996 consist of goodwill related to the
reorganization of AMC, the merger agreement of MedExec and AMC, organization
costs of AMCD, and a non-compete agreement with a shareholder and former
employee.
F-44
<PAGE>
5. Loans Payable to Humana
Loans payable to Humana of $375,000 at September 30, 1996 consist of a $325,000
loan bearing interest at 9.5% and secured by the Company's equipment and
furnishings at the Durham clinic and a $50,000 loan bearing interest at 10% and
secured by the Company's computer equipment at the Midwest clinic. There were no
loans payable to Humana at September 30, 1995.
6. Loans Payable to Banks
Loans payable to banks of $502,500 at September 30, 1996 consist of an unsecured
loan for $152,500 bearing interest at 10%; $200,000 drawn on an unsecured line
of credit for $200,000 bearing interest at prime; and $150,000 drawn on a
$1,500,000 line of credit bearing interest at 1/2% above prime. $900,000 of the
line of credit for $1,500,000 is secured by the Company's cash, accounts
receivable, and certain other assets. In order to borrow the additional $600,000
(unsecured portion of line) the Company is required to meet certain conditions.
There were no loans payable to banks at September 30, 1995.
7. Obligations to Certain Stockholders
At September 30, 1996, obligations to certain shareholders includes $200,000
advanced to the Company by GDS under the $1,200,000 credit facility described in
note 1c. Also included in obligations to certain stockholders is $175,000
payable in monthly installments of $8,333 until June 1998 to a shareholder and
former employee in connection with a non-compete agreement. Obligations to
certain stockholders at September 30, 1996 additionally includes $723,600 for
severance pay to certain stockholders. There was no payable to stockholders at
September 30, 1995.
8. Income Taxes
Income tax expense for the nine months ended September 30, 1996 was $605,810.
Income tax expense was computed based on a combined effective federal and state
income tax rate of 40%. Prior to December 31, 1995, MedExec, Inc. was an S
Corporation and not subject to Federal and Florida corporate income taxes. The
pro forma provision for income taxes for the nine months ended September 30,
1995 is $101,102 also assuming a combined effective Federal and State tax rate
of 40%.
9. Leases
Future minimum lease payments required under noncancellable operating leases at
September 30, 1996 are as follows:
Year ended
September 30,
-------------
1997 $ 245,753
1998 209,602
1999 52,437
F-45
<PAGE>
Thereafter --
---------
Total Minimum lease payments $ 507,792
=========
Rent expense incurred under office lease agreements for the nine months
ended September 30, 1996 and 1995 amounted to approximately $154,000 and
$140,000, respectively.
10. Business and Credit Concentrations
As described in footnote (1) (b) of the Unaudited Combined Financial Statements
of MedExec, Inc. and subsidiaries as of December 31, 1995 and 1994, MedExec
derives the majority of its revenue from its affiliated provider agreements with
Humana, Inc. 81% and 93% or approximately $34,046,000 and $17,060,000 of the
revenue of the Company for the nine months ended September 30, 1996 and 1995,
respectively was derived from such agreements with Humana.
Revenue generated by services and operations provided in Eastern Europe
represent 12% and 0% or approximately $4,934,000 and $0 of the revenue of the
Company for the nine months ended September 30, 1996 and 1995, respectively.
11. Subsequent Events
During October 1996, the Company obtained a loan commitment in the amount of
$3,300,000 from the bank which has also provided FMC with a $1,500,000 line of
credit (see Note 6). The commitment is for a 120 day loan bearing interest at
prime + .5%. The purpose of the loan is to provide financing for the merger
between the Company and the Lehigh Group, Inc. ("Lehigh"). The loan is secured
by all the assets of the Company, all the common stock of the Company and Lehigh
and is personally guaranteed up to $600,000 by the Chairman of the Board of the
Company. The existing line of credit of $1,500,000 from the bank would be capped
so that a maximum of $900,000 may be outstanding at any time until the
$3,300,000 loan is repaid in full. Therefore, an aggregate of $4,200,000 would
be available under this new facility.
F-46
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEEETS
(IN THOUSANDS)
September 30, December 31,
1996 1995
------ ------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 193 $ 347
Accounts receivable, net of 4,186 4,335
allowance for doubtful account $144 & $174
Inventories, net 1,547 1,823
Prepaid expenses and other current assets 104 22
------ ------
Total current assets 6,030 6,527
Property, plant and equipment, net of 50 61
accumulated depreciation and amortization
Other assets 35 34
------ ------
Total assets $6,115 $6,622
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-47
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1996 1995
------ ------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 501 $ 510
Notes payable-bank 360 360
Accounts payable 1,489 1,839
Accrued expenses and other current liabilities 1,735 1,381
--------- ---------
Total current liabilities 4,085 4,090
--------- ---------
Long-term debt, net of current maturities 2,110 2,080
Deferred credit applicable to sale of
discontinued operations - 0 - 250
Commitments and contingencies -- --
Preferred stock, par value $.001; authorized
5,000,000 shares none Issued
Common stock, par value $.001
authorized shares 100,000,000 in 1995 and
in 1994; shares issued 10,339,000 in 1995
and in 1994 which excludes 3,016,000 shares
held as treasury stock in 1995 and 1994 11 11
Additional paid-in capital 106,594 106,594
Accumulated deficit from January 1, 1986 (105,031) (104,749)
Treasury stock - at cost (1,654) (1,654)
--------- ---------
Total shareholders' equity (deficit) (80) 202
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 6,115 $ 6,622
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-48
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 2,411 $ 3,192 $ 8,398 $ 8,784
Cost of Sales 1,615 2,307 5,816 6,157
------ ------ ------ ------
Gross Profit 796 885 2,582 2,627
Selling, general and administrative expenses 929 977 2,898 3,130
------ ------ ------ ------
Operating loss (133) (92) (316) (503)
Other income (expense) :
Interest Expense (110) (108) (329) (324)
Interest and other income 109 264 116 288
Deferred finance charges (2) -- (2) --
------ ------ ------ ------
(3) 156 (215) (36)
Income (loss) from continuing operations
before income taxes and extraordinary item (136) 64 (531) (539)
Income taxes 0 1 1 3
------ ------ ------ ------
Income (Loss) from continuing operations before
extraordinary item (136) 63 (532) (542)
Extraordinary item: 250 -- 250 --
Gain from discontinued operations
------ ------ ------ ------
Net Income (Loss) $ 114 $ 63 $ (282) $ (542)
====== ====== ====== ======
Net Income (loss) per common share (Note 1):
From continuing operations before
extraordinary item $ (.01) $ .01 $ (.05) $ (.05)
From extraordinary item $ .02 -- $ .02 --
------ ------ ------ ------
Net Income (loss) per common share $ .01 $ .01 $ (.03) $ (.05)
====== ====== ====== ======
Weighted average number of common shares
and share equivalents outstanding
Primary and Fully diluted 10,339 10,339 10,339 10,339
====== ====== ====== ======
</TABLE>
F-49
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Additional Deficit Treasury
Common Paid in From Stock At
Stock Capital Jan. 1, 1986 Cost Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995 $ 11 $ 106,594 $(104,441) $ (1,654) $ 510
Net Loss (542) (542)
--------- --------- --------- --------- ---------
Balance September 30, 1995 $ 11 $ 106,594 $(104,983) $ (1,654) $ (32)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Deficit Treasury
Common Paid in From Stock At
Stock Capital Jan. 1, 1986 Cost Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1996 $ 11 $ 106,594 $(104,749) $ (1,654) $ 202
Private Placement 0 0
Net Income (282) (282)
--------- --------- --------- --------- ---------
Balance September 30, 1996 $ 11 $ 106,594 $(105,031) $ (1,654) $ (80)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-50
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Increase/(Decrease) in Cash and Cash Equivalents
Nine Months Ended September 30, 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities: Net loss $(282) $(542)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 22 45
Changes in assets and liabilities:
Accounts Receivable, net 149 170
Deferred credit applicable to sales
of discontinued operations (250) --
Inventories, net 276 (241)
Prepaid and other current assets (82) (4)
Accounts payable (350) 211
Accrued expenses and other current liabilities 353 107
Income taxes payable -- --
----- -----
Net cash provided by (used in)
operating activities (164) (254)
----- -----
Cash flows from investing activities:
Capital expenditures (10) (18)
Other assets, net (1) (1)
----- -----
Net cash used in investing activities (11) (19)
----- -----
Cash flows from financing activities:
Net payments under bank debt (270) (180
Repayments of Capital Leases (9) (11)
Debenture 300 --
----- -----
Net cash provided by (used in)
financing activities 21 (191)
Net changes in cash and cash equivalents 154 (464
Cash and cash equivalents at beginning of period 347 925
----- -----
Cash and cash equivalents at end of period $ 193 $ 461
===== =====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-51
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information for the three months and nine months ended
September 30, 1996 and 1995 is unaudited. However, the information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for the fair statement of results for the
interim periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's December 31, 1995 Report
on Form 10 -K.
The results of operations for the nine month period ended September 30,
1996 are not necessarily indicative of the results to be expected for the full
year.
EARNINGS PER SHARE - Earnings per common share is calculated by dividing net
income (loss) applicable to common shares by the weighted average number of
common shares and share equivalents outstanding during each period. Excluded
from fully diluted computations are stock options granted (12,000,000 options
which are contingently exercisable pending the occurrence of certain future
events).
2. SUPPLEMENTARY SCHEDULE
1996 1995
---- ----
(in thousands)
Statement of cash flows
Nine months ended September 30,
Cash paid during the nine months for:
Interest $199 $210
Income 1 6
F-52
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The pro forma data presented in the pro forma combined financial statements are
included in order to illustrate the effect on the financial statements of Lehigh
and FMC of the transactions described below. The pro forma information is based
on the historical financial statements of FMC and Lehigh.
The pro forma combined balance sheet data at September 30, 1996 gives effect to
the reverse acquisition of Lehigh by FMC. The adjustments are presented as if,
at such date, FMC had acquired Lehigh (which is expected to be finalized during
the first quarter 1997).
The pro forma combined balance sheet and statement of operations data as of and
for the year ended December 31, 1995 and as of and for the nine months ended
September 30, 1996 present adjustments to show the effect of the following
combinations with FMC: Broward Managed Care, Inc. and SPI Managed Care of
Broward, Inc. and AMC which were purchased in January, 1996 and Lehigh. All
adjustments are presented as if these transactions were consummated as of
January 1, 1995.
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
For financial reporting purposes, MedExec, Inc. has been considered the
acquiror. Accordingly, the predecessor formal financial statements included
herein represent the combined financial statements of MedExec, Inc. and
subsidiaries; SPI Managed Care, Inc.; and SPI Managed Care of Hillsborough
County, Inc. (collectively, "MedExec"). The pro forma statements should be read
in conjunction with the audited financial statement of MedExec appearing
elsewhere herein.
The pro forma combined financial statements should be read in conjunction with
the unaudited consolidated financial statements and the notes thereto of FMC and
the unaudited consolidated financial statements and Notes thereto of Lehigh
appearing elsewhere in this document. The pro forma combined statement of
operations data are not necessarily indicative of the results that would have
been reported had such events actually occurred on the date specified, nor are
they indicative of the companies' future results. There can be no assurance that
the Lehigh reverse acquisition by FMC will be consummated.
F-53
<PAGE>
<TABLE>
<CAPTION>
COMBINED MEDEXEC, INC. AND SUBSIDIARIES; & SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AMC CLINICS, AMC, INC. ,
BROWARD MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, AND THE LEHIGH GROUP, INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(unaudited)
(in thousands)
Total
(3) (4) (5) Combined Combined
MedExec AMC Broward FMC Lehigh Adjustments ProForma
------- --- ------- --- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 199 $ 221 $ 420 $ 347 $ 767
Accounts receivable 55 (50) 5 4,335 4,340
Humana IBNR receivable and
claims reserve funds 2,179 2,786 4,965 4,965
Inventories -- 1,823 1,823
Prepaid assets and other
current assets 82 13 95 22 117
----------------------------------------------------------------------- --------
Total current assets 2,515 -- 2,970 5,485 6,527 -- 12,012
Property and equipment-net 298 104 402 61 463
Intangible assets, net 1,020 1,020 2,000(1) 3,020
Other assets 231 49 280 34 314
----------------------------------------------------------------------- --------
TOTAL $3,044 $1,020 $3,123 $7,187 $ 6,622 $ 2,000 $15,809
======================================================================= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 786 20 $ 789 $1,595 $ 3,220 $ 4,815
Accrued medical claims 1,880 2,332 4,212 4,212
Current maturities of long-term debt 250 250 510 760
Notes payable-bank 100 100 360 460
Other current liabilities 50 750 0 800 800
----------------------------------------------------------------------- --------
Total current liabilities 2,816 1,020 3,121 6,957 4,090 -- 11,047
Long-term debt, net of current -- 2,080 -- 2,080
Other liabilities -- 139 139 250 -- 389
Stockholders' Equity:
Preferred Stock 0 -- --
Capital stock 2 -- 2 11 (11) (1) 2
Additional paid in capital 1 1 106,594 (104,392) (1) 2,203
Accumulated Earnings 225 (137) 88 (104,749) 104,749 (1) 88
Treasury stock -- -- -- (1,654) 1,654 (2) --
----------------------------------------------------------------------- --------
Total stockholders' equity
(deficit) 228 -- (137) 91 202 2,000 2,293
----------------------------------------------------------------------- --------
TOTAL $3,044 $1,020 $3,123 $7,187 $ 6,622 $ 2,000 $15,809
======================================================================= ========
</TABLE>
1 To record the issuance of shares of FMC for the reverse acquisition and the
resulting goodwill .
