As filed with the Securities and Exchange Commission on November 10, 1997
Registration No. 333-11955
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE LEHIGH GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 5063 13-1920670
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
THE LEHIGH GROUP INC.
1055 WASHINGTON BLVD.
STAMFORD, CONNECTICUT 06903
(203) 327-0900
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------------------------------------------------
ROBERT A. BRUNO
VICE PRESIDENT AND GENERAL COUNSEL
1055 WASHINGTON BLVD.
STAMFORD, CONNECTICUT 06903
(203) 327-0900
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
--------------------------------------------------------
Copy to:
ILAN K. REICH, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
505 PARK AVENUE
NEW YORK, NEW YORK 10022
(212) 753-7200
----------------------------------------------------------
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
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.
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<PAGE>
THE LEHIGH GROUP INC.
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K Showing Location in
Prospectus of Information required by Items of Form S-1.
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
REGISTRATION STATEMENT ---------------------------------
----------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus.................................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus.................... Inside Front; Additional Information;
Outside Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges................................................ Prospectus Summary; Risk Factors; The
Company;
4. Use of Proceeds............................................................ Use of Proceeds
5. Determination of Offering Price............................................ Outside Front Cover Page; Plan of
Distribution
6. Dilution................................................................... *
7. Selling Security Holders................................................... Selling Stockholders; Plan of
Distribution
8. Plan of Distribution....................................................... Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to be Registered ................................ Outside Front Cover Page; Description
of Securities
10. Interests of Named Experts and Counsel .................................... Experts; Legal Matters
11. Information with Respect to the Registrant................................. Front Cover Page; Prospectus Summary;
Risk Factors, Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Board
Meetings and Committees of the
Board; Executive Compensation;
Compensation of Directors;
Options; Board Report on Executive
Compensation; Compensation
Committee Interlocks and Insider
Participation; Certain
Relationships and Related
Transactions; Description of
Securities; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities................................................ Compensation of Directors
</TABLE>
- ---------------------------
* Omitted because answer is not applicable or negative.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997
PROSPECTUS
281,561,500 SHARES OF COMMON STOCK
THE LEHIGH GROUP INC.
This Prospectus relates to the reoffer and resale by certain
selling stockholders (the "Selling Stockholders") of (i) 11,276,250 shares of
Common Stock, par value $.001 per share ("Common Stock"), of The Lehigh Group
Inc. (formerly LVI Group Inc.) ("the Company") (ii) 259,365,250 shares of Common
Stock issuable upon conversion of shares of the Company's Series A Convertible
Preferred Stock, par value $.001 per share ("Preferred Stock" and collectively
with the Common Stock, the "Stock") and (iii) 10,875,000 shares of Common Stock
issued to certain selling stockholders as payment for early termination of
various employment and consulting agreements and in lieu of payment pursuant to
a stock purchase agreement (such shares of Common Stock offered hereby being
referred to herein collectively as the "Shares"). The Shares are being reoffered
and resold for the account of the Selling Stockholders and the Company will not
receive any of the proceeds from the resale of the Shares.
The information in this Prospectus does not give effect to the
1-for-30 reverse stock split (the "Reverse Split") of the Common Stock, which is
subject to shareholder approval. As a result of the Reverse Split, each thirty
(30) shares of Common Stock will be converted into one (1) share of Common Stock
and each share of Preferred Stock, which is presently convertible into 250
shares of Common Stock and has a like number of votes per share, voting together
with the Common Stock, will be automatically adjusted so that each such share
will be convertible into 8 1/3 shares of Common Stock, and will have a like
number of votes per share, voting together with the Common Stock. Following the
Reverse Split, the Company would have outstanding 375,875 shares of Common Stock
and the Preferred Stock would be convertible into an additional 8,645,508 shares
of Common Stock.
The Company's Common Stock is publicly traded on the New York
Stock Exchange ("NYSE") under the symbol ("LEI"). On November 6, 1997, the
closing price for the Common Stock on NYSE was $0.19.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGES 6-10 BELOW.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This offering is self-underwritten; neither the Company nor any
Selling Stockholder has employed an underwriter for the sale of the Shares. The
Company will bear all expenses of this Offering, other than discounts,
concessions or commissions on the sale of the Shares.
The Selling Stockholders have advised the Company that the Shares
may be offered by or for the account of the Selling Stockholders from time to
time on the NYSE or on any other exchange upon which shares of Common Stock are
traded, in negotiated transactions, or a combination of such methods of sale, at
fixed prices which may be changed or at negotiated prices. The Selling
Stockholders may effect such transactions by selling the Shares to or through
broker-dealers who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of Shares for whom such broker-dealers may act as agent or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). Any broker-dealer acquiring Shares from the
Selling Stockholders may sell such securities in its normal market making
activities, through other brokers on a principal or agency basis, in negotiated
transactions, to its customers or through a combination of such methods. See
"Plan of Distribution."
No person is authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation should not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this 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 Prospectus
nor any distribution of securities pursuant to this 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 Prospectus.
The date of this Prospectus is ____ __, 1997
<PAGE>
AVAILABLE INFORMATION
The Company 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, proxy and information statements and
other information filed by the Company 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 may also be accessed
electronically by means of the SEC's home page on the Internet at
http://www.sec.gov. The Common Stock is listed on the NYSE and such material and
other information concerning the Company can be inspected and copied at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
TABLE OF CONTENTS
AVAILABLE INFORMATION..................................................2
PROSPECTUS SUMMARY.....................................................3
RISK FACTORS ........................................................6
USE OF PROCEEDS.......................................................10
PRICE RANGE OF COMMON STOCK...........................................10
CAPITALIZATION .......................................................11
DIVIDEND POLICY.......................................................11
SELECTED AND PRO FORMA
FINANCIAL DATA.........................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................14
BUSINESS..............................................................22
MANAGEMENT............................................................35
BOARD MEETINGS AND COMMITTEES OF THE BOARD............................36
EXECUTIVE COMPENSATION................................................37
COMPENSATION OF DIRECTORS.............................................39
OPTIONS...............................................................39
BOARD REPORT ON EXECUTIVE COMPENSATION................................42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION...........42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE
COMPANY................................................43
SELLING STOCKHOLDERS..................................................46
DESCRIPTION OF SECURITIES.............................................47
PLAN OF DISTRIBUTION..................................................48
EXPERTS...............................................................49
LEGAL MATTERS.........................................................49
ADDITIONAL INFORMATION................................................49
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<PAGE>
PROSPECTUS SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Prospectus. This Summary is qualified in its entirety by the
more detailed information and financial statements appearing elsewhere in this
Prospectus.
THE COMPANY
On July 9, 1997, First Medical Corporation ("FMC") merged with a
wholly-owned subsidiary of the Company (the "Merger"). As a result of such
merger, FMC became a wholly-owned subsidiary of the Company. See "Business -
Merger with FMC."
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. See "Business - Lehigh."
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 hospital services division which provides a variety of
administrative and clinical services to acute care hospitals and other health
care providers. See "Business - FMC."
Unless the context otherwise indicates, the "Company" as used
herein means The Lehigh Group Inc. and its wholly-owned subsidiaries, FMC and
Hallmark and their subsidiaries, "Lehigh" means the Company before the Merger
and the Company other than its wholly-owned subsidiary FMC and its subsidiaries
after the Merger and "FMC" means First Medical Corporation and its subsidiaries.
The Company's executive offices are located at 1055 Washington
Blvd. Stamford, CT 06903, and its telephone number is (203) 327-0900.
-3-
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Set forth below are summary historical financial data and pro
forma financial data for the years ended 1992, 1993, 1994, 1995 and 1996, and
the six months ended June 30, 1997. The summary financial data for the years
ended 1992, 1993, 1994, 1995 and 1996 set forth below has been derived from the
audited financial statements of the Company. The summary financial data for the
six month period ended June 30, 1997 is unaudited. The pro forma financial data
has been presented to include FMC as if the Merger had occurred at the beginning
of such period.
THE LEHIGH GROUP INC. AND SUBSIDIARIES (A)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Six
month
Years Ended December 31, ended
--------------------------------------------------------------------- ------------
June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues earned $ 10,729 $ 12,890 $ 12,247 $ 12,105 $ 10,446 $ 5,765
Loss from continuing operations $ (2,048) $ (250) $ (410) $ (558) $ (920) $ (215)
Loss per common share from
continuing operations $ (0.19) $ (0.03) $ (0.04) $ (0.05) $ (0.09) $ (.02)
Cash dividends declared per -- -- -- -- -- --
common share
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
Years Ended December 31, Quarter Ended
------------------------------------------------------------- ---------------------------
March 31, June 30,
1992 1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital $(28,700) $ 2,800 $ 3,233 $ 2,437 $ 2,560 $ 2,800 $ 3,346
Total assets $ 13,753 $ 7,050 $ 7,441 $ 6,622 $ 5,625 $ 6,317 $ 7,177
Long-term debt $ 12,787 $ 2,524 $ 2,361 $ 2,080 $ 2,725 $ 2,752 $ 3,429
Total debt (B) $ 45,882 $ 3,615 $ 3,240 $ 2,950 $ 3,115 $ 3,142 $ 3,819
Shareholders' equity (deficit) $(45,041) $ (5,099) $ 510 $ 202 $ (86) $ 169 $ (2)
Book Value per share $ (6.15) $ (6.92) $ 0.05 $ .02 $ (.01) $ .01 $ (.00)
</TABLE>
(A) Historical data does not include FMC and FMC's subsidiaries.
(B) Includes long term debt, current maturities of long term debt and Note
payable - bank.
<TABLE>
<CAPTION>
LEHIGH FMC
EQUIVALENT
PROFORMA PER PROFORMA PER
HISTORICAL SHARE DATA(1) HISTORICAL SHARE DATA (2)
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE:
December 31, 1996 $ (0.01) $ (0.004) $ 70.35 $ 0.003
December 31, 1995 $ (0.02) $ 0.009 $ 23.00 $ 0.001
CASH DIVIDENDS PER COMMON
SHARE:
Year Ended December 31, 1996 $ -- $ -- $ -- $ --
Year Ended December 31, 1995 $ -- $ -- $ 3.80 $ 0.000
Year Ended December 31, 1994 $ -- $ -- $ 11.70 $ 0.001
INCOME (LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS:
Year Ended December 31, 1996 $ (0.09) $ (0.041) $ 32.30 $ 0.001
Year Ended December 31, 1995 $ (0.05) $ (0.025) $ (36.40) $ (0.002)
Year Ended December 31, 1994 $ (0.04) $ (0.018) $ 81.80 $ 0.003
</TABLE>
(1) Proforma data based upon issuance of additional 11,276,250 shares.
(2) Proforma equivalent data based upon 237,000,000 weighted average number
of shares outstanding.
-4-
<PAGE>
The summary financial data for the years ended December 31, 1992,
1993, 1994, 1995 and 1996 set forth below has been derived from the audited
financial statements of FMC. The summary financial data for the six month period
ended June 30, 1997 is unaudited.
<TABLE>
<CAPTION>
Six Month
Year Ended December 31, Ended
------------------------------------------------------------- -----------
June
30,
1992(1) 1993(1) 1994(1) 1995(1) 1996(1) 1997
------- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Capitated revenue $ 5,406 $ 10,563 $ 20,253 $ 21,744 45,070 26,887
Fee-for-service 53 96 200 182 7,075 4,422
Other 398 428 865 746 869 1,472
-------- -------- -------- -------- -------- --------
Total revenue 5,857 11,087 21,318 22,672 53,014 32,783
Medical expenses 4,480 8,405 16,568 18,444 43,526 30,512
--------
Gross profit 1,377 2,682 4,750 4,228 9,488 2,270
Operating expenses:
Salaries and related benefits 561 670 1,651 2,434 3,503 1,331
Other operating expenses 573 991 1,771 2,200 5,194 3,116
-------- -------- -------- -------- -------- --------
Total operating expenses 1,134 1,661 3,422 4,634 8,697 4,447
Income (loss) from operations 243 1,021 1,328 (406) 791 (2,177)
Other expenses (income) 4 218 (35) (42) 55 94
Net income (loss) before taxes 247 803 1,364 (364) 736 (2,271)
Pro forma adjustments for income
taxes(2) 99 321 545 -- 413 0
-------- -------- -------- -------- -------- --------
Pro forma net income (loss) from
continuing operations $ 148 $ 482 $ 818 ($ 364) $ 323 $(2,271)
======== ======== ======== ======== ======== ========
Pro forma net income (loss) from
continuing operations per share $ 14.80 $ 48.20 $ 81.80 $ (36.40) $ 32.30 $(2,271)
Pro forma weighted average number
of FMC shares currently
outstanding (3) 10,000 10,000 10,000 10,000 10,000 10,000
Cash Dividends as Declared 12 17 117 38 -- --
BALANCE SHEET DATA:
Working Capital $ 83 $ 279 $ 272 $ (302) $ (2,047) $ (5,349)
Total Assets 840 2,739 4,128 3,045 12,323 15,137
Current Liabilities 657 1,341 3,157 2,817 10,596 15,505
Stockholder's Equity 183 1,398 972 227 703 (1,567)
Book Value per share $ 18 $ 140 $ 97 $ 23 $ 70.35 $(156.70)
</TABLE>
- ----------------------
(1) The summary financial data for the years ended December 31, 1992, 1993,
1994 and 1995 has been derived from the audited combined financial
statements of MedExec, Inc. and subsidiaries; SPI Managed Care, Inc.;
and SPI Managed Care of Hillsborough County, Inc. (collectively,
"MedExec"). The data for 1996 has been derived from the 1996
consolidated financial statements.