2 To retire Lehigh's treasury stock.
3 Represents the audited combined financial statements of MedExec, Inc. and
Subsidiaries; SPI Managed Care, Inc. and SPI Managed Care of Hillsborough
County, Inc.
4 Represents the combined financial statements of American Medical Clinics,
Inc. and the American Medical Clinics.
F-54
<PAGE>
5 Represents the combined financial statements of Broward Managed Care, Inc.
and SPI Managed Care of Broward, Inc.
F-55
<PAGE>
<TABLE>
COMBINED MEDEXEC, INC. AND SUBSIDIARIES; SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC., AMC CLINICS, AMC, INC. ,
BROWARD MANAGED CARE, INC., SPI MANAGED CARE OF BROWARD, AND THE LEHIGH GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(unaudited)
(in thousands)
<CAPTION>
Total
(2) (3) (4) Combined Combined
MedExec AMC Broward FMC Lehigh Adjustments ProForma
------- --- ------- --- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 22,672 $ 5,666 $ 26,695 $ 55,033 $ 12,105 $ 67,138
Medical expenses 18,444 4,802 23,471 46,717 46,717
Cost of Sales 8,628 8,628
-----------------------------------------------------------------------------------
Gross profit 4,228 864 3,224 8,316 3,477 -- 11,793
Selling, general and
administrative expenses 4,634 1,095 2,929 8,658 3,994 133(1) 12,785
-----------------------------------------------------------------------------------
Operating income(loss) (406) (231) 295 (342) (517) (133) (992)
-----------------------------------------------------------------------------------
Other income (expense):
Interest expense -- -- 0 (433) (433)
Interest and other income 42 42 84 392 476
-----------------------------------------------------------------------------------
42 -- 42 84 (41) -- 43
-----------------------------------------------------------------------------------
Income(loss) from continuing
operations before income taxes (364) (231) 337 (258) (558) (133) (949)
Income from discontinued operations -- -- -- 250 250
-----------------------------------------------------------------------------------
Income (loss) before income taxes (364) (231) 337 (258) (308) (133) (699)
Income taxes 91 91 (91)
-----------------------------------------------------------------------------------
Net income (loss) $ (364) $ (231) $ 246 $ (349) $ (308) $ (133) $ (790)
===================================================================================
</TABLE>
1 To amortize the goodwill on the FMC and Lehigh acquisition.
2 Represents the audited combined financial statements of MedExec, Inc. and
subsidiaries; SPI Managed Care, Inc.; and SPI Managed Care of Hillsborough
County, Inc.
3 Represents the combined financial statements of American Medical Clinics,
Inc. and the American Medical Clinics.
4 Represents the combined financial statements of Broward Managed Care, Inc.
and SPI Managed Care of Broward, Inc.
5 Included in operating expenses of MedExec were certain expenses totalling
approximately $1,000,000 which related to expenses which are further
described in the MDA area.
F-56
<PAGE>
<TABLE>
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(unaudited)
(in thousands)
<CAPTION>
Consolidated
FMC Lehigh Adjustments Proforma
--- ------ ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 74 $ 193 $ 4,800(4) $ 5,067
Accounts receivable, net 1,176 4,186 5,362
Humana IBNR receivable and claims reserve funds 4,395 4,395
Due from affiliates and related parties, net 822 822
Inventories -- 1,547 1,547
Prepaid assets 84 104 -- 188
---------------------------------------------------------------------
Total current assets 6,551 6,030 4,800 17,381
Property and equipment, net 491 50 541
Goodwill related to Lehigh Group 1,900(2) 1,900
Other intangible assets, net 3,433 3,433
Other assets 5 35 -- 40
---------------------------------------------------------------------
TOTAL $ 10,479 $ 6,115 $ 6,700 $ 23,295
=====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 2,748 $ 3,224 $ (300)(1) $ 5,672
Accrued medical claims 3,634 3,634
Current portion of long-term obligations 1,072 501 (200)(4) 1,373
Notes payable-bank 503 360 300(1) 1,163
Minority interest 146 490(4) 636
Other current liabilities 686 0 686
---------------------------------------------------------------------
Total current liabilities 8,789 4,085 290 13,164
Long-term obligations, net of current portion 402 2,110 2,512
Other liabilities --
Stockholders' equity (deficit):
Preferred stock (4) --
Common stock 1 11 (11)(2),(4) 1
Additional paid in capital 155 106,594 (100,164)(2),(4) 6,585
Accumulated earnings (deficit) 1,133 (105,031) 104,931(2) 1,033
Treasury stock, at cost (1,654) 1,654(3) --
---------------------------------------------------------------------
Total stockholders' equity (deficit) 1,289 (80) 6,410 7,619
---------------------------------------------------------------------
TOTAL $ 10,479 $ 6,115 $ 6,700 $ 23,295
=====================================================================
</TABLE>
1 To record the payment of Lehigh payable pursuant to the loan agreement.
2 To record the issuance of shares of FMC for the reverse acquisition and the
resulting goodwill .
3 To retire Lehigh's treasury stock.
4 To record GDS's capital contribution of $5,000 and the corresponding
minority interest.
F-57
<PAGE>
<TABLE>
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
(unaudited in thousands)
<CAPTION>
Combined
FMC Lehigh Adjustments ProForma
--- ------ ----------- --------
<S> <C> <C> <C>
Revenue $41,647 $8,398 $50,045
Medical expenses 33,224 33,224
Cost of Sales 5,816 5,816
--------------------------------------------------------------------------------------
Gross profit 8,423 2,582 -- 11,005
Selling, general and administrative expenses 6,862 2,898 9,760
--------------------------------------------------------------------------------------
Operating income(loss) 1,561 (316) -- 1,245
Other income (expense):
Interest expense (60) (329) (389)
Other income 13 116 129
Deferred finance charges (2)
Amortization of goodwill - Lehigh (100)(1) (100)
Income(loss) from continuing operations 1,514 (531) (100) 885
before income taxes and extraordinary items
Income taxes 606 1 607
Extraordinary items:
Gain from discontinued operations -- 250 250
--------------------------------------------------------------------------------------
Net income (loss) $ 908 $ (282) $(100) $ 528
======================================================================================
</TABLE>
1 To amortize the goodwill on the FMC and Lehigh acquisition.
F-58
<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT made and entered into as of the
29th day of October 1996, by and among The Lehigh Group Inc., a Delaware
corporation ("Lehigh"), Lehigh Management Corp., a Delaware corporation and a
wholly-owned subsidiary of Lehigh ("Newco") and First Medical Corporation, a
Delaware corporation ("FMC"). Unless the context indicates otherwise, all
references herein to Lehigh or FMC refer to Lehigh and FMC and their respective
wholly owned subsidiaries.
W I T N E S S E T H T H A T:
R E C I T A L S:
A. Lehigh has recently organized Newco for the purpose of merging with
and into FMC on the terms and conditions set forth herein and with the effect
that, as a result thereof, the present stockholders of Lehigh will upon
consummation of the Merger hold four percent of the total equity of Lehigh on a
fully diluted basis.
B. Simultaneously with the execution and delivery of this Agreement,
FMC is lending to Lehigh the sum of $300,000 and, in evidence thereof, Lehigh is
delivering to FMC a debenture in the form annexed hereto as Exhibit A.
C. It is intended that the transactions contemplated by this
Agreement shall constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
and the benefits to be realized by each of the parties, the parties hereto agree
as follows:
1. THE MERGER
(a) On the Closing Date , Newco shall be merged with and into
FMC (the "Merger") in accordance with the provisions of the General Corporation
Law of the State of Delaware (the "DGCL"). FMC shall be the surviving
corporation of the Merger, shall be a wholly-owned subsidiary of Lehigh and
shall continue to be governed by the laws of Delaware. Immediately prior to the
Effective Time (as hereinafter defined) there shall be filed with the Delaware
Secretary of State an amendment to the Certificate of Incorporation of Lehigh
providing for "blank check" preferred stock and a Certificate of Designation
establishing a series of 951,211 shares of preferred stock to be designated the
Series A Convertible Preferred Stock, $.001 par value, of Lehigh (the "Lehigh
Preferred Stock"), each share of which shall be convertible at any time by the
holder thereof into 250 shares of the common stock, $.001 par value, of Lehigh
(the "Lehigh Common Stock") and each share of which shall be entitled to 250
votes, voting together with the Lehigh Common Stock, on all matters subject to
the vote of stockholders. Upon the effectiveness of the Merger, and by virtue
thereof without any further action by Lehigh, FMC or any of their stockholders:
(i) any and all shares of the Lehigh Common Stock held by FMC immediately prior
to the Effective Time shall be cancelled; (ii) each
A-1
<PAGE>
other share of the Lehigh Common Stock issued and outstanding immediately prior
to the Effective Time shall remain issued and outstanding; and (iii) each share
of common stock, $.01 par value, of FMC (the "FMC Common Stock") shall cease to
be outstanding and shall be converted into (A) 1,033.925 shares of Lehigh Common
Stock and (B) 95.1211 shares of Lehigh Preferred Stock.
(b) Certificates representing shares of FMC Common Stock shall be
exchanged for certificates of Lehigh Common Stock and Lehigh Preferred Stock as
follows:
(i) After the Effective Time, certificates evidencing
outstanding shares of FMC Common Stock shall evidence the right of the holder
thereof to receive certificates representing 1,033.925 shares of Lehigh Common
Stock and 95.1211 shares of Lehigh Preferred Stock for each share of FMC Common
Stock. Each holder of FMC Common Stock, upon surrender of the certificates which
prior thereto represented shares of FMC Common stock, to a trust company to be
designated by Lehigh which shall act as the exchange agent (the "Exchange
Agent") for such stockholders to effect the exchange of certificates on their
behalf, shall be entitled upon such surrender to receive in exchange therefor a
certificate or certificates representing the number of whole shares of Lehigh
Common Stock and Lehigh Preferred Stock into which the shares of FMC Common
Stock theretofore represented by the certificate or certificates so surrendered
shall have been converted. Until so surrendered, each such outstanding
certificate for shares of FMC Common Stock shall be deemed, for all corporate
purposes including voting rights, subject to the further provisions of this
Section 1(b), to evidence the ownership of the whole shares of Lehigh Common
Stock and Lehigh Preferred Stock into which such shares have been converted.
(ii) No certificate representing a fraction of Lehigh Common
Stock or Lehigh Preferred Stock will be issued and no right to vote or receive
any distribution or any other right of a stockholder shall attach to any
fractional interest of Lehigh Common Stock or Lehigh Preferred Stock to which
any holder of shares of FMC Common Stock would otherwise be entitled hereunder.
(iii) If any certificate for whole shares of Lehigh Common
Stock or Lehigh Preferred Stock is to be issued in a name other than that in
which the certificate surrendered in exchange therefor is registered, it shall
be a condition of the issuance thereof that the certificate so surrendered shall
be properly endorsed and otherwise be in proper form for transfer and that the
person requesting such exchange pay to the Exchange Agent any transfer or other
taxes required by reason of the issuance of certificates for shares of Lehigh
Common Stock or Lehigh Preferred Stock in any name other than that of the
registered holder of the certificate surrendered.
(iv) At the Effective Time, all shares of FMC Common Stock
which shall then be held in its treasury, if any, shall cease to exist, and all
certificates representing such shares shall be cancelled.
(c) Lehigh and FMC shall each submit this Agreement to its
stockholders for approval in accordance with the DGCL, at an annual or special
meeting of the stockholders (the "Meeting") called and held on a date to be
fixed by their respective Boards of Directors and shall use their best efforts
to hold such meeting on or before March 15, 1997 or as soon thereafter as
practical.
(d) Lehigh and FMC shall each use its best efforts to obtain the
affirmative vote of stockholders required to approve this Agreement and the
transactions contemplated hereby, and will recommend to their respective
stockholders the approval of the Merger, subject however, in the
A-2
<PAGE>
case of each company's Board of Directors, to its fiduciary obligation to
stockholders. Lehigh shall each mail to all its stockholders entitled to vote at
and receive notice of such meeting the material required in accordance with the
Registration Statement and Prospectus provisions specified in paragraph 9
hereof.
(e) On or before the date of the Meeting, the Board of Directors of
Newco shall duly approve this Agreement and Lehigh, as sole stockholder of
Newco, shall duly approve this Agreement and the transactions contemplated
hereby.
(f) Following the approval of the Merger by the stockholders of
Lehigh, Newco and FMC, a Certificate of Merger containing the information
required by applicable law shall be executed by the appropriate officers of FMC
and Newco.
(g) Notwithstanding any other provision of this Agreement to the
contrary, if Lehigh receives a proposal for a business combination with any
other party which is more favorable to Lehigh or its stockholders than the terms
set forth in this Agreement (an "Alternate Proposal") at any time prior to
consummation of the Merger, Lehigh shall be entitled to pursue and/or consummate
such transaction free of any obligation to FMC under or pursuant to this
Agreement except for those obligations set forth in Section 17 hereof.
2. CLOSING; EFFECTIVE TIME
(a) The closing of all the transactions contemplated hereby (herein
called the "Closing" or the "Closing Date") shall occur at a date and place
mutually agreed between the parties and on a date within fifteen (15) business
days after all of the of the conditions described in paragraphs 14 and 15 hereof
have been satisfied or, to the extent permitted by paragraph 16(c) hereof, their
satisfaction has been waived. Lehigh, Newco and FMC will use their best efforts
to obtain the approvals specified in paragraph 8 hereof and any other of the
consents, waivers, or approvals necessary or desirable to accomplish the
transactions contemplated by this Agreement . All documents required to be
delivered by each of the parties hereto shall be duly delivered to the
respective recipient thereof at or prior to the Closing. Without the consent of
FMC and Lehigh to extend such date, the Closing Date shall be no later than
April 1, 1997, and if it is delayed beyond said date, or extended date, then
either party shall have the right to terminate this Agreement upon notice to
that effect.
(b) At the Closing, Lehigh, Newco and FMC shall jointly direct that
the Certificate of Merger be duly filed, and in accordance with such direction
it shall be filed, in the Offices of the Secretary of State of Delaware so that
the Merger shall be effective on the Closing Date. The time at which the Merger
becomes effective is referred to herein as the "Effective Time."
3. LISTING
At a time mutually agreed to by Lehigh and FMC, but in no event later
than the date following the approval of stockholders of both Lehigh and FMC,
Lehigh agrees, at its expense, to apply for and use its best efforts to obtain
additional listings on the New York Stock Exchange, subject to notice of
issuance, of the shares of Lehigh Common Stock to be delivered to FMC
stockholders in the Merger. FMC agrees to render assistance to Lehigh in
obtaining such listing, including the furnishing of such financial statements as
Lehigh may reasonably request.
A-3
<PAGE>
4. INVESTIGATION BY THE PARTIES
Lehigh and FMC acknowledge that they have made or caused to be made
such investigation of the properties of the other and its subsidiaries and of
its financial and legal condition as the party making such investigation deems
necessary or advisable to familiarize itself with such properties and other
matters. Lehigh and FMC each agree that if matters come to the attention of
either party requiring additional due diligence, each agrees to permit the other
and its authorized agents or representatives to have, after the date of
execution hereof, full access to its premises and to all of its books and
records at reasonable hours, and its subsidiaries and officers will furnish the
party making such investigation with such financial and operating data and other
information with respect to the business and properties of it and its
subsidiaries as the party making such investigation shall from time to time
reasonably request. No investigation by Lehigh or FMC shall affect the
representations and warranties of the other and each such representation and
warranty shall survive any such investigation. Each party further agrees that in
the event the transactions contemplated by this Agreement shall not be
consummated, it and its officers, employees, accountants, attorneys, engineers,
authorized agents and other representatives will not disclose or make available
to any other person or use for any purpose unrelated to the consummation of this
Agreement any information, whether written or oral, with respect to the other
party and its subsidiaries or their business which it obtained pursuant to this
Agreement. Such information shall remain the property of the party providing it
and shall not be reproduced or copied without the consent of such party. In the
event that the transactions contemplated by this Agreement shall not be
consummated, all such written information shall be returned to the party
providing it.
5. "AFFILIATES" OF FMC
Each stockholder of FMC who is, in the opinion of counsel to Lehigh,
deemed to be an "affiliate" of FMC as such term is defined in the rules and
regulations of the Securities and Exchange Commission under the Securities Act
of 1933, as amended (hereinafter called the "1933 Act"), is listed on a Schedule
to be delivered to Lehigh within 20 days hereof, and will be informed by FMC
that: (i) absent an applicable exemption under the 1933 Act, the shares of
Lehigh Common Stock to be received by such "affiliate" and owned beneficially on
consummation of the transactions contemplated hereunder may be offered and sold
by him only pursuant to an effective registration statement under the 1933 Act
or pursuant to the provisions of paragraph (d) of Rule 145 promulgated under the
1933 Act; (ii) Rule 145 restricts the amount and method of subsequent
dispositions by such "affiliate" of such shares and (iii) a continuity of
interests by the "affiliate" must be maintained. Prior to the Closing Date, FMC
agrees to obtain from each "affiliate" an agreement to the effect that such
affiliate will not publicly sell any of such shares unless a registration
statement under the 1933 Act with respect thereto is then in effect, or such
disposition complies with paragraph (d) of Rule 145 promulgated under the 1933
Act, or counsel satisfactory to Lehigh has delivered a written opinion to Lehigh
and to such "affiliate" that registration under the 1933 Act is not required in
connection with such disposition.
6. STATE SECURITIES LAWS
Lehigh will take such steps as may be necessary to comply with any
state securities or so-called Blue Sky laws applicable to the actions to be
taken in connection with the Merger and the delivery by Lehigh to FMC
stockholders of the shares of Lehigh Common Stock and Lehigh
A-4
<PAGE>
Preferred Stock to be delivered pursuant to this Agreement. Costs and expenses
of any such Blue-Sky qualifications shall be borne by Lehigh.
7. CONDUCT OF BUSINESS PENDING THE CLOSING
From the date hereof, to and including the Closing Date, except as may
be first approved by the other Party or as is otherwise permitted or
contemplated by this Agreement :
(i) Lehigh and FMC shall each conduct their business only in the usual
and ordinary course;
(ii) neither Lehigh or FMC shall make any change in its authorized or
outstanding capitalization;
(iii) Except as set forth on their respective Disclosure Schedules
annexed to this Agreement neither Lehigh or FMC shall authorize for issuance or
issue or enter any agreement or commitment for the issuance of shares of capital
stock;
(iv) neither Lehigh or FMC shall create or grant any rights or
elections to purchase stock under any employee stock bonus, thrift or purchase
plan or otherwise;
(v) neither Lehigh or FMC shall amend their Certificates of
Incorporation or Bylaws unless deemed to be reasonably necessary to consummate
the transaction contemplated herein and upon prior notice thereof to each other
;
(vi) Neither Lehigh or FMC shall make any modification in their
employee benefit programs or in their present policies in regard to the payment
of salaries or compensation to their personnel and no increase shall be made in
the compensation of their personnel, except in the ordinary course of business ;
(vii) Neither Lehigh or FMC shall make any contract, commitment, sale
or purchase of assets or incur debt, except in the ordinary course of business ;
(viii) Lehigh and FMC will use all reasonable and proper efforts to
preserve their respective business organizations intact, to keep available the
services of their present employees and to maintain satisfactory relationships
with suppliers, customers, regulatory agencies, and others having business
relations with it;
(ix) Neither Lehigh or FMC shall create or implement a profit sharing
plan; and,
(x) The Board of Directors of Lehigh and FMC will not declare any
dividends on, or otherwise make any distribution in respect of, their
outstanding shares of capital stock .
A-5
<PAGE>
8. EFFORTS TO OBTAIN APPROVALS AND CONSENTS
FMC and Lehigh will use all reasonable and proper efforts to obtain,
where required, the approval and consent (i) of any governmental authorities
having jurisdiction over the transactions contemplated in this Agreement , and
(ii) of such other persons whose consent to the transactions contemplated by
this Agreement is required.
9. PROXY STATEMENT AND REGISTRATION STATEMENT
(a) FMC and Lehigh agree that they shall cooperate in the preparation
of and the filing with the Securities and Exchange Commission by Lehigh of a
proxy statement/prospectus (the "Proxy Statement") in accordance with the
Securities Exchange Act of 1934 (the "1934 Act") and the applicable rules and
regulations thereunder, to be included in the registration statement of Lehigh
referred to below and (ii) the filing with the Securities and Exchange
Commission, by Lehigh, of a registration statement on Form S-4 or such other
Form as may be appropriate (the "Registration Statement"), including the Lehigh
Proxy Statement, in accordance with the Securities Act of 1933 (the "1933 Act")
and the applicable rules and regulations thereunder covering the shares of
Lehigh Common Stock and Lehigh Preferred Stock to be issued pursuant to this
Agreement and the shares of Lehigh Common Stock issuable upon conversion of the
Lehigh Preferred Stock. Lehigh and FMC thereafter shall use all reasonable
efforts to cause the Registration Statement to become effective under the 1933
Act at the earliest practicable date, and shall take such actions as may
reasonably be required under applicable state securities laws to permit the
transactions contemplated by this Agreement. Lehigh shall advise FMC promptly
when the Registration Statement has become effective, and Lehigh shall thereupon
send a Proxy Statement to its stockholders for purposes of the Meeting
contemplated by this Agreement. The Proxy Statement shall be mailed not less
than 20 days prior to such meeting to all stockholders of record at their
address of record on the transfer records of Lehigh. Each party shall bear their
respective out of pocket expenses, and expenses related to preparing documents,
financial statements, schedules, exhibits, and like materials for inclusion in
the Registration Statement. Lehigh shall be responsible for the expenses of
filing the Registration Statement.
(b) Subject to the conditions set forth below, the parties agree to
indemnify and hold harmless each other, their respective officers, directors,
partners, employees, agents and counsel against any and all loss, liability,
claim, damage, and expense whatsoever (which shall include, for all purposes of
this Section 9, but not be limited to, attorneys' fees and any and all expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when incurred
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact made by the party against whom
indemnification is sought and contained (1) in any Prospectus/Proxy Statement,
the Registration Statement, or Proxy Statement (as from time to time amended and
supplemented) or any amendment or supplement thereto; or (2) in any application
or other document or communication (in this Section 9 collectively called an
"application") executed by or on behalf of either party or based upon written
information filed in any jurisdiction in order to qualify the shares of Lehigh
Common Stock and Lehigh Preferred Stock to be issued in connection with the
Merger and the shares of Lehigh Common Stock issuable upon conversion of the
Lehigh Preferred Stock under the "Blue Sky" or securities laws thereof or filed
with the Securities and Exchange Commission or any securities exchange; or any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
A-6
<PAGE>
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the indemnifying party from the party
seeking indemnification expressly for inclusion in any Prospectus/Proxy
Statement, the Registration Statement, or Proxy Statement, or any amendment or
supplement thereto, or in any application, as the case may be, or (ii) any
breach of representation, warranty, covenant, or agreement contained in this
Agreement. The foregoing agreement to indemnify shall be in addition to any
liability each party may otherwise have, including liabilities arising under
this Agreement. If any action is brought against either party or any of its
officers, directors, partners, employees, agents, or counsel ( an "indemnified
party") in respect of which indemnity may be sought pursuant to the foregoing
paragraph, such indemnified party or parties shall promptly notify the other
party (the "indemnifying party") in writing of the institution of such action
(but the failure to so notify shall not relieve the indemnifying party from any
liability it may have other than pursuant to this Paragraph 9(b) ) and the
indemnifying party shall promptly assume the defense of such action, including
the employment of counsel and payment of expenses (satisfactory to such
indemnified party or parties). Such indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the indemnifying party in connection with the defense of such action
or the indemnifying party shall not have promptly employed counsel satisfactory
to such indemnified party or parties to have charge of the defense of such
action or such indemnified party or parties shall have reasonably concluded that
there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available to
the other party in any of which events such fees and expenses shall be borne by
the indemnifying party and the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party or parties.