(2) 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 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%.
(3) The amount of FMC stock issued and outstanding on June 30, 1997 was
10,000; as result of the Merger all such FMC stock ceased to be
outstanding.
-5-
<PAGE>
RISK FACTORS
Prospective purchasers should carefully consider the following
information in addition to the other information contained in this Prospectus in
evaluating an investment in the Common Stock offered hereby.
RISK FACTORS
- --------------------------------------------------------------------------------
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the
Common Stock may be highly volatile. In addition, the trading volume of Common
Stock has been limited and the price of Common Stock will be sensitive to the
performance and prospects of the combined companies. See "Price Range of Common
Stock."
NO DIVIDENDS. The Company has paid no cash dividends on its
Common Stock since 1995 and does not anticipate paying cash dividends in the
foreseeable future. The Company's ability to pay dividends is dependent upon,
among other things, future earnings, the operating results and financial
condition of the Company, its capital requirements, general business conditions
and other pertinent factors, and is subject to the discretion of the Board of
Directors. The Board issued 1,037,461 shares of Preferred Stock in connection
with the Merger, each share of which is entitled to dividends, pari passu with
dividends declared and paid with respect to the Common Stock, equal to 250 times
the amount declared and paid with respect to each share of Common Stock. The
Board is authorized to issue, at any time hereafter, up to an additional
3,962,539 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 Common Stock. See "Dividend
Policy."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK;
ISSUANCE OF THE COMPANY PREFERRED STOCK; ANTI-TAKEOVER EFFECTS. 1,037,461 shares
of Preferred Stock were issued pursuant to the Merger; each such share is
entitled to 250 votes on any matter submitted to a vote of stockholders, to be
voted together with the Common Stock. The Company's Restated and Amended
Certificate of Incorporation, as amended (the "Certificate of Incorporation")
authorizes the issuance of up to an additional 3,962,539 shares of "blank check"
preferred stock, with such designations, rights, and preferences as may be
determined from time to time by the Board of Directors. See "Description of
Securities -- Preferred Stock." 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 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 the
Company.
The issuance of preferred stock may have the effect of
discouraging, delaying or preventing a change in control, may prevent a
third-party from making a tender offer which might be beneficial to the Company
and its stockholders, even though some stockholders might otherwise desire such
a tender offer. In particular, the issuance may discourage a third-party from
seeking to acquire the Company on account of the substantial dilution to which
an acquiror is potentially exposed. It may also deprive stockholders of
opportunities to sell their shares at a premium over prevailing market prices,
since tender offers frequently involve purchases of stock directly from
stockholders at a premium price. In addition, the issuance may have the effect
of insulating management of the Company from certain efforts to remove it, or
affording management the opportunity to prevent efforts to oust it.
POSSIBLE DELISTING BY THE NYSE. Currently, the Common Stock is
traded on the New York Stock Exchange. However, the Company has been advised
that the Common Stock no longer meets the technical requirements to maintain its
listing on the NYSE. The Board of Directors believes that the NYSE has refrained
from delisting the Common Stock only because of the Company's pending
application to have the Common Stock traded on the American Stock Exchange
("AMEX"). An application to list the Common Stock has been submitted to AMEX and
AMEX has indicated in response to the Company's application, that it has
approved the application of The Lehigh Group Inc. subject to the completion of a
30:1 reverse stock split, the effectiveness of the S-1 Registration of the
11,276,250 shares of Common Stock, 1,037,461 shares of Series A Preferred
Convertible Stock and the 259,365,250 underlying shares of Common Stock with
respect to the merger agreement, and the conversion of all of the Series A
Preferred Convertible Stock into Company Common Stock, which Reverse Split would
require the affirmative vote of a majority of the votes to which all of the
outstanding shares of Common Stock and the Preferred Stock voting together as a
single class are entitled, provided, however, that each share of Preferred Stock
will have 250 votes. The Company has scheduled a special meeting (the "Special
Meeting") of its stockholders for
-6-
<PAGE>
November, 12 1997 in order to obtain the approval of its stockholders. There can
be no assurance that such approval will be obtained and there can be no
assurance that AMEX will permit the listing of the Common Stock on AMEX unless
the above conditions are met. The New York Stock Exchange has notified the
Company that its stock will be suspended November 13, 1997 and application will
be made to the SEC to delist the Company's Stock. In such case the Company would
seek to have the Common Stock quoted on NASDAQ, but there can be no assurance
that such application would be approved or that there would not be a period when
the Common Stock was no longer traded on NYSE and not yet quoted on NASDAQ.
Unless the Reverse Split were approved, the Company might not satisfy the
requirements for listing on the NASDAQ National Market System or Small-Cap
Market. Failure of the Company to satisfy the listing requirements could result
in the Common Stock trading on the OTC Bulletin Board or in the "pink sheets"
maintained by the National Quotation Bureau, Inc., which are generally
considered to be less efficient markets.
SIGNIFICANT HOLDINGS BY ONE STOCKHOLDER FMC and Generale De Sante
International, Plc ("GDS") are parties to a Subscription Agreement, dated June
11, 1996 pursuant to which GDS paid $5,000,000 in order to acquire a variety of
ownership interests in FMC and its subsidiaries, including (i) 10% of the
outstanding shares of FMC's common stock (the FMC Common Stock"), each share of
which was automatically exchanged pursuant to the Merger for 1,127.675 shares of
Common Stock and 103.7461 shares of Preferred Stock, and (ii) shares of FMC's 9%
Series A Convertible Preferred Stock (the "FMC Preferred Stock") convertible
into 10% of the shares of FMC Common Stock, which Shares of FMC Preferred Stock
were converted following the Merger. Consequently, when GDS converted its shares
of FMC Preferred Stock, GDS received shares of Lehigh Common Stock and Lehigh
Preferred Stock. Together with the shares issued for the FMC Common Stock, these
shares would give GDS a total of approximately 23% ownership interest and voting
power of the Company. See "Security Ownership of Certain Beneficial Owners of
the Company."
The existence of such a stockholder may have the effect of
discouraging, delaying or preventing a change in control, may prevent a
third-party from making a tender offer which might be beneficial to the Company
and its stockholders, even though some stockholders might otherwise desire such
a tender offer. In addition, especially since the Certificate of Incorporation
provides for cumulative voting for directors, the existence of such a
stockholder will have the effect of helping to insulate management of the
Company from certain efforts to remove it and to afford management the
opportunity to prevent efforts to oust it.
RISK FACTORS RELATING TO FMC
DOMESTIC OPERATIONS
POTENTIAL EFFECTS OF 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 FMC'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 FMC. 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 FMC's operating results. See
"Business--Government Regulation of Domestic Regulations." 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 in the future.
DEPENDENCE ON CAPITATED FEE REVENUE. For the year ended December
31, 1996, approximately 85.0%, of FMC's net revenues were derived from contracts
pursuant to which FMC received a fixed, prepaid monthly fee, or capitated fee,
for each covered life in exchange for assuming the responsibility for providing
medical services. See "--Significant Dependence on One Client" for additional
information. FMC's success under these contracts is
-7-
<PAGE>
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 FMC, the revenue to FMC under the
contract may be insufficient to cover the costs of the care that was provided.
All of FMC'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 FMC's control, there
can be no assurance that capitated fee contracts will be profitable for FMC in
the future.
SIGNIFICANT DEPENDENCE ON ONE CLIENT. A substantial portion of
the revenues of FMC'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 FMC a capitated fee. 85%, or
approximately $45,070,000, of FMC's managed care business revenue, for the year
ended December 31, 1996 was derived from such prepaid contractual agreements
with Humana. FMC may in the future enter into significant additional capitation
arrangements with Humana. FMC's operating results could be adversely affected by
the loss of any such agreements or business relationships. In addition, a
significant decline in Humana's number of enrollees could have a material
adverse effect on FMC's operating results.
INABILITY OF FMC TO OBTAIN NEW CONTRACTS AND MANAGE COSTS. A
significant portion of FMC's historical and planned growth in revenues has
resulted from, and is expected to continue to result from, the addition of new
contracts in its physician practice management division. Obtaining new
contracts, which may involve a competitive bidding process, requires that FMC
accurately assess the costs it will incur in providing services so that it
undertakes contracts where FMC 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. To the
extent that enrollees require more frequent or extensive care than as
anticipated by FMC, the revenue to FMC under a contract may be insufficient to
cover the costs of the care that was provided. Any failure of FMC to manage the
cost of providing health care services or price its services appropriately may
have a material adverse effect on FMC's operations.
HIGHLY COMPETITIVE BUSINESS. The provision of physician
management services for health maintenance organizations ("HMO's") is a highly
competitive business in which FMC competes for contracts with several national
and many regional and local providers of physician management services.
Furthermore, FMC competes with traditional managers of health care services,
such as hospitals and HMO's, 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 FMC will encounter because of changing competitive conditions,
changes in laws and regulations, government budgeting, technological and
economic developments and other factors. Certain of FMC's competitors have
access to substantially greater financial resources than FMC. See
"Business--FMC--Competition."
VIOLATION OF STATE LAWS REGARDING FEE SPLITTING AND 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 FMC believes it
complies in all material respects with state fee splitting and corporate
practice of medicine laws, based on consultations with FMC's healthcare/managed
care inside legal counsel, there can be no assurance that, given varying and
uncertain interpretations of such laws, FMC would be found to be in compliance
with all restrictions on fee splitting and the corporate practice of medicine in
all states. FMC has not received a written opinion from its inside legal counsel
about compliance with the state laws regarding fee splitting and the corporate
practice of medicine. FMC itself does not practice medicine and is not licensed
to do so; rather, it employs physicians who are licensed to practice medicine.
In certain states FMC operates 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 FMC to operate through such a structure. FMC does not
employ physicians at the medical facility it manages in Texas. A determination
that FMC is in violation of applicable restrictions on fee splitting and the
corporate practice of medicine, or a determination that employment of physicians
is a violation
-8-
<PAGE>
of state laws that prohibit the corporate practice of medicine, or a change in
the law in any state in which it operates could have a material adverse effect
on FMC.
FMC currently operates in only one state that prohibits the
corporate practice of medicine, which state is Texas. Risks associated with
expanding FMC's business into other states that have this type of prohibition
include (i) the issue of consolidation of revenues and (ii) restrictions that
prevent FMC from exploiting the physician-patient relationship in pursuit of
profits. FMC does not consolidate the revenues from Texas, but operates as a
management services organization under a management contract. If FMC expands its
business into other states which prohibit the corporate practice of medicine, it
will operate as a management services organization under a management contract
in those states. See "Business--FMC--Governmental Regulation of Domestic
Operations."
CORPORATE EXPOSURE TO PROFESSIONAL LIABILITIES EXCEEDING THE
LIMITS OF AVAILABLE INSURANCE COVERAGE. Due to the nature of its business, FMC
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 FMC. To the extent such health care professionals are employees
of FMC or were regarded as agents of FMC in the practice of medicine, FMC could
be held liable for their negligence. In addition, FMC could be found in certain
instances to have been negligent in performing its contract management services
(or refusing to perform services) even if no agency relationship with the health
care professional exists. FMC 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 FMC's operations in
the future. See "Business--FMC--Professional Liability Insurance."
LOSS OF OTHER INSURANCE. FMC 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 FMC's financial
risk. To date, such protection has been provided to FMC through its provider
agreements with Humana. There can be no assurances that the agreements which
provide such insurance to FMC will continue. If assumption of capitated payments
risk through contracts with HMO's could be construed as insurance. FMC believes
there would be no effect from state insurance laws due to the circumstance that
all of FMC's contracts with HMO's provides for stop-loss coverage by the HMO's.
Any determination of material noncompliance with insurance regulations or any
change in the stop-loss coverage by the HMO's could adversely affect the
operations of FMC.
REDUCTION IN GOVERNMENTAL REIMBURSEMENT. FMC assumes the
financial risks related to changes in patient volume, payer mix and rates the
governmental establishes for offering reimbursements for various services. 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. A large percentage of the
capitated fee revenue described above is also derived indirectly from a Medicare
funded program with Humana. Any change in reimbursement policies, practices,
interpretations or regulations, or legislation that limits reimbursement amounts
or practices, could have a material adverse effect on FMC's operating results.
See "Business--FMC--Government Regulation."
While FMC 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 FMC would be found to be in compliance in all respects with
such regulations. A determination that FMC is in violation of such regulations
could result in retroactive adjustments and recoupments and have a material
adverse effect on FMC.
-9-
<PAGE>
DEPENDENCE ON KEY PERSONNEL. FMC is dependent upon the services
of certain of its executive officers, including Dennis A. Sokol, Valdimir
Checklin and Dr. Ken Burhart for the management of FMC and the implementation of
its strategy. FMC maintains key man life insurance for Dennis A. Sokol. The loss
to FMC of the services of any of these executive officers could adversely affect
FMC's operations.
INTERNATIONAL OPERATIONS
FMC is subject to numerous factors relating to the business
environments of those developing countries in which FMC conducts business
operations. In particular, fundamental economic and political changes occurring
in Eastern Europe and the CIS could have a material impact on FMC's
international operations and on FMC'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 FMC's
business operations.
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. 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 FMC's international
operations.
FOREIGN GOVERNMENT REGULATION. FMC's operations in Eastern Europe
and the CIS are subject to diverse laws and regulations primarily relating to
foreign investment (as well as numerous national and local laws and regulations
concerning the provision of medical services). Failure to comply with such laws
or regulations could have a material adverse effect on FMC. At the present time,
FMC is unaware of any restrictions on foreign investment that could materially
affect FMC's business. FMC believes it is in compliance with foreign government
regulations.
USE OF PROCEEDS
There is no conversion price for converting shares of Preferred
Stock and consequently the Company will receive no compensation upon their
conversion. The Company will not receive any of the proceeds from the reoffer
and resale of the Shares by the Selling Stockholders.
PRICE RANGE OF COMMON STOCK
The following table reflects the range of the reported high and
low closing prices of Common Stock on the NYSE 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 but not the Reverse Split.
Common Stock
HIGH LOW
---- ---
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............................... 15/32 1/8
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<PAGE>
1997:
First quarter................................ $1/4 $13/32
Second quarter............................... 14/32 1/8
Third quarter................................ 15/32 3/32
On July 8, 1997, the last full trading day prior to the
consummation of the Merger, the closing price of the Common Stock was $0.22 per
share, as reported on the NYSE. On November 6, 1997, the closing price of the
Common Stock was $.19 as reported on NYSE. The Preferred Stock is not publicly
traded. On November 6, 1997, there were approximately 8,000 and 32 holders of
the Common Stock and Preferred Stock, respectively.
The Company has not paid any cash dividends since prior to
January 1, 1995.
CAPITALIZATION
THE COMPANY
The following table sets forth the capitalization of the Company
at July 9, 1997, the effective date of the Merger.
July 9, 1997
----------------
(Dollars in
Thousands)
Long-term debt................................................. $6,968
Stockholder's equity:
Preferred Stock, $.001 par value, 5,000,000
authorized; 1,037,461 outstanding 1
Common Stock, $.001 par value, 100,000,000 shares 23
authorized 22,552,500 outstanding, as adjusted(1).........
Additional paid-in capital................................ 7,934
Retained earnings......................................... (2,027)
-----
Total stockholders' equity................................ 5,931
-----
Total capitalization................................. $12,899
======
[(1) Does not include: (i) 18,752,187 shares reserved for issuance under
option agreements, of which options to purchase 18,752,187 shares were
outstanding, and (ii) 259,365,250 shares reserved for issuance upon
conversion of the Preferred Stock.
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock since
prior to 1995 and does not intend to pay cash dividends on its Common Stock for
the foreseeable future. The payment of cash dividends will depend upon, among
other things, future earnings, the operating results and financial condition of
the Company, its capital requirements, general business considerations and other
pertinent factors and is subject to the discretion of the Board of Directors. In
addition, the Board is authorized to issue up to 5,000,000 shares of preferred
stock of which 1,037,461 shares of Preferred Stock were issued in connection
with the Merger. Each share of Preferred Stock is entitled to dividends, pari
passu with dividends declared and paid with respect to the Common Stock, equal
to 250 times the amount declared and paid with respect to each share of Common
Stock.
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<PAGE>
SELECTED AND PRO FORMA
FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Set forth below are selected historical financial data and pro
forma financial data for the years ended 1992, 1993, 1994, 1995 and 1996, and
the six months ended March 31 and June 30, 1997. The selected financial data for
the years ended 1992, 1993, 1994, 1995 and 1996 set forth below has been derived
from the audited financial statements of the Company. The selected financial
data for the six month period ended June 30, 1997 is unaudited. The pro forma
financial data has been presented to include FMC as if the Merger had occurred
at the beginning of such period.
THE LEHIGH GROUP INC. AND SUBSIDIARIES (A)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Six
month
Years Ended December 31, ended
--------------------------------------------------------------------- ------------
June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues earned $ 10,729 $ 12,890 $ 12,247 $ 12,105 $ 10,446 $ 5,765
Loss from continuing operations $ (2,048) $ (250) $ (410) $ (558) $ (920) $ (215)
Loss per common share from
continuing operations $ (0.19) $ (0.03) $ (0.04) $ (0.05) $ (0.09) $ (.02)
Cash dividends declared per -------- -------- -------- -------- -------- --------
common share
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
Years Ended December 31, Quarter Ended
------------------------------------------------------------- ---------------------------
March 31, June 30,
1992 1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital $(28,700) $ 2,800 $ 3,233 $ 2,437 $ 2,560 $ 2,800 $ 3,346
Total assets $ 13,753 $ 7,050 $ 7,441 $ 6,622 $ 5,625 $ 6,317 $ 7,177
Long-term debt $ 12,787 $ 2,524 $ 2,361 $ 2,080 $ 2,725 $ 2,752 $ 3,429
Total debt (B) $ 45,882 $ 3,615 $ 3,240 $ 2,950 $ 3,115 $ 3,142 $ 3,819
Shareholders' equity (deficit) $(45,041) $ (5,099) $ 510 $ 202 $ (86) $ 169 $ (2)
Book Value per share $ (6.15) $ (6.92) $ 0.05 $ .02 $ (.01) $ .01 $ (.00)
</TABLE>
(A) Historical data does not include FMC and FMC's subsidiaries.
(B) Includes long term debt, current maturities of long term debt and Note
payable - bank.
<TABLE>
<CAPTION>
LEHIGH FMC
EQUIVALENT
PROFORMA PER PROFORMA PER
HISTORICAL SHARE DATA(1) HISTORICAL SHARE DATA (2)
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE:
December 31, 1996 $ (0.01) $ (0.004) $ 70.35 $ 0.003
December 31, 1995 $ (0.02) $ 0.009 $ 23.00 $ 0.001
CASH DIVIDENDS PER COMMON
SHARE:
Year Ended December 31, 1996 $ -- $ -- $ -- $ --
Year Ended December 31, 1995 $ -- $ -- $ 3.80 $ 0.000
Year Ended December 31, 1994 $ -- $ -- $ 11.70 $ 0.001
INCOME (LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS:
Year Ended December 31, 1996 $ (0.09) $ (0.041) $ 32.30 $ 0.001
Year Ended December 31, 1995 $ (0.05) $ (0.025) $ (36.40) $ (0.002)
Year Ended December 31, 1994 $ (0.04) $ (0.018) $ 81.80 $ 0.003
</TABLE>
(1) Proforma data based upon issuance of additional 11,276,250 shares.
(2) Proforma equivalent data based upon 237,000,000 weighted average number
of shares outstanding.
-12-
<PAGE>
The selected financial data for the years ended December 31,
1992, 1993, 1994, 1995 and 1996 set forth below has been derived from the
audited financial statements of FMC. The selected financial data for the six
month period ended June 30, 1997 is unaudited.
<TABLE>
<CAPTION>
Six Month
Year Ended December 31, Ended
------------------------------------------------------------- -----------
June
30,
1992(1) 1993(1) 1994(1) 1995(1) 1996(1) 1997
------- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Capitated revenue $ 5,406 $ 10,563 $ 20,253 $ 21,744 45,070 26,887
Fee-for-service 53 96 200 182 7,075 4,422
Other 398 428 865 746 869 1,472
-------- -------- -------- -------- -------- --------
Total revenue 5,857 11,087 21,318 22,672 53,014 32,783
Medical expenses 4,480 8,405 16,568 18,444 43,526 30,512
--------
Gross profit 1,377 2,682 4,750 4,228 9,488 2,270
Operating expenses:
Salaries and related benefits 561 670 1,651 2,434 3,503 1,331
Other operating expenses 573 991 1,771 2,200 5,194 3,116
-------- -------- -------- -------- -------- --------
Total operating expenses 1,134 1,661 3,422 4,634 8,697 4,447
Income (loss) from operations 243 1,021 1,328 (406) 791 (2,155)
Other expenses (income) 4 218 (35) (42) 55 94
Net income (loss) before taxes 247 803 1,364 (364) 736 (2,271)
Pro forma adjustments for income
taxes(2) 99 321 545 -- 413 0
-------- -------- -------- -------- -------- --------
Pro forma net income (loss) from
continuing operations $ 148 $ 482 $ 818 ($ 364) $ 323 $(2,271)
======== ======== ======== ======== ======== ========
Pro forma net income (loss) from
continuing operations per share $ 14.80 $ 48.20 $ 81.80 $ (36.40) $ 32.30 $(2,271)
Pro forma weighted average number
of FMC shares currently
outstanding (3) 10,000 10,000 10,000 10,000 10,000 10,000
Cash Dividends as Declared 12 17 117 38 -- --
BALANCE SHEET DATA:
Working Capital $ 83 $ 279 $ 272 $ (302) $ (2,047) $ (5,349)
Total Assets 840 2,739 4,128 3,045 12,323 15,137
Current Liabilities 657 1,341 3,157 2,817 10,596 15,505
Stockholder's Equity 183 1,398 972 227 703 (1,567)
Book Value per share $ 18 $ 140 $ 97 $ 23 $ 70.35 $(156.70)
</TABLE>
- ----------------------
(1) The summary financial data for the years ended December 31, 1992, 1993,
1994 and 1995 has been derived from the audited combined financial
statements of MedExec, Inc. and subsidiaries; SPI Managed Care, Inc.;
and SPI Managed Care of Hillsborough County, Inc. (collectively,
"MedExec"). The data for 1996 has been derived from the 1996
consolidated financial statements.
(2) 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 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%.
(3) The amount of FMC stock issued and outstanding on June 30, 1997 was
10,000; as result of the Merger all such FMC stock ceased to be
outstanding.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements, including the notes thereto, contained
elsewhere in this Prospectus.
GENERAL
On July 9, 1997, First Medical Corporation ("FMC") merged with a
wholly-owned subsidiary of the Company. As a result of such merger, FMC became a
wholly-owned subsidiary of the Company. See "Business - Merger with FMC."
RESULTS OF OPERATIONS - LEHIGH
FIRST HALF OF 1997 IN COMPARISON
WITH FIRST HALF OF 1996
Revenues earned for the first half of 1997 were approximately
$5.8 million a decrease of approximately $200,000 or 3.72% compared to the first
half of 1996. This decrease in revenues was due largely to the closing of the
Miami export operation.
Gross profit as a percentage of sales increased from 29.9% in the
first half of 1996 to 34.5% in the first half of 1997. This increase is
primarily due to the closing of the Miami export operation, whose profit margins
were much lower than Hallmark's New York operation.
Selling general and administrative expenses decreased by $3,000
or .15% in the first half of 1997 as compared to the first half of 1996. This
decrease was due in part to the closing of the Miami export operation and the
reduction of legal fees.
The factors discussed above resulted in an operating income of
$23,000 for the first half of 1997, as compared to an operating loss of $182,000
for the first half of 1996. There was no provision for income taxes in both 1997
and 1996 due to the Company's operating losses.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
Revenues earned for 1996 were $10.4 million, a decrease of $1.7
million or 14% compared with 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. On October 31, 1996, HallMark sold its export
operation in Miami. Management does not believe the closure of the Miami export
operation will have a material adverse effect on Lehigh. HallMark may continue
its export operation from its home office in New York.
Gross profit as a percentage of revenues increased from 29% in
1995 to 32% in 1996. The increase was attributable to higher profit margins in
the domestic operations. Selling, general and administrative expenses for 1996
decreased by approximately $121,000, or 3%, compared with 1995. The decrease was
primarily a result of the closing of HallMark's export operation in Miami.
The net result of the factors discussed above resulted in an
operating loss of $562,000 in 1996 compared to $517,000 in 1995.
-14-
<PAGE>
Interest expense increased by $38,000 to $471,000 in 1996 from
$433,000 in 1995. The increase in interest expense was due primarily to an
increase in outstanding borrowings during 1996.
There was no federal income tax for 1996, due to Lehigh's
operating loss.
On December 31, 1991, Lehigh sold its right, title and interest
in the stock of various subsidiaries which made 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: 1996 - $250,000, 1995 - $250,000, 1994 - $5,000,000, 1993 -
$1,760,000, 1992 - $2,376,000.
During 1996, Lehigh retired $110,000 of the 14-78% debentures
plus accrued and unpaid interest of $181,000 for approximately $9,000. The gain
on extinguishment of debt of approximately $282,000 is included in extraordinary
item of $382,000.
YEAR ENDED DECEMBER 31, 1995
COMPARED TO YEAR ENDED DECEMBER 31, 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 three 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 1995.
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.
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 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 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.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - LEHIGH
At June 30, 1997 Lehigh had working capital of $3.3 million
(including cash of $463,000) compared to working capital of $2.6 million
(including cash of $471,000) at December 31, 1996, and 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,
private placement proceeds and loans to finance its operation.
Net cash used in operating activities was $224,000, $267,000, and
$160,000 in 1996, 1995 and 1994, respectively. The change 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. The change from 1995 to 1996 was primarily due to the net loss
after the addback of the deferred credit income and the gain on extinguishment
of debt being partially offset by a decrease in accounts receivable and
inventory and an increase in accrued expenses.
Net cash used in investing activities was $18,000, $21,000, and
$39,000 in 1996, 1995 and 1994, respectively. Due to the amount of cash used in
operating activities, Lehigh has expended very little with respect to property
and equipment.
Net cash provided by (used in) financing activities was $336,000,
$(290,000), and $656,000 in 1996, 1995 and 1994, respectively. The change 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 was unable to borrow from its
bank under a previous credit agreement. The change from 1995 to 1996 was
primarily due to the loan from First Medical Corporation and a decrease in the
amount of capital lease payments and decrease in loan payments to Banca
Nazionale del Lavoro, SPA.
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 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 month 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 DHB on June 11, 1996. On February 7, 1997, First
Medical Corporation elected to convert the debenture into 937,500 shares of
Lehigh's common stock.