Anything in this paragraph to the contrary notwithstanding, the indemnifying
party shall not be liable for any settlement of any such claim or action
effected without its written consent.
10. COOPERATION BETWEEN PARTIES
FMC and Lehigh shall fully cooperate with each other and with their
respective counsel and accountants in connection with any steps required to be
taken as part of their obligations under this Agreement, including the
preparation of financial statements and the supplying of information in
connection with the preparation of the Registration Statement and the Proxy
Statement.
11. REPRESENTATIONS OF LEHIGH
Lehigh represents, warrants and agrees that:
(a) Lehigh is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and it subsidiaries are
duly organized, validly existing and in good standing under the laws of the
jurisdiction pursuant to which they were incorporated. Lehigh and its
subsidiaries have the corporate power and any necessary governmental authority
to own or lease their properties now owned or leased and to carry on their
business as now being conducted. Lehigh and its subsidiaries are duly qualified
to do business and in good standing in every jurisdiction in which the nature of
their business or the character of their properties makes such qualification
necessary.
(b) As of the date hereof, the authorized capital stock of Lehigh
consists of 100,000,000 shares of Lehigh Common Stock, of which 10,339,250
shares are issued and outstanding, and 5,000,000 shares of preferred stock,
$.001 par value, none of which is issued and outstanding. As of
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the date hereof, there are options and warrants outstanding to purchase
18,697,187 shares of Lehigh Common Stock. The outstanding capital stock of
Lehigh and its subsidiaries has been duly authorized and issued and is fully
paid and nonassessable. Except for the foregoing, Lehigh and its subsidiaries
have no commitment to issue, nor will they issue, any shares of their capital
stock or any securities or obligations convertible into or exchangeable for, or
give any person any right to acquire from Lehigh or its subsidiaries , any
shares of Lehigh's or it subsidiaries' capital stock. Lehigh owns all of the
issued and outstanding capital stock of Newco.
(c) The shares of Lehigh Common Stock and Lehigh Preferred Stock
which are to be issued and delivered to the FMC stockholders pursuant to the
terms of this Agreement , when so issued and delivered, will be validly
authorized and issued and will be fully paid and nonassessable. Lehigh shall
have applied for and shall use its best efforts to obtain approval for listing
such shares of Lehigh Common Stock subject to notice of issuance on the New York
Stock Exchange prior to the Effective Time, and no stockholder of Lehigh or
other person will have any preemptive rights in respect thereto.
(d) Lehigh has furnished FMC with copies of its Annual Report on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1995 which contains consolidated balance sheets of Lehigh and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995 audited by BDO Seidman,
LLP. Lehigh has also furnished FMC with unaudited financial statements as of
June 30, 1996 as set forth in its Form 10-Q as filed with the Securities and
Exchange Commission. All of the above financial statements present fairly the
consolidated financial position of Lehigh and its subsidiaries at the periods
indicated, and the consolidated results of operations and cash flows for the
periods then ended. The interim financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis, and in the opinion of Lehigh include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of such interim
period. Since June 30, 1996 there has been no material adverse change in the
assets or liabilities or in the business or condition, financial or otherwise,
of Lehigh or its consolidated subsidiaries, and no change except in the ordinary
course of business or as contemplated by this Agreement.
(e) Except as disclosed in the public filings of Lehigh and except for
the lawsuit filed by Southwicke Corporation a copy of the complaint in which is
annexed hereto, neither Lehigh nor any of its subsidiaries is (i) engaged in or
a party to, or to the knowledge of Lehigh, threatened with any material legal
action or other proceeding before any court or administrative agency or (ii) to
the knowledge of Lehigh, has been charged with, or is under investigation with
respect to, any charge concerning any presently pending material violation of
any provision of Federal, state, or other applicable law or administrative
regulations in respect to its business .
(f) Lehigh and Newco have the corporate power to enter into this
Agreement and, subject to requisite stockholder approval, the execution and
delivery and performance of this Agreement have been duly authorized by all
requisite corporate action and this Agreement constitutes the valid and binding
obligations of Lehigh and Newco.
(g) The execution and carrying out of this Agreement and compliance
with the terms and provisions hereof by Lehigh and Newco will not conflict with
or result in any breach of any of the terms, conditions, or provisions of, or
constitute a default under, or result in the creation of, any lien,
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charge, or encumbrance upon any of the properties or assets of Lehigh, Newco or
any of its other subsidiaries pursuant to any corporate charter, indenture,
mortgage, agreement (other than that which is created by virtue of this
Agreement) or other instrument to which Lehigh or any of its subsidiaries is a
party or by which it or any of its subsidiaries if bound or affected.
(h) This Agreement and the documents and financial statements
furnished hereunder on behalf of Lehigh do not contain and will not contain any
untrue statement of a material fact nor omit to state a material fact necessary
to be stated in order to make the statements contained herein and therein not
misleading; and there is no fact known to Lehigh which materially adversely
affects or in the future will materially adversely affect the business
operations, affairs or condition of Lehigh or any of its subsidiaries or any of
its or their properties or assets which has not been set forth in this Agreement
or any documents or materials furnished hereunder.
(i) There are no agreements or contracts between Lehigh and its
subsidiaries with any other third party that require approvals or consents that
could delay or prevent the Merger of Lehigh and Newco and the other transactions
contemplated thereby.
(j) Neither Lehigh nor any of its subsidiaries uses or handles
potentially hazardous materials and have not received notification of, and are
not aware of, any past or present event, condition or activity of or relating to
the business, properties or assets of Lehigh which violates any Environmental or
Occupational Safety Law.
12. REPRESENTATIONS OF FMC
FMC represents, warrants and agrees that:
(a) FMC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and its subsidiaries are duly
organized, validly existing and in good standing under the laws of the
jurisdiction pursuant to which they were incorporated. FMC and its subsidiaries
have the corporate power and any necessary governmental authority to own or
lease their properties now owned or leased and to carry on their business as now
being conducted. FMC and its subsidiaries are duly qualified to do business and
in good standing in every jurisdiction in which the nature of their business or
the character of their properties makes such qualification necessary.
(b) The authorized capital stock of FMC consists of 15,000 shares of
FMC Common Stock, of which 10,000 shares are issued and outstanding. The
outstanding capital stock, of FMC and its subsidiaries has been duly authorized
and issued and is fully paid and nonassessable. FMC and its subsidiaries have no
commitment to issue, nor will they issue, any shares of their capital stock or
any securities or obligations convertible into or exchangeable for, or give any
person any right to acquire from FMC or its subsidiaries any shares of FMC or it
subsidiaries capital stock, except for those rights identified in the Disclosure
Schedule of FMC annexed hereto (the "FMC Disclosure Schedule").
(c) FMC has furnished Lehigh with copies of the unaudited
consolidated balance sheet of FMC and subsidiaries as of June 30, 1996 and the
related consolidated statements of operations, shareholder equity (deficit) and
cash flows for the six months ended June 30, 1996, and the consolidated balance
sheets of MedExec, Inc., a principal operating subsidiary of FMC, and its
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations,
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stockholder equity (deficit) and cash flows for each of the two years in the
period ended December 31, 1995 audited by KPMG Peat Marwick. All of the above
financial statements present fairly the consolidated financial position of FMC
and its subsidiaries at the periods indicated, and the consolidated results of
operations and cash flows for the periods then ended. The interim financial
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis, and in the opinion of FMC include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of such interim period. Since June 30, 1996 there has been no
material adverse change in the assets or liabilities or in the business or
condition, financial or otherwise, of FMC or its consolidated subsidiaries, and
no change except in the ordinary course of business or as contemplated by this
Agreement.
(d) Neither FMC nor any of its subsidiaries is engaged in or a party
to, or to the knowledge of FMC, threatened with any material legal action or
other proceeding before any court or administrative agency except as set forth
in the FMC Disclosure Schedule to be furnished to Lehigh. Neither FMC nor any of
its subsidiaries, to the knowledge of FMC, has been charged with, or is under
investigation with respect to, any charge concerning any presently pending
material violation of any provision of Federal, state, or other applicable law
or administrative regulations in respect to its business except as set forth on
said FMC Disclosure Schedule.
(e) The information to be furnished by FMC for use in the material
mailed to stockholders of FMC in connection with the Meetings will in all
material respects comply with the applicable requirement of the 1933 Act and the
1934 Act, and the rules and regulations promulgated thereunder.
(f) FMC has the corporate power to enter into this Agreement, the
execution and delivery and performance of this Agreement have been duly
authorized by all requisite corporate action, and this Agreement constitutes the
valid and binding obligations of FMC.
(g) The execution and carrying out of this Agreement and compliance
with the terms and provisions hereof by FMC will not conflict with or result in
any breach of any of the terms, conditions, or provisions of, or constitute a
default under, or result in the creation of, any lien, charge, or encumbrance
upon any of the properties or assets of FMC or any of its other subsidiaries
pursuant to any corporate charter, indenture, mortgage, agreement (other than
that which is created by virtue of this Agreement) or other instrument to which
FMC or any of its subsidiaries is a party or by which it or any of its
subsidiaries if bound or affected.
(h) This Agreement, the FMC Disclosure Schedule and all documents
and financial statements furnished hereunder on behalf of FMC do not contain and
will not contain any untrue statement of a material fact nor omit to state a
material fact necessary to be stated in order to make the statements contained
herein and therein not misleading; and there is no fact known to FMC which
materially adversely affects or in the future will materially adversely affect
the business operations, affairs or condition of FMC or any of its subsidiaries
or any of its or their properties or assets which has not been set forth in this
Agreement the FMC Disclosure Schedule or other documents and material furnished
hereunder.
(i) There are no agreements or contracts between FMC and its
subsidiaries with any other third party that require approvals or consents that
could delay or prevent the Merger of FMC and Newco and the other transactions
contemplated thereby.
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(j) Neither FMC nor any of its subsidiaries uses or handles
potentially hazardous materials other than those customarily handled by medical
clinics of the type managed by FMC, and have not received notification of, and
are not aware of, any past or present event, condition or activity of or
relating to the business, properties or assets of FMC which violates any
Environmental or Occupational Safety Law.
13. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties made herein by FMC and Lehigh shall
not survive, and shall expire with and be terminated upon, the Closing of the
Merger.
14. CONDITIONS TO THE OBLIGATIONS OF LEHIGH
The obligations of Lehigh hereunder are subject to the satisfaction on
or before the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved by the requisite vote of stockholders of Lehigh and FMC.
(b) Each "affiliate" of FMC will have properly executed and delivered
the Affiliate's Agreement described in paragraph 5 hereof.
(c) FMC shall have furnished Lehigh with (i) certified copies of
resolutions duly adopted by the holders of a majority or more of the issued and
outstanding shares of FMC common stock entitled to vote, evidencing approval of
this Agreement and the transactions contemplated hereby ; (ii) certified copies
of resolutions duly adopted by the Board of Directors of FMC approving the
execution and delivery of this Agreement and authorizing all necessary or proper
corporate action, to enable FMC to comply with the terms hereof and thereof;
(iii) an opinion dated the closing date of counsel for FMC in form and substance
satisfactory to Lehigh and its counsel to the effect that:
(1) FMC and each of its subsidiaries are corporations duly organized
and validly existing and in good standing under the laws of its respective
jurisdiction of incorporation, and to the best of the knowledge of such
counsel based on inquiries of responsible officers of FMC, is duly qualified
to do business and is in good standing in every jurisdiction in which the
nature of their business or the character of their properties makes such
qualification necessary, except where the failure to be so qualified will not
have a material adverse effect on FMC's business or consolidated financial
condition, and has all corporate and other power and authority, including all
governmental licenses and authorizations, necessary to own its properties and
to carry on its business as described in the Proxy Statement;
(2) this Agreement has been duly authorized and executed by proper
corporate action of FMC and constitutes the valid and legally binding
obligation of FMC in accordance with its terms.
(3) no provision of the Certificate of Incorporation or the By-laws of
FMC or of any contract (except those pursuant to which waivers or consents
have been obtained) known to such counsel to which FMC is a party, or any law,
rule or regulation prevents it from carrying out the transactions contemplated
hereby.
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(4) there is no material action or proceeding known to such counsel,
pending or threatened against FMC before a court or other governmental body or
instituted or threatened by any public authority or by the holders of any
securities of FMC, other than as specifically set forth in the FMC Disclosure
Schedule.