Lehigh continues to be in default in the payment of interest
(approximately $628,000 interest was past due as of December 31, 1996) on the
$390,000 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 (with the exception of certain of the 14-7/8 Subordinated Debentures
which were retired during 1996).
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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 written to the trustee who holds the Notes and Debentures in street name in
an effort to ascertain who the owners of these instruments are.
During 1996, Lehigh retired $110,000 of the 14-78% debentures
plus accrued and unpaid interest of $181,000 for approximately $9,000. The gain
on extinguishment of debt of approximately $282,000 is included in extraordinary
item of $382,000.
On November 6, 1996, HallMark paid off its loan with Banca
Nazionale del Lavoro, SPA and entered into a three year revolving loan with The
CIT Group/Credit Finance, Inc., with maximum borrowings of $5,000,000 subject to
a borrowing base formula.
FMC has agreed to lend Lehigh up to an additional $150,000 in
order for Lehigh to meet its current working capital requirements.
The State of Maine and Bureau of Labor Standards commenced an
action in Maine Superior Court on or about November 29, 1990 against Lehigh 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 in December 1994.
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 Lehigh when the Dori Shoe plant
was closed it was amended so as to arguably apply to Lehigh retroactively. In a
prior case brought against Lehigh (then known as Lehigh Valley Industries) and
its former subsidiary under the Maine severance pay statute prior to its
amendment, Lehigh 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 Lehigh in the amount of $260,969.11 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). The Company filed a
timely appeal appealing that decision and the matter was argued before the Maine
Supreme Judicial Court on December 7, 1995. Prejudgment interest will accrue at
an annual rate of approximately $20,800 from November 29, 1990.
On February 18, 1997, the Supreme Judicial Court of Maine
affirmed the Superior Court's decision. In July 1997, the Company agreed to pay
the State of Maine $215,000 to satisfy the judgment. On or about September 30,
1997 the Company made its payment.
The Company is involved in other minor litigation, none of which
is considered by management to be material to its business or, if adversely
determined, would have a material adverse effect on the Company's financial
condition.
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RESULTS OF OPERATIONS - FMC
SIX MONTHS ENDED JUNE 30, 1997
COMPARED WITH SIX MONTHS ENDED
JUNE 30, 1996
REVENUE. Total revenue of FMC for the six months ended June 30,
1997 and 1996 were $32.8 million and $24.9 million, respectively, of which 80 %
and 85 %, respectively, was derived from prepaid contractual agreements with
Humana pursuant to which Humana pays FMC a capitated fee ("HMO revenue"). During
the six months ended June 30, 1997, $28.4 million or 87 % of FMC's revenue were
derived from the physician practice management division and $4.4 million or 13 %
was derived from the international medical clinics division. During the six
months ended June 30, 1996, revenue derived from the physician practice
management division was $21.7 million, or 87 % of FMC's revenue and $3.2 million
or 13 % was derived from the international medical clinics division. The HMO
revenue growth was primarily a result of new provider agreements, as of
September, 1996, to manage a center in New Port Richey, Florida and as of
October, 1996, to manage additional centers in Lutz, Florida and South Dale
Mabry, Florida. Revenue related to these centers represent an increase of $8.2
million and the revenue related to the other centers decreased by $1.6 million,
due to a decrease in membership in the South Florida market.
MEDICAL EXPENSE. Medical expenses increased $9.7 million, or 47
%, to $30.5 million for the six months ended June 30, 1997 from $20.8 million
for the same period in 1996. The majority of the increase ($8.0 million or 84 %)
resulted from medical services provided under the New Port Richey, Lutz and
South Dale Mabry agreements. Medical expenses as a percentage of HMO and fee for
service revenue ("medical loss ratio") were 97.4 % and 85.3%, respectively, for
the six months ended June 30, 1997 and 1996. The increase in medical expenses
was due to changes in the program benefits provided by Humana. FMC has recently
implemented controls to monitor expenses in the future.
OPERATING EXPENSES. Operating expenses increased by $1.2 million,
or 39 %, to $4.4 million, for the six months ended June 30, 1997 from $ 3.2
million for the same period in 1996. The increase was partially due to the
additional three centers. As a percent of revenue, operating expenses were 13.5
% as compared to 12.8 % for the same period in 1996.
NET INCOME. Net loss for the six months ended June 30, 1997 was
$2.3 million compared to net income of $.5 million for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1997, FMC had cash
of $44,796 compared to $63,014 at December 31, 1996. As of June 30, 1997, FMC
had fully utilized its $1.5 million credit facility. As of June 30, 1997, FMC
had advanced Lehigh $135,000 for working capital purposes. Subsequent to the end
of the period, FMC received approximately $4,500,000 as a result of the merger.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
Revenue. The total revenues of FMC for the year ended December
31, 1996 and 1995 were $53.0 million and $22.7 million, respectively, of which
85% and 96%, respectively, was derived from prepaid contractual agreements with
Humana pursuant to which Humana pays FMC a capitated fee ("HMO revenue"). HMO
Revenue is derived primarily from the predetermined prepaid contractual
arrangements paid per member per month by Humana to the primary care centers
which are owned and operated by the Company. Under the capitated fee
arrangements, FMC assumes the risk of providing medical services for each
managed care member. To the extent that members require more frequent or
extensive care, the revenue to FMC may be insufficient to cover the cost of the
care that was provided. During the year ended December 31, 1996, $46.4 million
or 88% of FMC's revenues were derived from the physician practice management
division and $6.7 million or 12% was derived from the international medical
clinics division. As of December 31, 1996 the FMC Healthcare Services division
had not
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obtained any definitive management consulting service agreements. Revenue
increased by $30.3 million or 133% to $53.0 million for the year ended December
31, 1996, from $22.7 million for the same period in 1995. The HMO revenue growth
was primarily a result of FMC'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 operate and
manage two primary care centers in Broward County, Florida ("Broward"), and new
provider agreements, as of September 1996, to manage a center in New Port
Richey, Florida ("New Port Richey") and as of October 1996, to manage additional
centers in Lutz, Florida and South Dale Mabry, Florida. Revenue related to the
Broward, New Port Richey, Lutz, and South Dale Mabry centers represents $20.3
million or 87% of the increase in HMO revenue. As discussed in Note 1 of the
audited consolidated financial statements, FMC (through the transaction between
MedExec and AMC) has a management services agreement with three clinics in the
CIS. During the year ended December 31, 1996, revenues generated by this
international division accounted for $6.7 million of the $30.3 million increase
discussed above. FMC intends to finance the growth of the clinics in Eastern
Europe primarily with the capital contribution from GDS. The $30.3 million
increase in FMC's revenue is also net of the decrease resulting from the
termination in August 1995 of the provider agreement to manage the center in
Brandon, Florida. The Brandon center generated $3.5 million in revenue during
the year ended December 31, 1995.
Medical Expenses. Medical expenses increased $25.1 million, or
136%, to $43.5 million for the year ended December 31, 1996 from $18.4 million
for the same period in 1995. The majority of the increase ($21.6 million or 86%)
resulted from medical services provided under the Broward, New Port Richey, Lutz
and South Dale Mabry provider agreements. Medical expenses related to the AMC
clinics accounted for $5.4 million or 22% of the increase. The increase in
medical expense is net of the decrease related to the termination of the Brandon
provider agreement in 1995. Medical expenses for Brandon were $3.3 million in
1995. Medical expenses as a percentage of HMO and fee for service revenue
("medical loss ratio") were 84% for the years ended December 31, 1996 and 1995.
Operating Expenses. Operating expenses increased by $3.1 million,
or 89%, to $8.7 million, for the year ended December 31, 1996 from $4.6 million
for the same period in 1995. The increase was primarily due to new employees to
staff the primary care centers in Broward, New Port Richey, Lutz, and South Dale
Mabry and $.8 million in expenses incurred by FMC in connection with the
development and opening of two international centers. As a percentage of
revenue, however, operating expenses decreased to 15% from 20% for the same
period in 1995.
Net Income. Net income for the year ended December 31, 1996 was
$.3 compared to a net loss of $(.4) for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO
YEAR ENDED DECEMBER 31, 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 FMC during 1995. These expenses
relate primarily to additional compensation to former officers of FMC under
employment agreements, 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. Humana from time to time renegotiates certain contracts which results
in retroactive adjustments to the financial statements. In 1995, Humana
renegotiated certain hospital contracts in the Tampa market retroactive to the
beginning of 1994. As a result, hospitals rebilled FMC for previously billed
claims in order to recover additional funds from FMC for 1994 and 1995. The
ongoing impact, as with any price increase is higher medical costs. The
repricing is noted because
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1995 in effect included two years of price increases instead of one. As per FAS
No. 5, FMC records retroactive adjustments when they are probable and estimable.
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.
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 accounts receivables and additional compensation to shareholders under
employment agreements. The accounts receivable balances which were written-off
because they were uncollectible related to certain management services provided
by FMC totaling $.47 million. The amount was reversed out of revenues where it
was originally recorded during the year rather than written off in operating
expenses as a bad debt. The remaining accounts receivable balances were deemed
to be collectible.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO
YEAR ENDED DECEMBER 31, 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.
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
At June 30, 1997, FMC had cash of $44,796 compared to $63,014 at
December 31, 1996. As of June 30, 1997, FMC had fully utilized its $1.5 million
credit facility. As of June 30, 1997, FMC had advanced Lehigh $135,000 for
working capital purposes. Subsequent to the end of the period, FMC received
approximately $4,500,000 as a result of the merger.
FMC had cash of $63,014 at December 31, 1996 compared to $198,763
at December 31, 1995.
Net cash used in operating activities was ($.568) million for the
year ended December 31, 1996.
Net cash used in investing activities of ($.448) million was
primarily the result of ($.119) in capital expenditures, organizational costs of
($.478) million, acquisition of additional ownership in various subsidiaries of
($.151) million, net of $.3 million for the proceeds from the sale of MedExec's
investment in HCO Networks.
Net cash provided by financing activities of $.880 million was
the result of $1.350 million in proceeds received from loans payable to Humana,
banks, and certain shareholders, respectively, a $.152 million capital
contribution to AMCD, and ($.622) million repayment on notes due to shareholders
and banks.
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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.
To date, FMC'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.
FMC also maintains a secured line of credit with a domestic bank
for $0.4 million bearing interest at prime. The $0.4 million drawn under this
line of credit at June 30, 1997 has been used by FMC in connection with the
satisfaction of development costs relating to FMC's Midwest operations.
Amortization of $5,000 per month will commence as to the first $200,000 in
November, 1997 and as to the remaining $200,000, in May, 1997
FMC believes that funds generated from operations, availability
under its credit facilities, and lease financing will be sufficient to finance
its current and anticipated operations and planned capital expenditures at least
through 1997. FMC's long term capital requirements beyond 1997 will depend on
many factors, including, but not limited to, the rate at which FMC expands its
business. To the extent that the funds generated from the sources described
above are insufficient to fund FMC's activities in the short or long term, FMC
would need to raise additional funds through public or private financings. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms favorable to FMC.
As of June 30 1997, FMC also had a credit facility for $1.5
million bearing interest at 1/2% above prime. Subsequent to June 30, 1997, FMC
increased its credit facility from $1,500,000 to $2,500,000, of which $500,000
is guaranteed by certain current and former offiers of FMC.
FMC also borrowed an additional $537,000 to purchase Lehigh
stock. Both loans are currently due and FMC is currently negotiating with other
institutions to obtain a new credit facility to replace its current facility. As
of June 30, 1997 the $1,500,000 and $537,000 facilities were fully utilized.
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BUSINESS
MERGER WITH FMC
On July 9, 1997 at a Special Meeting (the "July Meeting") of
stockholders of the Company, the stockholders of the Company approved the Merger
pursuant to the terms of the Agreement and Plan of Merger dated as of October
29, 1996, as amended (the "Merger Agreement") among the Company, First Medical
Corporation ("FMC") and Lehigh Management Corp., a wholly-owned subsidiary of
the Company ("Merger Sub"). On the same day, Merger Sub was merged with and into
FMC and each outstanding share of common stock of FMC (the "FMC Common Stock"),
was exchanged for (i) 1,127.675 shares of the Company's Common Stock, par value
$.001 per share ("Common Stock"), and (ii) 103.7461 shares of the Company's
Series A Convertible Preferred Stock, par value $.001 per share (the "Preferred
Stock"), each of which, as a result of the Reverse Split, is convertible into
250 shares of Common Stock and has a like number of votes per share, voting
together with the Common Stock. Prior to the Merger, FMC held approximately
25.4% of the outstanding shares of Common Stock which were acquired through two
series of transactions.
There were outstanding 10,000 shares of FMC Common Stock
immediately prior to the Merger. These shares were exchanged for a total of (i)
11,276,750 shares of Common Stock which, as a result of the Reverse Split, is
now 375,875 shares of Common Stock, and (ii) 1,037,461 shares of Preferred
Stock. As a result of the Merger, holders of Common Stock immediately prior the
Merger and former FMC stockholders each owned 50% of the issued and outstanding
shares of Common Stock immediately following the Merger. In the event that all
of the shares of Preferred Stock issued to the former FMC stockholders are
converted into Common Stock, holders of Common Stock immediately prior to the
Merger and former FMC stockholders would own approximately 4% and 96%,
respectively, of the outstanding Common Stock.
In addition, under the terms of the Merger Agreement,
concurrently with the implementation of the Reverse Split, the Company will be
renamed "First Medical Group, Inc.," and following the Merger, Dennis Sokol, the
Chairman of the Board and Chief Executive Officer of FMC, became the Chairman
and Chief Executive Officer of the Company, Salvatore Zizza, the Chairman of the
Board, President and Chief Executive Officer of the Company, became Executive
Vice President and Treasurer and Mr. Bruno continued as Vice President and
Secretary. Mr. Bruno, Richard Bready, Charles Gargano, Anthony Amhurst and
Salvatore Salibello, five of the six members of the Board of Directors were not
nominated for re-election, and at the Special Meeting Mr. Sokol, Melvin
Levinson, Elliot Cole and Paul Murphy, four members of FMC's board of directors,
were elected to replace them. On August 11, 1997, Richard Berman was elected to
the Board of Directors.
LEHIGH
GENERAL
Lehigh (formerly The LVI Group Inc.) through its wholly owned
subsidiary, HallMark Electrical Supplies Corp., 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
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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.
The following is a detailed supplemental description of the 1993
restructuring as it appeared in note number 1 to Lehigh's Annual Report on Form
10-K for the year ended December 31, 1993:
FINANCIAL CONDITION AND RESTRUCTURING - Lehigh incurred
substantial losses from operations in 1988, 1989 and 1990 attributable in
significant part to the performance of its NICO Construction and LVI
Environmental businesses. The interior construction segment experienced
significant revenue decreases in each of these years and incurred losses in both
1989 and 1990. The asbestos abatement segment incurred substantial losses in
1988 and 1989 and experienced a revenue decrease in 1990. Lehigh also incurred a
substantial loss attributable to its LVI Energy business in 1990. For the three
year period ended December 31, 1990, Lehigh incurred a cumulative net loss of
$76.7 million. As a consequence, Lehigh had a consolidated shareholders' deficit
at December 31, 1990 of $30.8 million.
At December 31, 1990, Lehigh had outstanding long-term debt
(including the current portion thereof), on a consolidated basis, of
approximately $97.8 million (excluding revolving credit facilities of certain
subsidiaries and trade notes payable to subcontractors). This long-term debt had
an annual debt service requirement of $12.2 million, all but $2.5 million of
which was payable in cash. Lehigh had also not paid the eight quarterly
dividends on its outstanding preferred stock due from March 15, 1989 through
December 15, 1990, aggregating $2.5 million ($4.12 per share).
For the foregoing reasons, Lehigh consummated the 1991
Restructuring on March 15, 1991. The consummation of the 1991 Restructuring
followed extensive negotiations and discussion among Lehigh, and representatives
of various of its creditors and preferred stockholders which began in August
1990.
Pursuant to the 1991 Restructuring, among other things,
(a) The holders of $33.84 million principal amount of
Lehigh's 13-1/2% Senior Subordinated Notes due May 15, 1998 ("13-1/2 Notes")
exchanged such securities, together with accrued but unpaid interest thereon,
for $8,642,736 principal amount of new 8% Class B Senior Secured Redeemable
Notes due March 15, 1999 issued by NICO Construction ("Class B Notes") and
212,650,560 shares of Common Stock;
(b) The holders of $8.76 million principal amount of
Lehigh's 14-7/8% Subordinated Debentures due October 15, 1995 ("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,
(c) each of the 444,068 shares of Lehigh's $2.0625
Cumulative Convertible Exchangeable Preferred Stock, no par value (the
"Cumulative Preferred Stock"), outstanding on March 15, 1991, together with the
accumulated but unpaid dividends thereon, was converted into 34 shares of Common
Stock (an aggregate of 15,098,312 common shares),
(d) NICO Construction transferred to the Trust all of
the stock of Mobile Pulley and Riverside together with approximately $4 million
face amount of certain debt securities,
(e) a group of related insurance companies, consisting
of Executive Life Insurance Company, Executive Life Insurance Company of New
York and First Stratford Life Insurance Company (collectively, "First
Executive"), exchanged $53.596 million principal amount of NICO Construction's
senior secured notes for (i) $8 million principal amount of new 9.5% Class A
Senior Secured Redeemable Notes due March 15, 1997 issued by NICO Construction
("Class A Notes"), (ii) $6 million principal amount of Class B Notes, (iii)
78,746,690 shares of Common Stock, and (iv) beneficial ownership of the Trust,
and
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(f) prior to the consummation of the 1991
Restructuring, certain amendments to the indentures, pursuant to which the
13-1/2% Notes and the 14-7/8% Debentures were issued, were adopted to eliminate
substantially all of the restrictive covenants set forth therein.
In sum, pursuant to the 1991 Restructuring, a total of
360,141,802 shares of Common Stock, $16,799,360 principal amount of Class B
Notes and $8 million principal amount of Class A Notes were issued. The total
shares of Common Stock issued pursuant to the 1991 Restructuring was reduced to
10,289,765 in December, 1991, as a result of a 35 for 1 reverse split approved
by Lehigh's stockholders. Upon consummation of the 1991 Restructuring, the
former holders of the 13-1/2% Notes, 14-7/8% Debentures and First Executive
owned approximately 90% of the outstanding shares of Common Stock (exclusive of
any Common Stock owned by them prior thereto), the former holders of Cumulative
Preferred Stock owned approximately 4% of the outstanding shares of Common Stock
(exclusive of any Common Stock owned by them prior thereto) and the holders of
Common Stock immediately prior to the 1991 Restructuring owned approximately 6%
of the outstanding shares of Common Stock.
As intended, the 1991 Restructuring substantially reduced
Lehigh's debt service obligations. However, adverse market conditions in the
interior construction industry continued to negatively impact the sales volume
of NICO Construction. Significant overhead reductions were made to reduce costs
to a level commensurate with reduced sales volume. Notwithstanding these
efforts, the effect of the general economic slowdown, particularly as it related
to the real estate market, prompted management to discontinue Lehigh's interior
construction business during the third quarter of 1991.
In September, 1991, Lehigh sold its registered service mark
"NICO" for use in the interior construction management and consulting business
in the United States. In December, 1991, Lehigh sold all ownership in its NICO
Construction and LVI Energy businesses.
Lehigh 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.
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 Class A Notes and the Class B Notes
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") were surrendered to Lehigh, together with 3,000,000
shares of its 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.
Beginning in 1994, Lehigh investigated the feasibility of
acquiring or investing in one or more other businesses that management of Lehigh
believed might have a potential for growth and profit. On July 9, 1997, Lehigh
acquired FMC pursuant to the Merger.
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 90% of HallMark's sales are
domestic and 10% are export. All of Lehigh's revenues are attributed to
HallMark.
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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 1996, 1995 and 1994, 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 2 countries.
From November 1, 1992 until October 31, 1996, HallMark's export business was
conducted primarily from Miami, Florida. HallMark now conducts its export
operation from New York City.
HallMark customers whose sales exceed 10% of Lehigh's
consolidated revenues (prior to the Merger) are: Adco Electric, Arc Electric or
and Forest Electric. These customers account for an aggregate of approximately
38% of Lehigh's consolidated revenues (prior to the Merger).
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 June 30, 1997, Lehigh had 2 employees and HallMark had 35.
Approximately 85% 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.
LEGAL PROCEEDINGS
The State of Maine and Bureau of Labor Standards commenced an
action in Maine Superior Court on or about November 29, 1990 against Lehigh 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 in December 1994.
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 Lehigh when the Dori Shoe plant
was closed it was amended so as to arguably apply to Lehigh retroactively. In a
prior case brought against Lehigh (then known as Lehigh Valley Industries) and
its former subsidiary under the Maine severance pay statute prior to its
amendment, Lehigh 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 Lehigh in the amount of $260,969.11 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). Lehigh filed an appeal
appealing that decision and the matter was argued before the Maine Supreme
Judicial Court on December 7, 1995. On February 18, 1997, the Supreme Judicial
Court of Maine affirmed the Superior Court's decision. In July 1997, the Company
agreed to pay the State of Maine $215,000 to satisfy the judgment. On or about
September 30, 1997, the Company made its payment.
Lehigh is involved in other minor litigation, none of which is
considered by management to be material to its business or, if adversely
determined, would have a material adverse effect on Lehigh's financial
condition.
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PROPERTIES
Lehigh, as of October 1, 1997 is currently occupying 2,400 square
feet at 1055 Washington Boulevard, Stamford, CT 06901 pursuant to a 3 year lease
that FMC has with its landlord at annual rental of $65,000.00 (which
progressively escalates to $75,000.00 in 1999). HallMark leases 28,250 square
feet of office and warehouse facilities in Brooklyn, New York, pursuant to a
lease expiring on June 30, 2004, at an annual rental of approximately $78,000
(which progressively escalates to $106,000 in 2003). In December 1994, HallMark
leased 4,500 square feet of additional warehouse facilities in Brooklyn, New
York, pursuant to a lease expiring on June 30, 2004, at an annual rental of
$18,000 (which progressively escalates to $21,600).
Lehigh believes that all of its facilities are adequate for the
business in which it is engaged.
FMC
FMC 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
acute care hospitals and other health care providers.
INDUSTRY BACKGROUND
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 FMC 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 HMO's, 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, HMO's, and other third party
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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 FMC is willing and able to provide.
INTERNATIONAL OPERATIONS.
The American health care delivery system and its related services
remain a valuable export. The internationally recognized level of training,
technology and services associated with the American health care systems and
their professionals continues to enjoy increasing demand among both expatriates
and wealthy nationals in FMC's expanding foreign markets. FMC's value is
reflected in the premium prices which its clients are willing to pay for access
to comprehensive American 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, FMC 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, FMC
believes that its experienced management team and operational systems will
afford FMC 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. FMC 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. FMC plans to develop its physician practice
management services division by expanding the services provided to existing
clients and obtaining new HMO contracts. FMC 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. A priority for FMC 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. FMC
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 FMC's expertise. FMC believes that its strong management team, which has
over 75 years in managing health care delivery systems, situates and enables FMC
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.
FMC 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.
Integration of Domestic Operations. In addition to sharing
management services expertise and resources, FMC 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 will create a relationship between the two
divisions warranting a consolidation. A primary objective of FMC is to provide
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management services on a long-term contractual basis for an entire integrated
delivery system in a number of local markets.
FMC'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, FMC continues to review and revise its business
mix.
Continued Development of the International Division. FMC will
continue the development and expansion of its international division. FMC
believes that through its continuing development efforts, FMC 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. FMC
expects that it will benefit from exporting the expertise and capabilities
developed by its domestic operations to its international operations. FMC has
entered into an agreement to open a western-style medical facility in Abu Dhabi,
United Arab Emirates in March 1997 status, and anticipates opening additional
facilities throughout Europe, the Middle East, Latin American and the Pacific
Rim as part of its expansion program.
FMC strives to deliver a comprehensive range of diverse medical
services to meet the specific needs of its clients in each of FMC's unique
markets. In response to demands for western style hospitals in the CIS, FMC
commenced development of the American Hospital of Moscow pursuant to which FMC
will establish the first western-style hospital in the CIS.
An integral part of FMC's strategy is to provide an environment
for medical education and training of local medical professionals and health
care administrators. In this regard, FMC 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. FMC 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 two capacities as a management
services organization: (i) owning and operating nine primary care centers
(located in Florida and Indiana) which have full risk contracts for primary care
and part B services and partial risk (50%) contracts for part A services, and
(ii) managing sixteen multi-specialty groups (located in Florida and Texas) with
fee-for-service and full risk contracts for primary care and part B services and
partial risk (50%) contracts for part A services. Full risk contracts are
contracts with managed care companies where FMC assumes essentially all
responsibility for a managed care members' medical costs and partial risk
contracts are contracts where FMC assumes partial responsibility for a managed
care members' medical costs. Revenue from the primary care centers is derived
primarily from the predetermined amounts paid per member ("capitation") by
Humana. In addition to the payments from Humana, the primary care centers
received copayments from commercial members for each office visit, depending
upon the specific plan and options selected by individual members and receive
payments from non-HMO members on a fee-for-service basis. Revenue from the
multi-specialty practices managed by FMC are determined based on per member per
month fees and/or a percentage of the net profits for Part A and Part B service
funds for such centers.
Revenue from the multi-specialty practices are obtained by FMC
through management agreements. In Texas, pursuant to a five-year management
agreement, FMC is entitled to receive (i) direct expenses incurred by FMC in
furnishing all items and services to the multi-specialty group, (ii) indirect
space costs, and an (iii) administrative fee of $30,000.00 per month. In
Florida, FMC is entitled to receive (i) from Humana Medicare members, an amount
equal to $4.50 per member per month plus a percentage of Part A profits, Part B
profits and
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Medicare Membership Conversion fees ranging from 9% down to 4% based upon
Medicare membership, and (ii) for Humana commercial HMO members, an amount equal
to $1.50 per member per month plus 5% of Part A profits and Part B profits. The
members of the practices are patients of the physicians who are enrolled as
Humana members.
FMC is not licensed to practice medicine. FMC employs or manages
licensed physicians to work at the primary care centers in Florida and Indiana
which centers provide the delivery of medicine. In Texas, FMC provides
utilization, billing, human resources, management information systems, senior
executive management, financial consulting and risk evaluation as a management
services organization. In order to better serve its existing markets and
potential markets, FMC is in the process of establishing five geographic
operating regions, to wit, the East Coast of Florida, the West Coast of Florida,
the Midwest, the Southwest and the Northeast.