(5) FMC has adequate title, subject only to liens and other matters set
forth on the financial statements furnished to Lehigh pursuant to paragraph
12(c) hereof, to all its real estate properties, except for any lien of taxes
not yet delinquent or being contested in good faith by appropriate proceedings
and easements and restrictions of record which do not materially adversely
affect the use of the property by FMC, and except for minor defects in titles,
none of which, based upon information furnished by officers of FMC, does or
will materially adversely affect FMC's use of such properties or its
operations, and to which the rights of FMC therein have not been questioned.
In giving such opinion, counsel may rely upon title policies previously issued
to FMC or updated certificates furnished by title insurance companies.
(6) to the best knowledge of such counsel and based upon inquiries of
responsible officers of FMC and upon searches of Uniform Commercial Code
filings in the offices of the appropriate Secretary of State, there are no
liens against properties of FMC (excluding real estate) except as disclosed by
FMC to Lehigh in the FMC Disclosure Schedule.
In rendering its opinion, FMC counsel may rely as to factual matters on
statements of officers of FMC. In rendering this opinion with respect to the
laws of any jurisdiction other than Delaware, FMC counsel may rely on the
opinion of other counsel retained by FMC provided that said opinion shall state
that Lehigh is justified in relying on the opinion or opinions of such other
counsel.
(d) The representations and warranties of FMC contained in this
Agreement shall be true in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of such date, except for changes permitted by this Agreement or those
incurred in the ordinary course of business and FMC shall have received from FMC
at the Closing a certificate dated the Closing Date of the Chairman, President
or a Vice President of FMC to that effect.
(e) Each and all of the respective agreements of FMC to be performed on
or before the Closing Date pursuant to the terms hereof shall in all material
respects have been duly performed and FMC shall have delivered to FMC a
certificate dated the Closing Date, of the Chairman, President or a Vice
President of FMC to that effect.
(f) The completion of Lehigh's Proxy Statement and the effectiveness
of Lehigh's Registration Statement on Form S-4, as each may be amended.
(g) The approval of this Agreement by the FMC Board of Directors.
(h) The absence of any material contingent liabilities of FMC not
previously disclosed to Lehigh.
(i) The nonexistence of any agreement or contract that could delay or
prevent the completion of the transactions contemplated by this Agreement.
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15. CONDITIONS TO THE OBLIGATIONS OF FMC
The obligations of FMC hereunder are subject to the satisfaction on or
before the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved by the requisite vote of stockholders of Lehigh and FMC.
(b) Lehigh shall have furnished FMC with (i) certified copies of
resolutions duly adopted by a majority of the holders of the issued and
outstanding shares of Lehigh Common Stock validly present at a meeting,
evidencing approval of this Agreement and the transactions contemplated hereby;
(ii) certified copies of resolutions duly adopted by the Board of Directors of
Lehigh approving the execution and delivery of this Agreement and authorizing
all necessary or proper corporate action, to enable Lehigh to comply with the
terms hereof and thereof; (iii) an opinion dated the closing date of counsel for
Lehigh in form and substance satisfactory to FMC and its counsel to the effect
that:
(1) Lehigh and each of its subsidiaries are corporations duly organized
and validly existing and in good standing under the laws of its respective
jurisdiction of incorporation, and to the best of the knowledge of such
counsel based on inquiries of responsible officers of Lehigh, is duly
qualified to do business and is in good standing in every jurisdiction in
which the nature of their business or the character of their properties makes
such qualification necessary, except where the failure to be so qualified will
not have a material adverse effect on Lehigh's business or consolidated
financial condition, and has all corporate and other power and authority,
including all governmental licenses and authorizations, necessary to own its
properties and to carry on the business as described in the Proxy Statement of
Lehigh made a part of the Proxy Statement .
(2) this Agreement has been duly authorized and executed by proper
corporate action of Lehigh and constitutes the valid and legally binding
obligation of Lehigh in accordance with its terms .
(3) no provision of the Certificate of Incorporation or the By-laws of
Lehigh or of any contract (except those pursuant to which waivers or consents
have been obtained) known to such counsel to which Lehigh is a party, or any
law, rule or regulation prevents it from carrying out the transactions
contemplated hereby .
(4) there is no material action or proceeding known to such counsel,
pending or threatened against Lehigh before a court or other governmental body
or instituted or threatened by any public authority or by the holders of any
securities of Lehigh, other than as specifically set forth in the Disclosure
Schedule.
(5) Lehigh has adequate title, subject only to liens and other matters
set forth on the financial statements furnished to FMC pursuant to paragraph
11(d) hereof, to all its real estate properties, except for any lien of taxes
not yet delinquent or being contested in good faith by appropriate proceedings
and easements and restrictions of record which do not materially adversely
affect the use of the property by Lehigh, and except for minor defects in
titles, none of which, based upon information furnished by officers of Lehigh,
does or will materially adversely affect Lehigh's use of such properties or
its operations, and to which the rights of Lehigh therein have
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not been questioned. In giving such opinion, counsel may rely upon title
policies previously issued to Lehigh or updated certificates furnished by
title insurance companies.
(6) to the best knowledge of such counsel and based upon inquiries of
responsible officers of Lehigh and upon searches of Uniform Commercial Code
filings in the offices of the appropriate Secretary of State, there are no
liens against properties of Lehigh (excluding real estate) except as to be
disclosed in the Disclosure Schedule.
In rendering its opinion, Lehigh counsel may rely as to factual matters on
statements of officers of Lehigh. In rendering this opinion with resect to the
laws of any jurisdiction other than Delaware, Lehigh counsel may rely on the
opinion of other counsel retained by Lehigh provided that said opinion shall
state that Lehigh is justified in relying on the opinion or opinions of such
other counsel.
(c) The representations and warranties of Lehigh contained in this
Agreement shall be true in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of such date, except for changes permitted by this Agreement or those
incurred in the ordinary course of business and FMC shall have received from
Lehigh at the Closing a certificate dated the Closing Date of the President or a
Vice President of Lehigh to that effect.
(d) Each and all of the respective agreements of Lehigh to be
performed on or before the Closing Date pursuant to the terms hereof shall in
all material respects have been duly performed and Lehigh shall have delivered
to FMC a certificate dated the Closing Date, of the Chairman, President or a
Vice President of Lehigh to that effect.
(e) The completion of Lehigh's Proxy Statement and the effectiveness
of Lehigh's Registration Statement on Form S-4, as each may be amended.
(f) The approval of this Agreement by the Lehigh Board of Directors.
(g) The absence of any material contingent liabilities of Lehigh not
previously disclosed to FMC.
(h) The nonexistence of any agreement or contract that could delay
or prevent the completion of the transactions contemplated by this Agreement.
16. TERMINATION AND MODIFICATION OF RIGHTS
(a) This Agreement (except for the last three sentences of paragraph 4
of this Agreement and paragraph 17 of this Agreement) may be terminated at any
time prior to the Closing Date by (i) mutual consent of the parties hereto
authorized by their respective Boards of Directors or (ii) upon written notice
to the other party, by either party upon authorization of its Board of
Directors:
(1) if in its reasonably exercised judgment since the date of this
Agreement there shall have occurred a material adverse change in the financial
condition or business of the other party or the other party shall have
suffered a material loss or damage to any of its property or assets, which
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change, loss or damage materially affects or impairs the ability of the other
party to conduct its business, or if any previously undisclosed condition
which materially adversely affects the earning power or assets of either party
come to the attention of the other party; or
(2) if any action or proceeding shall have been instituted or
threatened before a court or other governmental body or by any public
authority to restrain or prohibit the transactions contemplated by this
Agreement or if the consummation of such transactions would subject either of
such parties to liability for breach of any law or regulation.
(b) As provided in paragraph 2(a), this Agreement may be terminated
by either party upon notice to the other in the event the Closing shall not be
held by April 1, 1997.
(c) Any term or condition of this Agreement may be waived at any
time by the party hereto which is entitled to the benefit thereof, by action
taken by the Board of Directors of such party; and any such term or condition
may be amended at any time, by an agreement in writing executed by the Chairman
of the Board, the President or any Vice President of each of the parties
pursuant to authorization by their respective Boards of Directors provided
however that no amendment of any principal term of the Merger shall be affected
after approval of this Agreement by the stockholders of Lehigh, FMC and Newco
unless such amendment is approved by such stockholders in accordance with
applicable law.
17. BREAK-UP FEE
In the event that Lehigh receives and consummates an Alternate Proposal
(as that term is defined in paragraph 1(g) hereof), then Lehigh shall pay FMC
$1,500,000 by wire transfer of immediately available funds at the date of
consummation of such Alternate Proposal.
18. BROKERS
Each of the parties represents that no broker, finder or similar person
has been retained or paid and that no brokerage fee or other commission has been
agreed to be paid for or on account of this Agreement other than Gruntal &
Company and First Union.
19. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the
State of Delaware.
20. NOTICES
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand or when mailed by registered or certified mail,
postage prepaid, or when given by telex or facsimile transmission (promptly
confirmed in writing), as follows:
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(a) If to Lehigh or Newco:
Salvatore J. Zizza, President
810 Seventh Avenue - #27 F
New York, NY 10019
With a copy to:
Robert A. Bruno, Esq.
General Counsel & Vice President
810 Seventh Avenue - #27 F
New York, NY 10019
and
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York , NY 10022
Attn: Ilan K. Reich, Esq.
(b) If to FMC:
Dennis Sokol
Chairman
First Medical Corporation
1055 Washington Boulevard
Stamford, CT 06901
With a copy to:
Gary Epstein, Esq.
Greenberg Traurig
1221 Brickell Avenue
Miami, FL 33131
21. NON-ASSIGNMENT
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties.
22. COUNTERPARTS
This Agreement may be executed simultaneously in two or more
counterparts, and by the different parties hereto on separate counterparts each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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23. HEADINGS AND REFERENCES
The headings of the paragraphs of this Agreement are inserted for
convenience of reference only.
24. ENTIRE AGREEMENT; SEVERABILITY
This Agreement, including the Disclosure Schedules, documents referred
to herein which form a part hereof, contains the entire understanding of the
parties hereto in respect of the subject matter contained herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter. A determination that any portion of this
Agreement is unenforceable or invalid shall not affect the enforceability or
validity of any of the remaining portions of this Agreement or this Agreement as
a whole.
[SIGNATURES APPEAR ON NEXT PAGE]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto by their respective officers thereunto duly authorized by a
majority of their directors as of the date first above written.
ATTEST: THE LEHIGH GROUP INC.
By /s/ Salvatore J. Zizza,
- -------------------------- --------------------------
AUTHORIZED OFFICER Salvatore J. Zizza,
Chairman of the Board and
Chief Executive Officer
ATTEST: FIRST MEDICAL CORPORATION
By /s/ Dennis A. Sokol
- -------------------------- ----------------------
AUTHORIZED OFFICER Dennis A. Sokol, Chairman
ATTEST: LEHIGH MANAGEMENT CORP.
By /s/ Salvatore J. Zizza
- -------------------------- -------------------------
AUTHORIZED OFFICER Salvatore J. Zizza, President and
Chief Executive Officer
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APPENDIX B
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE
PREFERRED STOCK
OF
THE LEHIGH GROUP INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
The Lehigh Group Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolution was adopted by the Board of
Directors of the Corporation:
RESOLVED, that, pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation (the "Board of
Directors") by the provisions of the Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation"), there hereby is created, out
of the 5,000,000 shares of Preferred Stock of the Corporation authorized in
Article FOURTH of the Certificate of Incorporation (the "Preferred Stock"), a
series of the Preferred stock consisting of 951,211 shares, which series shall
have the following powers, designations, preferences and relative,
participating, optional or other rights, and the following qualifications,
limitations and restrictions (in addition to the powers, designations,
preferences, participations and restrictions set forth in the Certificate of
Incorporation which are applicable to the Preferred Stock):
Section 1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Series A
Convertible Preferred Stock" (the "Series A Preferred Stock") and the authorized
number of shares constituting such series shall be 951,211. The par value of the
Series A Preferred Stock shall be $.001 per share.
Section 2. DIVIDENDS.
The holders of shares of the Series A Preferred Stock shall be
entitled to receive, when, as and if dividends are declared by the Board of
Directors on the Corporation's Common Stock, $.001 par value (the "Common
Stock"), out of funds of the Corporation legally available therefor, cash
dividends in an amount per share of Series A Preferred Stock equal to two
hundred and fifty times the amount declared with respect to each share of the
Common Stock. Each such dividend shall be paid to the holders of record of the
shares of the Series A Preferred Stock as they appear on the stock records of
the Corporation on the record date for payment of the corresponding dividend on
the Common Stock.