In connection with the operation of such primary care centers in
Florida and Indiana, FMC employs all of the personnel, including physicians who
agree to provide the necessary clinical skills, required in such centers. FMC
compensates its physician employees bi-weekly pursuant to the terms of written
employment agreements. The written employment agreements are for a term of 2-3
years, provide for termination "with cause", provide for a base salary and a
bonus, which bonus is determined by a formula comprised of quality management,
utilization management, medical records documentation, patient
satisfaction/patient education and time and motion management, contain a
non-competition provision and contain provisions outlining the duties of the
physician and FMC.
FMC currently employs physicians in Florida and Indiana, which
states do not have regulations on the corporate practice of medicine. In Texas,
there are regulations on the corporate practice of medicine, and FMC does not
employ any physicians and has no ownership interest in or control of the entity
in which physicians are employed. In all states other than Texas, FMC retains an
ownership interest or control in the various clinics it operates. FMC operates
an office in Illinois for administrative services only and has employed
physicians in Indiana. FMC maintains a proprietary data base for physicians who
might be available to be employed at FMC's owned and operated clinics in
particular specialties and locations, and expects to create an in-house
recruiting department.
FMC generates fees at its primary care centers on a
fee-for-service basis and/or capitated basis. Under fee-for-service
arrangements, FMC 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 risk, reimbursement and
collection rates. Under capitated arrangements, FMC assumes the risk and
receives revenues at a fixed rate from HMO's at contractually agreed-upon per
member per month rates for all the primary care needs of a patient. Under its
HMO contracts, FMC 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 FMC, the revenue to FMC under
a contract may be insufficient to cover the costs of the care that was provided.
A substantial portion of the patients seeking clinical services from the
company's primary care centers are members of HMO's with which FMC maintains
contractual relationships.
Additionally, FMC has entered into contracts with HMO's to manage
the delivery of comprehensive medical services to enrollees at FMC's clinics
located in Florida, Texas and Indiana. A substantial portion of the revenues of
FMC's managed care business are derived from prepaid contractual arrangements
with Humana, pursuant to which Humana pays FMC a capitated fee. FMC employs
primary care physicians to work at FMC clinics in Florida and Indiana. FMC also
provides for other services with hospitals and medical specialists at negotiated
prices for both capitated and non-capitated (i.e. fee-for service) services. Due
to FMC's risk for the cost of providing health care services, it carefully
manages utilization of primary care, hospital and medical specialist services.
In addition, FMC contracts with primary care medical practices
pursuant to which FMC provides a variety of management services. In particular,
FMC provides management services which improve physician practices' operating
efficiencies through standardization of operating processes, including the
installation of information technology and billing systems, and assists such
practices in contracting on a network basis to insurers, HMO's and other payers.
In consideration for such management services, FMC receives an annual management
fee and participates in profits.
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FMC believes that it will have significant opportunities to
expand its managed care business primarily because physician practice management
organizations are better qualified than most third-party payers to recruit,
manage and retain physicians, deliver services on a cost-effective basis and
control medical malpractice costs. FMC believes that physician practice
management organizations are better qualified to perform these functions because
of their ability to provide and guarantee quality control by providing quality
health care while simultaneously providing favorable utilization through the use
of a medical director who manages the physicians in the center. In contrast, an
HMO is generally concerned with utilization and risks which are handled from a
centralized headquarter; while a management service organization is concerned
with providing consistent quality at the site at which healthcare services are
delivered.
Neither FMC, its subsidiary, MedExec, nor its affiliates are
licensed to operate as HMO's.
CEDA CONTRACT
FMC 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 CEDA contract, held by Midwest
Management Care, a wholly-owned subsidiary of FMC, is to provide overall
management of primary care centers. Humana, the HMO, provides the insurance
function. The contract designates FMC'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 FMC's clinics for their health care
needs.
As a result of being awarded such agreement, FMC plans to develop
eight to ten clinics on or near CEDA sites. FMC 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 accredited HMO. FMC will
be reimbursed based on what the HMO has determined the monthly amount necessary
to provide all covered services to Assigned Members. The HMO had established
capitation funding at a specific amount per member per month. The Medicare Part
B capitation rate for the richest benefit plan will be paid at an aggregate of
$140 per member per month. The Medicare Part A richest benefit plan will be paid
at an aggregate of $220 per member per month. Accordingly, FMC has recently
selected Humana Healthcare Plans, a fully accredited HMO to participate with and
is currently finalizing the terms of a partnership agreement.
Hospital Services Division
FMC, 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. To date, FMC is in the process
of negotiating healthcare facility contracts but has not yet entered into any
definitive agreements. 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 primary target groups have been identified in
order to match FMC's management teams and senior managers with businesses in
which they have experience (e.g. troubled hospitals that need crisis management;
physician groups that need the management experience of a management service
organization; extended care facilities and alternative care providers that
desire to be affiliated with a network).
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,
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(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 needed or as requested. FMC Healthcare Services
will be paid on a fee for services basis.
International Medical Clinics Division
FMC's international division currently specializes in developing
and managing health care facilities in Eastern Europe, the CIS and other
developing countries. Currently, FMC contracts to provide services in Moscow,
St. Petersburg and Kiev of the CIS; Warsaw, Poland; and Prague, Czech Republic.
FMC has recently entered into an agreement with Bin Barook Trading Company to
open and operate a western- style medical clinic in Abu-Dhabi, United Arab
Emirates, which is expected to commence operations in March 1997. FMC 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 FMC'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.
Based upon its experience, FMC'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. Local
customers currently account for approximately 25% of the international
division's revenue.
Generally, corporations are required to pay an annual membership
fee as well as placing an advance deposit with FMC for future services rendered
based on the selected membership plan and size 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. FMC also offers an insurance processing service
for corporate members. FMC's corporate membership currently includes
approximately five hundred international corporations.
In order to meet the changing needs of FMC's corporate clients
and to provide expanded access to western health care to potential clients, FMC
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, FMC'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 FMC competes for contracts with several national
and many regional and local providers of physician management services.
Furthermore, FMC competes with traditional managers of health care services,
such as hospitals, which directly recruit and manage physicians. Certain of
FMC's competitors have access to substantially greater financial resources than
FMC.
Although there exist a number of companies which offer one or
more of the services which are offered by FMC Healthcare Services, FMC 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 FMC have access to substantially greater resources
than FMC Healthcare Services.
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Internationally, FMC 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, FMC believes the market for
developing and providing management of primary care networks in the United
States which contract with HMO's and employers will increasingly be based on
patient access, quality of care, outcomes management and cost.
MARKETING
FMC's physician practice management division has developed two
marketing methods. The primary method is to conduct joint marketing efforts with
HMO's. 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 FMC 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.
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
FMC'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 FMC.
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 FMC'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 FMC's operating results.
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.
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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. Periodic
audits of health care professionals by government reimbursement programs have
not had any impact on FMC.
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. FMC has not violated the antikickback statute; if either
FMC or its employees violated the statute they could be subject to sanctions.
Only one physician holds FMC common stock and this physician does not refer any
patients to FMC, is the medical director of FMC, oversees the medical aspect of
the physician practice management division, and has no bonus arrangement with
FMC; therefore management believes the Federal anti-Kickback statute is not
applicable.
Every state imposes licensing requirements on individual
physicians and on health care facilities. In addition, federal and state laws
regulate HMO's and other managed care organizations with which FMC may have
contracts. Many states require regulatory approval before acquiring or
establishing certain types of health care equipment, facilities or programs.
Since FMC is not an insurer, there is no insurance regulation of FMC's
operations. Texas prohibits the corporate practice of medicine. The business
structure that FMC has adopted in Texas in order to comply with the prohibitions
on the corporate practice of multi-specialty medicine is a full service
management agreement wherein FMC manages an independent group of physicians by
providing utilization, billing, human resources, management information systems,
senior executive management, financial consulting and risk evaluation for a
negotiated fee.
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 FMC 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, FMC would be found to be in compliance with all
restrictions on fee splitting and the corporate practice of medicine in all
states. FMC currently operates in Texas 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 FMC 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.
FMC currently operates in only one state that prohibits the
corporate practice of medicine, which state is Texas. Risks associated with
expanding FMC's business into other states that have this type of prohibition
include (i) the issue of consolidation of revenues and (ii) preventing FMC from
exploiting the physician-patient relationship in pursuit of profits. FMC does
not consolidate the revenues from Texas, but operates as a management services
organization under a management contract. If FMC expands its business into other
states which prohibit the corporate practice of medicine, it will operate as a
management services organization under a management contract.
FMC 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 FMC's financial risk. To date, such
protection has been provided to FMC through its provider agreements with Humana.
There can be no assurances that the agreements which provide such insurance to
FMC will continue. If assumption of capitated payments risk through contracts
with HMO's could be construed as insurance, FMC believes there would be no
effect from state insurance laws due to the circumstance that all of FMC's
contracts with HMO's provides for stop-loss coverage by the HMO's. Any
determination of material noncompliance with insurance regulations or any change
in the stop-loss coverage by the HMO's could adversely affect the operations of
FMC. FMC is not aware of any specific state insurance law that could affect FMC
regarding this disclosure. Reference to state insurance laws were in response
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to the SEC's staff requesting FMC to ASSUME such legislation existed. FMC
responded to the assumption by stating that if such legislation existed it was
not aware of any effect such assumed law would have on FMC. Therefore, based on
the foregoing, FMC can not describe in any detail a law the SEC's staff
requested FMC to assume existed.
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, FMC, 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 FMC's management services involves the provision of
professional liability insurance ("PLI") coverage for its physicians. FMC
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,
FMC 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. FMC
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 FMC's operations in the
future.
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 and, no
individual item of litigation or group of similar items of litigation, taking
into account the insurance coverage available to FMC, is not likely to have a
material adverse effect on FMC's financial condition.
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. No specific monetary
amount of damages was claimed. The employee was terminated by FMC for cause
after having refused to sign a confidentiality agreement, disclosed financial
information to outsiders, violating confidentiality standards. Thereafter, on
November 26, 1996, this same employee filed an action in Dade County, Florida
alleging what is essentially a breach of fiduciary duties by FMC's Board of
Directors arising out of payments made to former partners as part of the
purchase price, which the employee believed was improper. This litigation was
settled for an amount that would be unlikely to have a material adverse effect
on FMC's financial condition.
EMPLOYEES
As of October 29, 1997, FMC had approximately 755 employees.
Approximately 20% of such employees are compensated on an hourly basis.
FMC complies with prevailing local contracts in the respective
geographic locations of particular jobs with respect to wages, fringe benefits
and working conditions.
PROPERTIES
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FMC's principal executive office is located at 1055 Washington
Boulevard, Stamford, Connecticut 06901, and its telephone number is (203)
327-0900.
FMC leases approximately 2,400 square feet in Stamford,
Connecticut. FMC leases approximately 5,000 square feet in Miami, Florida to
provide administrative support pursuant to a lease expiring on December 31, 1998
at an annual rental of $147,000. FMC leases approximately 1,400 square feet in
Tampa, Florida for use by SPI Hillsborough pursuant to a lease expiring on
November 30, 2001 at an annual rental of $26,736. FMC leases approximately 4,100
square feet in Maywood, Illinois pursuant to a lease expiring on November 30,
2001 at an annual rental of $48,000.
In addition, FMC leases two facilities in Moscow, and one each in
St. Petersberg, Kiev, Warsaw and Prague, which facilities are used as medical
clinics, at monthly rents of $16,780, $4,933, $10,326, $6,000, $3,110 and
$6,700, respectively.
FMC believes that all of its facilities are adequate for the
business in which it is engaged.
MANAGEMENT
The table set forth below sets forth information with respect to
the directors and executive officers of the Company. Information as to age,
occupation and other directorships has been furnished to the Company by the
individual named. Salvatore J. Zizza, Dennis A. Sokol, Melvin Levinson, Elliot
Cole and Richard Berman are currently directors of the Company and will serve as
directors until the next annual meeting of stockholders of the Company (or until
their respective successors are duly elected and qualified or until their
earlier death, resignation or removal).
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE CURRENT POSITION
---- --- ----------------
Dennis A. Sokol 52 Chairman of the Board, Chief Executive
Officer and Director of the Company and
Chairman of the Board and Chief Executive
Officer of FMC
Salvatore J. Zizza 51 Chief Financial Officer, Executive Vice
President, Treasurer and Director of the
Company
Robert A. Bruno 41 Vice President, General Counsel and
Secretary of the Company
Melvin E. Levinson, M.D. 68 Director of the Company
Elliot H. Cole 65 Vice Chairman of the Board and Director of
the Company
Richard Berman 53 Director of the Company
Mr. Sokol has been a director and Chairman of the Board and Chief
Executive Officer of the Company since the Merger, which was consummated on July
9, 1997. 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
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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. Zizza has been a director of the Company since 1985 (except
that he did not serve as a director during the period from March 15, 1991
through April 16, 1991) and Executive Vice President and Treasurer since 1997.
He was Chairman of the Board of the Company from April 16, 1991 until the
Merger, and was Chief Executive Officer of the Company from April 16, 1991
through August 22, 1991 and President of NICO Inc. ("NICO") from 1983 through
August 22, 1991. He also served as President of the Company 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., The Gabelli Global MultiMedia Trust Inc. and Initial
Acquisition Corp. (a NASDAQ- listed company). In 1995, Mr. Zizza became Chairman
of the Board of The Bethlehem Corporation (an AMEX company).
Mr. Bruno has served as Vice President and General Counsel of the
Company since May 5, 1993 and as Secretary since August 22, 1994. He served on
the Board from March 31, 1994 until July 9, 1997. 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).