Section 3. VOTING RIGHTS.
The holders of Series A Preferred Stock shall be entitled to
vote, together with the holders of Common Stock, on all matters as to which
holders of the Common Stock shall be entitled to vote, with the holders of
Series A Preferred Stock being entitled to cast two hundred and fifty votes
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for each share of Series A Preferred Stock held by them. The holders of Series A
Preferred Stock shall not be entitled to vote separately, as a class, on any
matter except (a) as provided in Section 7 and (b) as required by law.
Section 4. LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or otherwise, after payment
or provision for payment of the debts and other liabilities of the Corporation,
the holders of shares of the Series A Preferred Stock shall be entitled to
receive, in cash, out of the remaining net assets of the Corporation, the amount
of $.01 for each share of the Series A Preferred Stock held by them, plus an
amount equal to all dividends accrued and unpaid on each such share up to the
date fixed for distribution, before any distribution shall be made to the
holders of shares of Common Stock. If upon any liquidation, dissolution or
winding up of the Corporation, the assets distributable among the holders of
shares of the Series A Preferred Stock are insufficient to permit the payment in
full to the holders of all such shares of all preferential amounts payable to
all such holders, then the entire assets of the Corporation thus distributable
shall be distributed ratably among the holders of the shares of the Series A
Preferred Stock in proportion to the respective amounts that would be payable
per share if such assets were sufficient to permit payment in full.
(b) For purposes of this Section 4, a distribution of assets
in any dissolution, winding up or liquidation shall not include (i) any
consolidation or merger of the Corporation with or into any other corporation,
(ii) any dissolution, liquidation, winding up or reorganization of the
Corporation immediately followed by reincorporation of another corporation or
(iii) a sale or other disposition of all or substantially all of the
Corporation's assets to another corporation; PROVIDED, HOWEVER, that, in each
case, effective provision is made in the certificate of incorporation of the
resulting and surviving corporation or otherwise for the protection of the
rights of the holders of shares of the Series A Preferred Stock.
(c) After the payment of the full preferential amounts
provided for herein to the holders of shares of the Series A Preferred Stock or
funds necessary for such payment have been set aside in trust for the holders
thereof, such holders shall be entitled to no other or further participation in
the distribution of the assets of the Corporation.
Section 5. CONVERSION.
(a) Holders of shares of the Series A Preferred Stock shall
have the right, exercisable (subject to the provisions of Section 5(d)) at any
time and from time to time, to convert each share of Series A Preferred Stock
into two hundred and fifty shares of the Common Stock, subject to adjustment as
described below. Upon conversion, no adjustment or payment will be made for
dividends, but if any holder surrenders a share of the Series A Preferred Stock
for conversion after the close of business on the record date for the payment of
a dividend and prior to the opening of business on the payment date for such
dividend, then, notwithstanding such conversion, the dividend payable on such
dividend payment date will be paid to the registered holder of such share of the
Series A Preferred Stock on such record date.
(b) Any holder of a share or shares of the Series A Preferred
Stock electing to convert such share or shares shall deliver the certificate or
certificates therefor to the principal office of any transfer agent for the
Common Stock, with such form of notice of election to convert as the
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Corporation shall prescribe fully completed and duly executed and (if such
required by the Corporation or any conversion agent) accompanied by instruments
of transfer in form satisfactory to the Corporation and to any conversion agent,
duly executed by the registered holder or his duly authorized attorney, and
transfer taxes, stamps or funds therefor or evidence of payment thereof if
required pursuant to Section 5(c) hereof. The conversion right with respect to
any such shares shall be deemed to have been exercised at the date upon which
the certificates therefor accompanied by such duly executed notice of election
and instruments of transfer and such taxes, stamps, funds, or evidence of
payment shall have been so delivered, and the person or persons entitled to
receive the shares of the Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of the
Common Stock upon said date.
(c) If a holder converts a share or shares of the Series A
Preferred Stock, the Corporation shall pay any documentary, stamp or similar
issue or transfer tax due on the issue of Common Stock upon the conversion. The
holder, however, shall pay to the Corporation the amount of any tax which is due
(or shall establish to the satisfaction of the Corporation payment thereof) if
the shares are to be issued in a name other than the name of such holder and
shall pay to the Corporation any amount required by the last sentence of Section
5(a) hereof.
(d) The Series A Preferred Stock shall not become convertible
into shares of Common Stock until such time as the number of shares of the
Corporation's authorized and unissued Common Stock equals or exceeds the
aggregate number of shares of the Common Stock into which all of the authorized
shares of Series A Preferred Stock would be convertible under Section 5(a)
(without regard to this sentence) if all of such shares of Series A Preferred
Stock were outstanding. Thereafter, the Corporation shall reserve and shall at
all times have reserved out of its authorized but unissued shares of the Common
Stock sufficient shares of the Common Stock to permit the conversion of the then
outstanding shares of the Series A Preferred Stock. All shares of Common Stock
which may be issued upon conversion of shares of the Series A Preferred Stock
shall be validly issued, fully paid and nonassessable. In order that the
Corporation may issue shares of the Common Stock upon conversion of shares of
the Series A Preferred Stock, the Corporation will endeavor to comply with all
applicable Federal and State securities laws and will endeavor to list such
shares of the Common Stock to be issued upon conversion on each securities
exchange on which the Common Stock is listed.
(e) The conversion rate in effect at any time shall be subject
to adjustment from time to time as follows:
(i) In case the Corporation shall (1) pay a dividend
in shares of the Common Stock to holders of the Common Stock,
(2) make a distribution in shares of the Common Stock to
holders of the Common Stock, (3) subdivide the outstanding
shares of the Common Stock into a greater number of shares of
the Common Stock or (4) combine the outstanding shares of the
Common Stock into a smaller number of shares of the Common
Stock, the conversion rate immediately prior to such action
shall be adjusted so that the holder of any shares of the
Series A Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of the
Common Stock which he would have owned immediately following
such action had such shares of the Series A Preferred Stock
been converted immediately prior thereto. An adjustment made
pursuant to this Section 5(e)(i) shall become effective
immediately after the record date in the case of a dividend or
distribution and shall
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become effective immediately after the effective date in the
case of a subdivision or combination.
(ii) In case the Corporation shall issue rights or
warrants to substantially all holders of the Common Stock
entitling them (for a period commencing no earlier than the
record date for the determination of holders of Common Stock
entitled to receive such rights or warrants and expiring not
more than 45 days after such record date) to subscribe for or
purchase shares of the Common Stock (or securities convertible
into shares of the Common Stock) at a price per share less
than the current market price (as determined pursuant to
Section 5(e)(iv)) of the Common Stock on such record date, the
number of shares of the Common Stock into which each share of
the Series A Preferred Stock shall be convertible shall be
adjusted so that the same shall be equal to the number
determined by multiplying the number of shares of the Common
Stock into which such shares of the Series A Preferred Stock
was convertible immediately prior to such record date by a
fraction of which the numerator shall be the number of shares
of the Common Stock outstanding on such record date plus the
number of additional shares of the Common Stock offered (or
into which the convertible securities so offered are
convertible), and of which the denominator shall be the number
of shares of the Common Stock outstanding on such record date,
plus the number of shares of the Common Stock which the
aggregate offering price of the offered shares of the Common
Stock (or the aggregate conversion price of the convertible
securities so offered) would purchase at such current market
price. Such adjustments shall become effective immediately
after such record date.
(iii) In case the Corporation shall distribute to all
holders of the Common Stock shares of any class of capital
stock other than the Common Stock, evidence of indebtedness or
other assets (other than cash dividends out of current or
retained earnings), or shall distribute to substantially all
holders of the Common Stock rights or warrants to subscribe
for securities (other than those referred to in Section
5(e)(ii)), then in each such case the number of shares of the
Common Stock into which each share of the Series A Preferred
Stock shall be convertible shall be adjusted so that the same
shall equal the number determined by multiplying the number of
shares of the Common Stock into which such shares of the
Series A Preferred Stock was convertible immediately prior to
the date of such distribution by a fraction of which the
numerator shall be the current market price (determined as
provided in Section 5(e)(iv)) of the Common stock on the
record date mentioned below, and of which the denominator
shall be such current market price of the Common Stock, less
the then fair market value (as determined by the Board of
Directors, whose determination shall be conclusive evidence of
such fair market value) of the portion of the assets so
distributed or of such subscription rights or warrants
applicable to one share of the Common Stock. Such adjustment
shall become effective immediately after the record date for
the determination of the holders of the Common Stock entitled
to receive such distribution. Notwithstanding the foregoing,
in the event that the Corporation shall distribute rights or
warrants (other than those referred to in Section 5(e)(ii)
("Rights") pro rata to holders of the Common Stock, the
Corporation may, in lieu of making any adjustment pursuant to
this Section 5(e)(iii), make proper provision so that each
holder of a share of Series A Preferred Stock who converts
such share after the record date for such distribution and
prior to the expiration or redemption of the Rights shall be
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entitled to receive upon such conversion, in addition to the
shares of the Common Stock issuable upon such conversion (the
"Conversion Shares"), a number of Rights to be determined as
follows: (i) if such conversion occurs on or prior to the date
for the distribution to the holder of Rights of separate
certificate evidencing such Rights (the "Distribution Date"),
the same number of Rights to which a holder of a number of
shares of the Common Stock equal to the number of Conversion
Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to
the Rights; and (ii) if such conversion occurs after the
Distribution Date, the same number of Rights to which a holder
of the number of the Common Stock into which a share of the
Series A Preferred Stock so converted was convertible
immediately prior to the Distribution Date would have been
entitled on the Distribution Date in accordance with the terms
and provisions of and applicable to the Rights.
(iv) The current market price per share of the Common
Stock on any date shall be deemed to be the average of the
daily closing prices for thirty consecutive trading days
commencing forty-five trading days before the day in question.
The closing price for each day shall be the last reported sale
price regular way or, in case no such reported sale takes
place on such date, the average of the reported closing bid
and asked prices regular way, in either case on the New York
Stock Exchange, or if the Common Stock is not listed or
admitted to trading on such Exchange, on the principal
national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, the closing sale
price of the Common stock, or in case no reported sale takes
place, the average of the closing bid and asked prices, on
NASDAQ or any comparable system, or if the Common Stock is not
quoted on NASDAQ or any comparable system, the closing sale
price or, in case no reported sale takes place, the average of
the closing bid and asked prices, as furnished by any two
members of the National Association of Securities Dealers,
Inc. selected from time to time by the Corporation for that
purpose.
(v) In any case in which this Section 5 shall require
that an adjustment be made immediately following a record
date, the Corporation may elect to defer (but only until five
business days following the mailing of the notice described in
Section 5(e)) issuing to the holder of any share of the Series
A Preferred Stock converted after such record date the shares
of the Common Stock and other capital stock of the Corporation
issuable upon such conversion over and above the shares of the
Common stock and other capital stock of the Corporation
issuable upon such conversion only on the basis of the
conversion rate prior to adjustment; and, in lieu of the
shares the issuance of which is so deferred, the Corporation
shall issue or cause its transfer agents to issue due bills or
other appropriate evidence of the right to receive such
shares.
(f) No adjustment in the conversion rate shall be required
until cumulative adjustments result in a concomitant change of 1% or more of the
conversion price as in effect prior to the last adjustment of the conversion
rate; PROVIDED, HOWEVER, that any adjustments which by reason of this Section
5(f) are not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this Section 5 shall be
made to the nearest cent or to
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the nearest one-hundredth of a share, as the case may be. No adjustment to the
conversion rate shall be made for cash dividends.
(g) In the event that, as a result of an adjustment made
pursuant to Section 5(e), the holder of any share of the Series A Preferred
Stock thereafter surrendered for conversion shall become entitled to receive any
shares of capital stock of the Corporation other than shares of the Common
Stock, thereafter the number of such other shares so receivable upon conversion
of any shares of the Series A Preferred Stock shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in this Section 5.
(h) The Corporation may make such increases in the conversion
rate, in addition to those required by Sections 5(e)(i), (ii) and (iii), as it
considers to be advisable in order than any event treated for Federal income tax
purposes as a dividend of stock or stock rights shall not be taxable to the
recipients thereof.