Dr. Levinson has been a director of the Company since July 1997
and 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 been a director of the Company since July 1997 and
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. Berman has been a director of the Company since August 1997.
Since 1995 Mr. Berman has been the President of Manhattanville College. From
1991 to 1994 he was employed by Howe-Lewis International, initially as President
of North America and subsequently as President and Chief Executive Officer. He
also is a director of HCIA, Inc., Health Insurance Plan of Greater New York, the
Independent College Fund and a member of the Special Advisory Panel on Empire
Blue Cross/Blue Shield and the New York State Council on Health Care.
No family relationship exists between any of the directors and
executive officers of the Company.
All directors will serve until the annual meeting of stockholders
of the Company to be held in 1998 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 of Directors and serve at the
discretion thereof.
BOARD MEETINGS AND COMMITTEES OF THE BOARD
During 1996 the Board of Directors held three meetings which were
attended by all of the directors, except two former directors who each missed
one meeting.
The Board of Directors has a standing Audit Committee, Executive
Committee and Compensation Committee. The Audit Committee did not meet during
1996. The current members of the Audit Committee are Messrs. Zizza and Berman.
The functions of the Audit Committee include recommending to the Board of
Directors the appointment of the independent public accountants for the Company;
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
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procedures and controls on various aspects of corporate operations and
consulting with the independent public accountants on matters relating to the
financial affairs of the Company. The Executive Committee of the Board of
Directors held no meetings in 1996. The current members of the Executive
Committee are Messrs. Sokol, Zizza and Cole. The Executive Committee is
authorized (except when the Board of Directors is in session) to exercise all of
the powers of the Board of Directors (except as otherwise provided by law). The
Compensation Committee did not meet in 1996. The current members of the
Compensation Committee are Mr. Cole and Dr. Levinson. The Compensation Committee
is responsible for developing the Company's executive compensation policies,
determining the compensation paid to the Company's Chief Executive Officer and
its other executive officers and administering the Stock Option Plan and the
Incentive Compensation Plan. See "Board Report on Executive Compensation."
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 the Company whose total annual salary and bonus exceeded $100,000
for services rendered in all capacities to the Company during each of the years
ended December 31, 1996, December 31, 1995 and December 31, 1994:
SUMMARY COMPENSATION TABLE+
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------ ---------------
Securities
Underlying
Options
Other Annual (number of All Other
Name and Principal Position Year Salary Bonus Compensation(1) Shares) Compensation (2)
- ------------------------------ --------- --------------- ------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore J. Zizza (3) 1996 $200,000 0 0 0 $1,272
Chairman of the Board 1995 $200,000 0 0 0 $1,272
1994 $200,000 0 0 10,250,000(3) $ 800
Robert A. Bruno (4) 1996 $150,000 0 0 0 $1,272
Vice President and General 1995 $150,000 0 0 250,000(4) $1,272
Counsel 1994 $100,000 0 0 0 $ 822
Joseph Delowery (5) 1996 $110,784 $1,500 0 0 $1,272
President of HallMark 1995 $110,784 13,469 0 0 $1,272
1994 0 0 0 0 $1,272
</TABLE>
- ----------------------
+ Does not include the Chief Executive Officer or other executive
officers of FMC since the Merger was consummated after the end of Fiscal 1996.
For information regarding their compensation, see "Certain Relationships and
Related Transactions"
* Less than $100,000.
(1) 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.
(2) Represents premiums paid by the Company with respect to term life
insurance for the benefit of the named executive officer.
(3) Until the Merger, Mr. Zizza was Chairman of the Board, President
and Chief Executive Officer of the Company and at present he is
the Executive Vice President and Treasurer. On August 22, 1994,
the Company and Mr. Zizza entered into an employment agreement.
Mr. Zizza and the Company amended the terms of Mr. Zizza's
employment agreement effective as of the time of Merger. In
general, as amended, the employment agreement provides for his
employment through December 31, 2000 at an annual salary of
$200,000 (subject to increase, in the discretion of the Board of
Directors, if the Company acquires one
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or more new businesses, to a level commensurate with the
compensation paid to the top executives of comparable
businesses). In addition, Mr. Zizza may be entitled to a bonus,
at the discretion of the Company.
Pursuant to the employment agreement, the Company also granted to
Mr. Zizza options to purchase 10,250,000 shares of 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.
Subsequently Mr. Zizza purchased 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. Both the options and the warrants have an expiration
date of August 22, 1999, subject to earlier termination under
certain circumstances in the event of Mr. Zizza's death or the
termination of his employment. The amendment to Mr. Zizza's
employment agreement also provides that Mr. Zizza's options and
warrants to purchase an aggregate of 6,000,000 shares of Common
Stock at an exercise price of $.75 per share and options and
warrants to purchase an aggregate of 6,000,000 shares of Common
Stock at an exercise price of $1.00 per share were converted into
options to purchase 3% of the total issued and outstanding stock
of the Company, on a fully diluted basis (after giving effect to
the issuance and conversion of Preferred Stock) at a blended
exercise price of $.875 per share. See "Security Ownership of
Certain Beneficial Owners of the Company." No compensation
expense is expected to be recognized in connection with the
options because the exercise price is significantly in excess of
the market price of the Common Stock. Simultaneously with the
effectiveness of the amendment, Mr. Zizza's options and warrants
to purchase 6,000,000 shares of Common Stock at an exercise price
of $.50 per share were cancelled.
(4) On January 1, 1995, the Company and Mr. Bruno entered into an
employment agreement. providing for his employment through
December 31, 1999 as Vice President and General Counsel for the
Company 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 the Company's annual revenues exceed $25
million. In April 1995, the Company granted Mr. Bruno an option
to purchase 250,000 shares of Common Stock at an exercise price
of $.50 per share on or before December 31, 1999.
Mr. Bruno and the Company 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 was extended through December 31, 2000.
(5) During 1996, Mr. Delowery could be deemed to be an executive
officer of the Company by virtue of his position with HallMark
Electrical Supplies Corp. ("HallMark"). HallMark was the
Company's principal operating subsidiary prior to the Merger.
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COMPENSATION OF DIRECTORS
Prior to the Merger, the Company's directors received no
compensation for serving on the Board of Directors other than the reimbursement
of reasonable expenses incurred in attending meetings. Since the consummation of
the Merger, executive directors have continued to receive no compensation;
however, each non- executive director now is entitled to receive annually shares
of Common Stock with a fair market value of $10,000 (pro-rated in 1997 to
reflect the portion of the year following the Merger); as of November 7, 1997,
the non- executive directors had not received any shares for 1997. In April
1996, the Company granted options to purchase 15,000 shares of Common Stock at
an exercise price of $.50 per share to a former non-executive officer director
and options to purchase 10,000 shares of Common Stock at an exercise price of
$.50 per share to three former non- executive officer directors, two of whom
were members of the Compensation Committee.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation and By-laws of the Company
contain provisions permitted by the Delaware General Corporation Law (under
which the Company 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 the Company if they meet
certain specified conditions. In addition, the Certificate of Incorporation of
the Company contains provisions that limit the monetary liability of directors
of the Company for certain breaches of their fiduciary duty of care and provide
for the advancement by the Company to directors and officers of expenses
incurred by them in defending suits arising out of their service as such.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
OPTIONS
No options were granted during 1996 to the executive officers of
the Company named in the Summary Compensation Table or to other employees of the
Company. However, four former non-executive officer directors were granted stock
options in 1996. See "Compensation of Directors." In July 1997, the Board of
Directors established, subject to stockholder approval, the Lehigh Group, Inc.
Stock Option Plan (the "Stock Option Plan") and the Incentive Compensation Plan
(the "Incentive Compensation Plan"). In connection with the Reverse Split, the
Company is seeking shareholder approval of the Stock Option Plan and the
Incentive Compensation Plan which are described below.
No options were exercised by the executive officers of the
Company named in the Summary Compensation Table during the fiscal year ended
December 31, 1996. The following table sets forth the number and dollar value of
options held by such persons on December 31, 1996, none of which were "in the
money" at December 31, 1996.
AGGREGATED OPTION EXERCISES IN
1996 AND YEAR-END OPTIONS
Number of Unexercised Options and Warrants at
Year-End
--------------------------------------------
Name Exercisable Unexercisable
---- ------------------------ ---------------
Salvatore Zizza 6,000,000(1) 12,000,000(1)
Robert Bruno 250,000(2)
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(1) See note 3 of the Summary Compensation Table.
(2) See note 4 of the Summary Compensation Table.
THE STOCK OPTION PLAN
The purpose of the Stock Option Plan is to advance the Company's
interests by providing additional incentive to attract and retain in the employ
of the Company and its subsidiaries, qualified and competent persons to provide
management services, to encourage the sense of proprietorship and to stimulate
the active interest of such persons in the development and financial success of
the Company and its subsidiaries. The Stock Option Plan provides for the grant
of incentive stock options and nonqualified stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as stock appreciation rights ("Rights") with respect to stock options and
restricted stock ("Restricted Stock") awards.
The Stock Option Plan, which is administered by the Compensation
Committee of the Board of Directors (but can also be administered directly by
the Board of Directors), currently authorizes the issuance of a maximum of
500,000 shares of Common Stock (on a post Reverse Split basis), which may be
newly issued shares or previously issued shares held by any subsidiary of the
Company. If any award under the Stock Option Plan terminates, expires
unexercised, or is cancelled, the shares of Common Stock that would otherwise
have been issuable pursuant thereto will be available for issuance pursuant to
the grant of new awards.
The purchase price of each share of Common Stock purchasable
under an incentive option granted under the Stock Option Plan is to be
determined by the Compensation Committee at the time of grant, but is to not be
less than 100% of the fair market value of a share of Common Stock on the date
the option is granted; PROVIDED, HOWEVER, that with respect to an optionee who,
at the time such incentive option is granted, owns more than 10% of the total
combined voting power of all classes of stock of the Company or of any of its
subsidiaries, the purchase price per share is to be at least 110% of the fair
market value per share on the date of grant. The term of each option is to be
fixed by the Compensation Committee, but no option is to be exercisable more
than five years after the date such option is granted.
The aggregate fair market value, determined as of the date the
incentive option is granted, of shares of Common Stock for which incentive
options are exercisable for the first time to any optionee during any calendar
year under the Stock Option Plan (and/or any other stock options plans of the
Company or any of its subsidiaries) shall not exceed $100,000. The aggregate
number of shares of Common Stock subject to options granted under the Stock
Option Plan granted during any calendar year any one director is not to exceed
that number of shares as equals ten percent of the outstanding shares of the
Company for which options may be granted under the Stock Option Plan.
The Compensation Committee shall have the authority to grant
Rights with respect to all or some of the shares of Common Stock covered by any
option, which Rights may be granted together with or subsequent to the grant of
the option. Rights entitle the holder to cash equal to the difference between an
Offer Price Per Share (as defined in the Stock Option Plan) and the exercise
price of the related option if shares of Stock representing 20 percent or more
of the aggregate votes of the Stock voting together as a single class, provided,
however, that each share of Preferred Stock will have the number of votes
provided for such share pursuant to its Certificate of Designation is acquired
pursuant to a tender offer or exchange offer. If a Right is exercised, the
related Option is terminated, and if an option terminates or is exercised, the
corresponding Right terminates.
In addition, the Compensation Committee shall have the authority
to award Restricted Stock which entitles the recipient to acquire, at no cost or
for a purchase price determined by the Compensation Committee, shares of Common
Stock subject to such restrictions and conditions as the Compensation Committee
may determine at the time of grant. Conditions may be based on continuing
employment and/or achievement of pre-established performance goals and
objectives. A recipient of Restricted Stock shall have the rights of a
stockholder with respect to the voting of the Restricted Stock, subject to such
other conditions contained in the written instrument evidencing the Restricted
Stock. However, generally Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of, and, generally,
upon the termination of the recipient's employment with the Company, the Company
shall have the right, at the discretion of the Compensation Committee, to
repurchase such Restricted Stock at its purchase price. Nonetheless, once the
pre-established performance goals, objectives and other conditions have been
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attained, such shares of Restricted Stock shall no longer be Restricted Stock
and shall be deemed "vested" and will be freely transferable.
The Board of Directors may amend, suspend, or terminate the Stock
Option Plan, except that no amendment may be adopted that would impair the
rights of any optionee without his consent. Further, no amendment may be adopted
which, without the approval of the stockholders of the Company, would (i)
materially increase the number of shares issuable under the Stock Option Plan,
except as provided in itself, (ii) materially increase the benefits accruing to
optionees under the Stock Option Plan, (iii) materially modify the eligibility
requirements for participation in the Stock Option Plan, (iv) decrease the
exercise price of an incentive option to less than 100% of the fair market value
per share of Common Stock on the date of grant or the exercise price of a
nonqualified option to less than 80% of the fair market value per share of
Common Stock on the date of grant, or (v) extend the term of any option beyond
that provided for in the Stock Option Plan.
The Compensation Committee may amend the terms of any option
previously granted, prospectively or retroactively, but no such amendment may
impair the rights of any optionee without his consent. The Compensation
Committee may also substitute new options for previously granted options,
including options granted under other plans applicable to the participant and
previously granted options having higher option prices, upon such terms as it
may deem appropriate.
The number of shares of Common Stock available under the Stock
Option Plan and the terms of any option or other award granted thereunder are
subject to adjustment in the event of a merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the shares of Common Stock, if the Compensation Committee determines
that such event equitably requires such an adjustment.