(i) Whenever the conversion rate is adjusted, the Corporation
shall promptly mail to all holders of record of shares of the Series A Preferred
Stock a notice of the adjustment and shall cause to be prepared a certificate
signed by a principal financial officer of the Corporation setting forth the
adjusted conversion rate and a brief statement of the facts requiring such
adjustment and the computation thereof; such certificate shall forthwith be
filed with each transfer agent for the shares of the Series A Preferred Stock.
(j) In the event that:
(1) the Corporation takes any action which would
require an adjustment in the conversion
rate,
(2) the Corporation consolidates or merges with,
or transfers all or substantially all of its
assets to, another corporation and
stockholders of the Corporation must approve
the transaction, or
(3) there is a dissolution or liquidation of the
Corporation,
a holder of shares of the Series A Preferred Stock may wish to convert some or
all of such shares into shares of the Common Stock prior to the record date for,
or the effective date of, the transaction so that he may receive the rights,
warrants, securities or assets which a holder of shares of the Common Stock on
that date may receive. Therefore, the Corporation shall mail to holders of
shares of the Series A Preferred Stock a notice stating the proposed record or
effective date of the transaction, as the case may be. This Corporation shall
mail the notice at least 10 days before such date; however, failure to mail such
notice or any defect therein shall not affect the validity of any transaction
referred to in clauses (1), (2) or (3) of this Section 5(j).
(k) If any of the following shall occur, namely: (i) any
reclassification or change of outstanding shares of the Common Stock issuable
upon conversion of shares of the Series A Preferred Stock (other than a change
in par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), (ii) any consolidation
or merger to which the Corporation is a party other than a merger in which the
Corporation is the continuing
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corporation and which does not result in any reclassification of, or change
(other than a change in name, or par value, or from par value to no par value,
or from no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of the Common Stock or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then the Corporation, or such successor or
purchasing corporation, as the case may be, shall, as a condition precedent to
such reclassification, change, consolidation, merger, sale or conveyance,
provide in its certificate of incorporation or other charter document that each
share of the Series A Preferred Stock shall be convertible into the kind and
amount of shares of capital stock and other securities and property (including
cash) receivable upon such reclassification, change, consolidation, merger, sale
or conveyance by a holder of the number of shares of the Common Stock
deliverable upon conversion of such share of the Series A Preferred Stock
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. Such certificate of incorporation or other charter document shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 5. The foregoing,
however, shall not in any way affect the right a holder of a share of the Series
A Preferred Stock may otherwise have, pursuant to clause (ii) of the last
sentence of Section 5(e)(iii), to receive Rights upon conversion of a share of
the Series A Preferred Stock. If, in the case of any such consolidation, merger,
sale or conveyance, the stock or other securities and property (including cash)
receivable thereupon by a holder of the Common Stock includes shares of capital
stock or other securities and property of a corporation other than the successor
or purchasing corporation, as the case may be, in such consolidation, merger,
sale or conveyance, then the certificate of incorporation or other charter
document of such other corporation shall contain such additional provisions to
protect the interests of the holders of shares of the Series A Preferred Stock
as the Board of Directors shall reasonably consider necessary by reason of the
foregoing. The provision of this Section 5(k) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
Section 6. RANKING. With regard to rights to receive dividends
and distributions upon dissolution of the Corporation, the Series A Preferred
Stock shall rank prior to the Common Stock and junior to any other Preferred
Stock issued by the Corporation, unless the terms of such other Preferred Stock
provide otherwise.
Section 7. LIMITATIONS. In addition to any other rights
provided by applicable law, so long as any shares of the Series A Preferred
Stock are outstanding, the Corporation shall not, without the affirmative vote,
or the written consent as provided by law, of the holders of at least a majority
of the outstanding shares of the Series A Preferred Stock, voting as a class,
amend, alter or repeal, whether by merger, consolidation or otherwise, any of
the provisions of the Certificate of Incorporation (including this Certificate
of Designation) that would change the preferences, rights or powers with respect
to the Series A Preferred Stock so as to affect the Series A Preferred Stock
adversely; provided, however, that (except as otherwise required by applicable
law) nothing herein contained shall require such a vote or consent in connection
with any increase in the total number of authorized shares of the Common Stock.
Section 8. NO PREEMPTIVE RIGHTS. No holder of shares of the
Series A Preferred Stock will possess any preemptive rights to subscribe for or
acquire any unissued shares of capital stock of the Corporation (whether now or
hereafter authorized) or securities of the Corporation convertible into or
carrying a right to subscribe for or acquire shares of capital stock of the
Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Designation to be signed by Salvatore J. Zizza, its President,
and attested by Robert A. Bruno, its Secretary, this ____ day of __________,
1997.
THE LEHIGH GROUP INC.
By:
--------------------------
Name: Salvatore J. Zizza
Title: President
Attested:
By:
--------------------
Name: Robert A. Bruno
Title: Secretary
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation and By-laws of Lehigh contain
provisions permitted by the Delaware General Corporation Law (under which Lehigh
is organized), that, in essence, provide that directors and officers shall be
indemnified for all losses that may be incurred by them in connection with any
claim or legal action in which they may become involved by reason of their
service as a director or officer of Lehigh if they meet certain specified
conditions. In addition, the Restated Certificate of Incorporation of Lehigh
contains provisions that limit the monetary liability of directors of Lehigh for
certain breaches of their fiduciary duty of care and provide for the advancement
by Lehigh to directors and officers of expenses incurred by them in defending
suits arising out of their service as such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following Exhibits are filed as part of this registration statement
(references are to Regulation S-K Exhibit Numbers):
*2.1 Agreement and Plan of Merger, dated as of October 29, 1996, between the
Registrant, the Registrant Acquisition Corp. and First Medical
Corporation, as amended (filed as Appendix A to the Joint Proxy
Statement/Prospectus included in this Registration Statement).
3(a) Restated Certificate of Incorporation, By-Laws and Amendments to
By-Laws (incorporated by reference to Exhibits A and B to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1970. Exhibits 3 and 1, respectively, to the Registrant's Current
Reports on Form 8-K dated September 8, 1972 and May 9, 1973, and
Exhibit to the Registrant's Current Report on Form 8-K dated October
10, 1973, and Exhibit 3 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1980).
3(b) Certificate of Amendment to Restated Certificate of Incorporation dated
September 30, 1983 (incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
29, 1985).
3(c) Certificate of Amendment to Restated Certificate of Incorporation of
the Registrant filed with the Secretary of State of the State of
Delaware on October 31, 1985 (incorporated by reference to Exhibit 4(c)
to the Registrant's Current Report on Form 8-K dated November 7, 1985).
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3(d) Certificate of Amendment to Restated Certificate of Incorporation of
the Registrant filed with the Secretary of State of the State of
Delaware on January 2, 1986 (incorporated by reference to Exhibit 3(d)
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1985).
3(e) Certificate of Amendment to Restated Certificate of Incorporation of
the Registrant filed with the Secretary of State of the State of
Delaware on June 4, 1986 (incorporated by reference to Exhibit 4(a) to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1986).
3(f) Certificate of Amendment to Restated Certificate of Incorporation of
the Registrant filed with the Secretary of State of the State of
Delaware on March 15, 1991 (incorporated by reference to Exhibit 3(g)
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
3(g) Certificate of Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware
on December 27, 1991 (incorporated by reference to Exhibit 3(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991).
3(h) Certificate of Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware
on January 27, 1995 (incorporated by reference to Exhibit 3(i) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994).
3(i) Form of Certificate of Description of the Series A Convertible
Preferred Stock.
3(j) Amended and Restated By-Laws of the Registrant, as amended to date
(incorporated by reference to Exhibit 3(ii) to the Registrant's Current
Report on Form 8-K dated July 17, 1996).
4(a) Form of Indenture, dated as of October 15, 1985, among Registrant,
NICO, Inc. and J. Henry Schroder Bank & Trust the Registrant, as
Trustee, including therein the form of the subordinated debentures to
which such Indenture relates (incorporated by reference to Exhibit 4(a)
to the Registrant's Current Report on Form 8-K dated November 7, 1985).
4(b) Amendment to Indenture dated as of March 14, 1991 referenced to in Item
4(b)(1) (incorporated by reference to Exhibit 4(b)(2) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
4(c) Indenture dated as of March 15, 1991 (the "Class B Note Indenture")
among the Registrant, NICO, the guarantors signatory thereto, and
Continental Stock Transfer and Trust the Registrant, as Trustee,
pursuant to which the 8% Class B Senior Secured Redeemable Notes due
March 15, 1999 of NICO were issued together with the form of such Notes
(incorporated by reference to Exhibit 4(i) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990).
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4(d) First Supplemental Indenture dated as of May 5, 1993 between NICO and
Continental Stock Transfer & Trust the Registrant, as trustee under the
Class B Note Indenture (incorporated by reference to Exhibit 4(h) to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1993).
4(e) Form of indenture between the Registrant, NICO and Shawmut Bank, N.A.,
as Trustee, included therein the form of Senior Subordinated Note due
April 15, 1998 (incorporated by reference to Exhibit 4(b) to Amendment
No. 2 to the Registrant's Registration Statement on Form S-2 dated May
13, 1988).
**5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP regarding the
legality of the securities being registered.
10(a) Guaranty of LVI Environmental dated as of May 5, 1993 (incorporated by
reference to Exhibit 10(f) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993).
10(b) Indemnification Agreement dated as of May 5, 1993 among LVI
Environmental, the Registrant and certain directors and officers of the
Registrant (incorporated by reference to Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993).
10(c) Assumption Agreement dated as of May 5, 1993 among the Registrant, NICO
and LVI Holding for the benefit of holders of certain securities of
Hold-Out Notes (as defined therein) (incorporated by reference to
Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993).
10(d) Exchange Offer and Registration Rights Agreement dated as of March 15,
1991 made by the Registrant in favor of those persons participating in
the Registrant's exchange offers (incorporated by reference to Exhibit
10(j) to the Registrant's Annual Report on Form 10-K/A Amendment #2 for
the year ended December 31, 1993).
10(e) Employment Agreement between the Registrant and Salvatore J. Zizza
dated August 22, 1994 (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission in September 1994).
10(f) Options of Mr. Zizza to purchase an aggregate of 10,250,000 shares of
Common Stock of the Registrant (incorporated by reference to Exhibit
10.2 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(g) Registration Rights Agreement dated as of August 22, 1994 between Mr.
Zizza and the Registrant (incorporated by reference to Exhibit 10.3 to
the Registrant's Current Report on Form 8-K filed with the Securities
and Exchange Commission in September 1994).
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10(h) Consulting Agreement dated as of August 22, 1994 between Dominic
Bassani and the Registrant (incorporated by reference to Exhibit 10.4
to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(i) Warrants of Mr. Bassani to purchase an aggregate of 7,750,000 shares of
Common Stock of the Registrant (incorporated by reference to Exhibit
10.5 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(j) Registration Rights Agreement dated as of August 22, 1994 between Mr.
Bassani and the Registrant (incorporated by reference to Exhibit 10.6
to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(k) Form of Registration Rights Agreement dated as of August 22, 1994 among
the Registrant and the investors in the Private Placement (incorporated
by reference to Exhibit 10.7 to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission in September
1994).
10(l) Warrant of Goldis Financial Group, Inc. to purchase an aggregate of
386,250 shares of Common Stock of the Registrant (incorporated by
reference to Exhibit 10.8 to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission in September
1994).
10(m) Employment Agreement between the Registrant and Robert A. Bruno dated
January 1, 1995 (incorporated by reference to Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).
10(n) Subordinated debenture dated March 28, 1996 between the Registrant and
Macrocom Investors, LLC (incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).
10(o) Option Letter Agreement, dated October 29, 1996, between Salvatore J.
Zizza and First Medical Corporation (incorporated by reference to
Exhibit 99.7 to the Registrant's Current Report of Form 8-K filed with
the Securities and Exchange Commission in November 1996).
10(p) $100,000 Promissory Note, dated as of October 29, 1996, from First
Medical Corporation to Salvatore J. Zizza (incorporated by reference to
Exhibit 99.8 to the Registrant's Current Report of Form 8-K filed with
the Securities and Exchange Commission in November 1996).
***10(q) Employment Agreement, dated as of June 11, 1996, between the Registrant
and Salvatore J. Zizza.
***10(r) Employment Agreement, dated as of June 11, 1996, between the Registrant
and Robert A. Bruno.
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<PAGE>
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21
to Registrant's Annual Report on Form 10-K for the year ended December
31, 1995).
*23.1 Consent of BDO Seidman, LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
**23.4 Consent of Olshan Grundman Frome & Rosenzweig LLP (included in Exhibit
5.1).
*99.1 Form of Proxy with respect to the solicitation of the holders of the
Registrant's Common Stock.
* Filed herewith.
** To be filed by Amendment.
*** Previously filed as an Exhibit to this Registration Statement.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
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<PAGE>
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City and State of
New York on the 26th day of December, 1996.
THE LEHIGH GROUP INC.
By: S/ SALVATORE J. ZIZZA/
-----------------------
Salvatore J. Zizza
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ SALVATORE J. ZIZZA Chairman of the Board December 26, 1996
- --------------------------- Director and President Chief
Salvatore J. Zizza Executive Officer (Chief
Financial Officer)
/S/ ROBERT A. BRUNO Vice President, General December 26, 1996
- ------------------- Counsel, Secretary and
Robert A. Bruno Director
* Director
- ---------------------------
Richard L. Bready
* Director
- ---------------------------
Charles A. Gargano
* Director
- ---------------------------
Anthony F.L. Amhurst
* Director
- ---------------------------
Salvatore M. Salibello
*BY: /S/SALVATORE J. ZIZZA December 26, 1996
---------------------
Salvatore J. Zizza
Attorney-in-fact
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<PAGE>
EXHIBIT INDEX
EXHIBIT
*2.1 Agreement and Plan of Merger, dated as of October 28,
1996, between the Registrant, the Registrant Acquisition
Corp. and First Medical Corporation (filed as Appendix A
to the Joint Proxy Statement/Prospectus included in this
Registration Statement).
3(a) Restated Certificate of Incorporation, By-Laws and
Amendments to By-Laws (incorporated by reference to
Exhibits A and B to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1970. Exhibits
3 and 1, respectively, to the Registrant's Current
Reports on Form 8-K dated September 8, 1972 and May 9,
1973, and Exhibit to the Registrant's Current Report on
Form 8-K dated October 10, 1973, and Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1980).
3(b) Certificate of Amendment to Restated Certificate of
Incorporation dated September 30, 1983 (incorporated by
reference to Exhibit 4(a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 29, 1985).
3(c) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of Delaware on October 31, 1985
(incorporated by reference to Exhibit 4(c) to the
Registrant's Current Report on Form 8-K dated November 7,
1985).
3(d) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of Delaware on January 2, 1986
(incorporated by reference to Exhibit 3(d) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1985).
3(e) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of Delaware on June 4, 1986
(incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1986).
3(f) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of Delaware on March 15, 1991
(incorporated by reference to Exhibit 3(g) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990).
3(g) Certificate of Amendment to Certificate of Incorporation
of the Registrant filed with the Secretary of State of
the State of Delaware on December 27, 1991 (incorporated
by reference to Exhibit 3(h) to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1991).
3(h) Certificate of Amendment to Certificate of Incorporation
of the Registrant filed with the Secretary of State of
the State of Delaware on January 27, 1995 (incorporated
by
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<PAGE>
reference to Exhibit 3(i) to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994).
3(i) Form of Certificate of Designation of the Series A
Convertible Preferred Stock.
3(j) Amended and Restated By-Laws of the Registrant, as
amended to date (incorporated by reference to Exhibit
3(ii) to the Registrant's Current Report on Form 8-K
dated July 17, 1996).
4(a) Form of Indenture, dated as of October 15, 1985, among
Registrant, NICO, Inc. and J. Henry Schroder Bank & Trust
the Registrant, as Trustee, including therein the form of
the subordinated debentures to which such Indenture
relates (incorporated by reference to Exhibit 4(a) to the
Registrant's Current Report on Form 8-K dated November 7,
1985).
4(b) Amendment to Indenture dated as of March 14, 1991
referenced to in Item 4(b)(1) (incorporated by reference
to Exhibit 4(b)(2) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1990).
4(c) Indenture dated as of March 15, 1991 (the "Class B Note
Indenture") among the Registrant, NICO, the guarantors
signatory thereto, and Continental Stock Transfer and
Trust the Registrant, as Trustee, pursuant to which the
8% Class B Senior Secured Redeemable Notes due March 15,
1999 of NICO were issued together with the form of such
Notes (incorporated by reference to Exhibit 4(i) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990).
4(d) First Supplemental Indenture dated as of May 5, 1993
between NICO and Continental Stock Transfer & Trust the
Registrant, as trustee under the Class B Note Indenture
(incorporated by reference to Exhibit 4(h) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).
4(e) Form of indenture between the Registrant, NICO and
Shawmut Bank, N.A., as Trustee, included therein the form
of Senior Subordinated Note due April 15, 1998
(incorporated by reference to Exhibit 4(b) to Amendment
No. 2 to the Registrant's Registration Statement on Form
S-2 dated May 13, 1988).
**5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP
regarding the legality of the securities being
registered.
10(a) Guaranty of LVI Environmental dated as of May 5, 1993
(incorporated by reference to Exhibit 10(f) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).
10(b) Indemnification Agreement dated as of May 5, 1993 among
LVI Environmental, the Registrant and certain directors
and officers of the Registrant (incorporated by reference
to Exhibit 10(h) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993).
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<PAGE>
10(c) Assumption Agreement dated as of May 5, 1993 among the
Registrant, NICO and LVI Holding for the benefit of
holders of certain securities of Hold-Out Notes (as
defined therein) (incorporated by reference to Exhibit
10(i) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993).
10(d) Exchange Offer and Registration Rights Agreement dated as
of March 15, 1991 made by the Registrant in favor of
those persons participating in the Registrant's exchange
offers (incorporated by reference to Exhibit 10(j) to the
Registrant's Annual Report on Form 10-K/A Amendment #2
for the year ended December 31, 1993).
10(e) Employment Agreement between the Registrant and Salvatore
J. Zizza dated August 22, 1994 (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(f) Options of Mr. Zizza to purchase an aggregate of
10,250,000 shares of Common Stock of the Registrant
(incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(g) Registration Rights Agreement dated as of August 22, 1994
between Mr. Zizza and the Registrant (incorporated by
reference to Exhibit 10.3 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(h) Consulting Agreement dated as of August 22, 1994 between
Dominic Bassani and the Registrant (incorporated by
reference to Exhibit 10.4 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(i) Warrants of Mr. Bassani to purchase an aggregate of
7,750,000 shares of Common Stock of the Registrant
(incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(j) Registration Rights Agreement dated as of August 22, 1994
between Mr. Bassani and the Registrant (incorporated by
reference to Exhibit 10.6 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange
Commission in September 1994).
10(k) Form of Registration Rights Agreement dated as of August
22, 1994 among the Registrant and the investors in the
Private Placement (incorporated by reference to Exhibit
10.7 to the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission in September
1994).
10(l) Warrant of Goldis Financial Group, Inc. to purchase an
aggregate of 386,250 shares of Common Stock of the
Registrant (incorporated by reference to Exhibit 10.8 to
the
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<PAGE>
Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(m) Employment Agreement between the Registrant and Robert A.
Bruno dated January 1, 1995 (incorporated by reference to
Exhibit 10(m) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995).
10(n) Subordinated debenture dated March 28, 1996 between the
Registrant and Macrocom Investors, LLC (incorporated by
reference to Exhibit 10(n) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995).
10(o) Option Letter Agreement, dated October 29, 1996, between
Salvatore J. Zizza and First Medical Corporation
(incorporated by reference to Exhibit 99.7 to the
Registrant's Current Report of Form 8-K filed with the
Securities and Exchange Commission in November 1996).
10(p) $100,000 Promissory Note, dated as of October 28, 1996,
from First Medical Corporation to Salvatore J. Zizza
(incorporated by reference to Exhibit 99.8 to the
Registrant's Current Report of Form 8-K filed with the
Securities and Exchange Commission in November 1996).
***10(q) Employment Agreement, dated as of June 11, 1996, between
the Registrant and Salvatore J. Zizza.
***10(r) Employment Agreement, dated as of June 11, 1996, between
the Registrant and Robert A. Bruno.
21 Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995).
*23.1 Consent of BDO Seidman, LLP.
*23.2 Consent of KPMG Peat Marwick LLP
** 23.3 Consent of Olshan Grundman Frome & Rosenzweig LLP
(included in Exhibit 5.1).
*99.1 Form of Proxy with respect to the solicitation of the
holders of the Registrant's Common Stock.
- -------------------
* Filed herewith.
** To be filed by Amendment.
*** Previously filed as an Exhibit to this Registration Statement.
E-4
EXHIBIT 99.1
PROXY FOR HOLDERS OF COMMON STOCK
THE LEHIGH GROUP INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS -- [ ,] 1997
The undersigned hereby appoints Salvatore J. Zizza and Robert A. Bruno,
and each of them, proxies of the undersigned with full power of substitution to
vote all of the undersigned's Common Stock, par value $ .001 per share, as
indicated hereon, of THE LEHIGH GROUP INC. ("Lehigh") at the Special Meeting of
Stockholders to be held [ , ,] 1997 in the [ ] and at any adjournments thereof,
upon all matters that may properly come before the Meeting, including the
matters described in the Proxy Statement furnished herewith, subject to the
directions indicated below:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR:
1. The merger of Lehigh Management Corp., into First Medical Corporation
and the amendment of the Restated Certificate of Incorporation of
Lehigh to provide for "blank check" preferred stock.
FOR / / AGAINST / / ABSTAIN / /
2. The approval of the following amendments to the Restated Certificate of
Incorporation and By-laws of Lehigh:
A. Changing the name of the Corporation from "The Lehigh Group Inc." to
"First Medical Group, Inc."
B. To eliminate cumulative voting for the election of directors.
C. To eliminate action by stockholders by written consent.
D. To provide that the number of directors comprising the entire Board of
Directors of Lehigh be not less than seven nor more than eleven, as
determined from time to time by the Board of Directors.
E. Requiring any further amendments to the provisions of the Certificate
of Incorporation addressed by parts (B) through (E) to require the vote
of the holders of at least 80% of the outstanding shares of Lehigh
common stock.
FOR / / AGAINST / / ABSTAIN / /
3. ELECTION OF DIRECTORS
/ / FOR all Director nominees, pro rata (or in such other
proportions as the proxy holders may determine in their sole discretion).
<PAGE>
/ / CUMULATE my votes as follows (insert number of votes*)
------------------------- Salvatore J. Zizza
------------------------- Dennis A. Sokol
------------------------- Charles J. Pendola
------------------------- Melvin E. Levinson
------------------------- Elliot H. Cole
------------------------- Paul Murphy
------------------------- Alain Lellouche
* NOTE: The number of votes is equal to the
total number of shares of Common
Stock to be voted, multiplied by seven.
/ / WITHHOLD my vote.
4. The ratification of the appointment of BDO Seidman, LLP, as independent
auditors of Lehigh for the year ending December 31, 1996.
FOR / / AGAINST / / ABSTAIN / /
5. The transaction of such other business as may properly come before the
meeting.
PLEASE CHECK IF YOU PLAN TO ATTEND THE MEETING / /
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR PROPOSALS
1, 2, 3 AND 4, IF NO INSTRUCTION TO THE CONTRARY IS INDICATED OR IF NO
INSTRUCTION IS GIVEN.
All as set forth in the Proxy Statement for this Special Meeting
of Stockholders.
Dated ________________________________________, 1997
_______________________________________________ (L.S.)
_______________________________________________ (L.S.)
Signature of Stockholder(s)
Please sign your name as it appears on this Proxy. If
executed by a corporation a duly authorized officer
should sign. Partners, executors, trustees, guardians
or attorneys should so indicate when signing. If
shares are held jointly, EACH holder should sign.
To the Board of Directors of The Lehigh Group Inc.
We hereby consent to the inclusion of our report dated March 4, 1996, except as
to Note 3, which is as of March 28, 1996 with respect to the consolidated
balance sheets of The Lehigh Group Inc. and subsidiaries as of December 31, 1995
and 1994 and the related consolidated statements of operations, shareholders
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1995.
/s/ BDO SEIDMAN LLP
BDO SEIDMAN LLP
New York, New York
December 26, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of
MedExec, Inc.;
SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.
We consent to the inclusion of our report dated May 17, 1996, except as to note
15, which is as of December 23, 1996, with respect to the combined financial
statements of MedExec, Inc. and subsidiaries; SPI Managed Care, Inc.; and SPI
Managed Care of Hillsborough County, Inc. as of December 31, 1995 and 1994, and
the related combined statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1995,
which report appears in the Form S-4 (No. 333-11955) of The Lehigh Group, Inc.
dated December 26, 1996 and reference to our firm under the heading "Experts".
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Miami, Florida
December 26, 1996