As of November 6, 1997, there were no options outstanding under
the Stock Option Plan and no Restricted Stock had been awarded.
INCENTIVE COMPENSATION PLAN
The purpose of the Incentive Compensation Plan is to advance the
Company's interests by providing additional incentives to those key employees of
the Company who contribute the most to the growth and profitability of the
Company and to encourage such key employees to continue as employees by making
their compensation competitive with compensation opportunities in competing
businesses and industries.
The Incentive Compensation Plan, which is administered by the
Compensation Committee of the Board of Directors (but can also be administered
directly by the Board of Directors), authorizes the Compensation Committee to
determine by March 15 of each year which key employees will be eligible in such
year for incentive compensation pursuant to the Incentive Compensation Plan (the
"Participants") and to establish targets for such fiscal year for the Company's
earnings per share. If the targets are achieved then each Participant will
receive (i) a cash bonus equal to 10% of his base salary for such year, (ii) an
amount of Common Stock (the "Stock Bonus") determined by dividing 30% of his
base salary by fifty percent (50%) of the average of the high and low closing
prices for the Common Stock during such year (or, if lower, 50% of the closing
sales price on the last trading day of such year), and (iii) a cash payment
sufficient to satisfy such participant's income tax liability with respect to
his Stock Bonus. There is no maximum number of shares of Common Stock which may
be awarded under the Incentive Compensation Plan.
The Compensation Committee may amend the Incentive Compensation
Plan, except that no amendment may be adopted that would impair the rights of
any Participant with respect to the year in which such amendment has been
adopted.
The Plan shall terminate on December 31, 2002 except for the
delivery of shares of Common Stock and/or cash due to Participants with respect
to such year.
If, prior to the end of the any Fiscal Year, a Participant's
employment terminates on account of (i) death, (ii) retirement, (iii) total and
permanent disability, or (iv) the Company's termination of the Participant
without
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<PAGE>
Cause, the Participant will nonetheless remain eligible to receive amounts under
the Incentive Compensation Plan for such year if the Participant shall have been
an active, full-time employee for a period of at least two years preceding such
termination. In all other cases, the Participant will be ineligible.
No bonuses or stock have been awarded under the Incentive
Compensation Plan.
BOARD REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for developing the
Company's executive compensation policies, determining the compensation paid to
the Company's Chief Executive Officer and its other executive officers and
administering the Stock Option Plan and the Incentive Compensation Plan. The
Compensation Committee did not meet in 1996 since all executives are paid
pursuant to previously executed employment agreements and the report is the
report of the entire Board of Directors.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until the meeting on July 9, 1997 at which the current Board of
Directors was elected, Anthony Amburst and Charles Gargano were members of the
Compensation Committee and were directors. Currently, Mr. Cole and Dr. Levinson
are members of the Compensation Committee and are directors. There are no
compensation committee interlock relationships to be disclosed pursuant to Item
402 of Regulation S-K.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FMC and Generale De Sante International, Plc ("GDS") are parties
to a Subscription Agreement, dated June 11, 1996 pursuant to which GDS paid
$5,000,000 in order to acquire a variety of ownership interests in FMC and its
subsidiaries, including (i) 10% of the outstanding shares of FMC's common stock
(the FMC Common Stock"), each share of which was automatically exchanged
pursuant to the Merger for 1,127.675 shares of Common Stock and 103.7461 shares
of Preferred Stock, and (ii) shares of FMC's 9% Series A Convertible Preferred
Stock (the "FMC Preferred Stock") convertible into 10% of the shares of FMC
Common Stock, which Shares of FMC Preferred Stock were converted following the
Merger. Consequently, when GDS converts its shares of FMC Preferred Stock, GDS
received shares of Lehigh Common Stock and Lehigh Preferred Stock. Together with
the shares issued for the FMC Common Stock, these shares would give GDS a total
of approximately 23% ownership interest and voting power of the Company. See
"Security Ownership of Certain Beneficial Owners of the Company."
For information regarding the employment arrangements and options
of Messrs. Zizza and Bruno, see notes 3 and 4 to the Summary Compensation Table
and note 3 to the table regarding Security Ownership of Certain Beneficial
Owners of the Company.
On January 1, 1996, FMC and Dr. Levinson, who is a director of
the Company, entered into an agreement for the period commencing January 1, 1996
and terminating December 31, 1998 and providing for a payment of $100,000
(subject to increase in accordance with the consumer price index) annually
during the period.
FMC and Dennis A. Sokol, the Chairman of the Board, Chief
Executive Officer and Director of the Company and Chairman of the Board and
Chief Executive Officer of FMC, have an oral agreement whereby FMC has agreed to
pay Mr. Sokol an annual salary of $300,000 per year for his services as FMC's
Chairman of the Board and Chief Executive Officer. At the discretion of the
Compensation Committee of the Board of FMC, Mr. Sokol may be awarded an annual
bonus.
The Company and Elliot H. Cole, the Vice Chairman of the Board
and Director of the Company, have an oral agreement whereby the Company has
agreed to pay Mr. Cole a consulting fee of $60,000 per year for his services as
the Company's Vice Chairman of the Board.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE COMPANY
The following table indicates the number of shares of Common
Stock and Preferred Stock beneficially owned as of November 7, 1997 by (i) each
person (including any "group," as that term is used in Section 13(d)(3) of the
Exchange Act) known to the Company to be the beneficial owner of more than 5% of
the Common Stock or the Preferred Stock, (ii) each director and nominee for
director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table set forth above and (iv) all directors and executive
officers of the Company as a group. Unless otherwise indicated, the address of
each person listed below is the Company's principal executive offices.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE COMPANY
<TABLE>
<CAPTION>
Common Stock(1) Preferred Stock
-------------------------------------------- ---------------------------------------------------
Amount and Nature of Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(2) Percent of Class Beneficial Ownership(2) Percent of Class
- ------------------------ ------------------------ ------------------- --------------------------- ------------------
<S> <C> <C> <C> <C>
Generale De Sante 2,559,822 11.35% 235,504 22.70%
International PLC
4 Cornwall Terrace
London NW1 4QP
ENGLAND
SAJH Partners 2,121,157(3) 9.41% 195,146(3) 18.81%
Salvatore J. Zizza 8,735,630(4) 28.15% -- --
Robert A. Bruno 312,760(5) 1.38% -- --
Dennis A. Sokol 603,306(6) 2.68% 55,504(6) 5.35%
Melvin E. Levinson 558,199 2.48% 51,354 4.95%
Elliot H. Cole 401,452 1.78% 36,934 3.56%
Richard Berman
All executive officers -- -- -- --
and directors as a group
(7 persons) 15,292,326(7) 57.23% 574,442(6) 55.37%
</TABLE>
* Less than 1%.
(1) Does not include shares of Common Stock which are obtainable upon
the conversion of shares of Preferred Stock since the shares are
not convertible until such time as the Company's authorized and
unissued shares of Common Stock exceeds the aggregate number of
shares of Common Stock into which all of the authorized shares of
Preferred Stock is convertible, which will require either an
amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock or a
reverse stock split such as the Reverse Split.
(2) 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.
(3) Dennis Sokol is the Managing Partner of SAJH Partners and has a
1% partnership interest in the partnership and consequently could
be deemed under Rule 13d-3 of the Exchange Act to have beneficial
ownership of such shares. Mr. Sokol disclaims ownership of all
such shares other than as a result of his 1% partnership
interest.
(4) Includes options to purchase 8,480,128 shares of Common Stock for
$.875 per share, which options were received on July 9, 1997,
when (i) Mr. Zizza's options and warrants to purchase 12,000,000
shares of Common Stock, half exercisable at $.75 per share and
half exercisable at $1.00 per share, were converted into options
to purchase three percent of the total issued and outstanding
stock of the Company on a fully diluted basis immediately after
the merger (after giving effect to the issuance of Common Stock
and the issuance and conversion of Preferred Stock pursuant to
the Merger Agreement) and (ii) Mr. Zizza's options and warrants
to purchase 6,000,000 shares of Common Stock at an exercise price
of $.50 per share were cancelled. See note 3 of the Summary
Compensation Table.
(5) Includes options to purchase 250,000 shares of Common Stock at
$.50 per share. See note 4 of the Summary Compensation Table.
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<PAGE>
(6) Excludes shares as indicated in note (3) above.
(7) Includes shares as indicated in notes (4) and (5) above. Excludes
shares as indicated in note (3) above.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth (i) the number of Shares to be
offered for resale by each Selling Stockholder and (ii) the number and
percentage of Shares to be held by each Selling Stockholder after completion of
the offering.
<TABLE>
<CAPTION>
Number of Common
Number of Number of Shares Shares/Percentage of Class to
Shares Beneficially to be Sold in the be Owned After Completion
Name and Address(1)(2) Owned Prior to the Offering(3) Offering Resale of the Offering
- ------------------------------------ ------------------------------ ----------------- ------------------------------
Number Percent
------ -------
<S> <C> <C> <C> <C>
Generale de Sante 61,435,822 61,435,822 0 *
Dennis Sokol 14,479,306 14,479,306 0 *
Elliot Cole 9,634,952 9,634,952 0 *
Shannon Slusher 9,634,952 9,634,952 0 *
Myles Druckman 3,545,475 3,545,475 0 *
Elena Korchagina 2,977,044 2,977,044 0 *
Vladimir Checklin 4,817,476 4,817,476 0 *
James C. Gale/Judith S. Hazelton 2,219,219 2,219,219 0 *
James C. Gale Trustee FBO Arena Gale 784,953 784,953 0 *
Jack Weinstein 351,910 351,910 0 *
Robert Weinstein 108,261 108,261 0 *
Doug Kleinberg 81,133 81,133 0 *
Lionel G.H. Hest 1,028,352 1,028,352 0 *
Robert Sablowsky 595,309 595,309 0 *
Charles Greenberg 1,028,352 1,028,352 0 *
Global Asset Allocation Consultant Inc. 3,816,002 3,816,002 0 *
Gruntal & Co. 1,001,474 1,001,474 0 *
Mark Kugler 13,396,699 13,396,699 0 *
Melvin Levinson, M.D 14,146,669 14,146,669 0 *
Stuart Kaufman 14,146,669 14,146,669 0 *
Jeff Fine 14,146,669 14,146,669 0 *
Michael Cavanaugh 12,232,959 12,232,959 0 *
Asif Jamal 4,871,482 4,871,482 0 *
Stephanie Schmidt 4,871,482 4,871,482 0 *
SAJH 50,907,657 50,907,657 0 *
Lindsay D. Kugler 6,657,908 6,657,908 0 *
Gregg Fine 3,328,954 3,328,954 0 *
Kevin Fine 3,328,954 3,328,954 0 *
Jamie Kaufman 3,328,954 3,328,954 0 *
Debbie Susskind 3,328,954 3,328,954 0 *
Mike Levinson 3,328,954 3,328,954 0 *
Jill Kaufman 3,328,954 3,328,954 0 *
Charles Pendola(4) 1,625,000 1,625,000 0 *
Joel Feiss, M.D.(5) 7,000,000 7,000,000 0 *
</TABLE>
* Less than 1%
(1) The persons named in the table, to the Company's knowledge, have
sole voting and investment power with respect to all shares shown
as beneficially owned by them, subject to community property laws
where applicable and the footnotes to this table. The calculation
of Common Shares beneficially owned was determined in accordance
with Rule 13d-3 of the Exchange Act.
(2) Unless otherwise stated, the address for each Selling Stockholder
is c/o First Medical Corporation, 1055 Washington Boulevard,
Stamford, Connecticut 06901.
(3) Assumes all the shares of Preferred Stock owned by each Selling
Stockholder have been converted into shares of Common Stock.
(4) The address for the selling Stockholder is 18 Guild Ct.,
Plainview, New York 11803
(5) The address for the Selling Stockholder is c/o West Broward
Gastroenterology, 201 Northwest 82nd Avenue, Suite 202,
Plantation, Florida 33324
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<PAGE>
DESCRIPTION OF SECURITIES
The following is a summary of certain provisions of the Company's
Certificate of Incorporation, the Certificate of Designation and rights accorded
to holders of Common Stock and Preferred Stock generally and as a matter of law,
and does not purport to be complete. It is qualified in its entirety by
reference to the Certificate of Incorporation, the Certificate of Designation,
the Company's By-Laws, and the Delaware General Corporation Law.
COMMON STOCK
GENERAL. As of November 7, 1997, there were 22,553,500 shares of
Common Stock outstanding. Under the Company'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 Common Stock. The Company
has 100,000,000 shares of common stock authorized and 5,000,000 preferred shares
authorized.
DIVIDENDS. Holders of Common Stock may receive dividends if, as
and when dividends are declared on Common Stock by the Company'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 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 except for the Preferred Stock. The ability of the
Company to lawfully declare and pay dividends on Common Stock is also limited by
certain provisions of applicable state corporation law. It is not expected that
dividends will be declared on the Common Stock in the foreseeable future.
DISTRIBUTIONS IN LIQUIDATION. If the Company is liquidated,
dissolved and wound up for any reason, distribution of the Company's assets upon
liquidation would be made first to the holders of preferred shares, if any, and
then to the holders of Common Stock. If the Company'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 the Company would be
distributed pro rata to the holders of shares of preferred stock and no
distribution will be made to the holders of Common Stock. There are no shares of
preferred stock issued or outstanding at this time except for the Preferred
Stock. A consolidation or merger of the Company with or into any other company,
or the sale of all or substantially all of the Company's assets, is not deemed a
liquidation, distribution or winding up for this purpose.
VOTING RIGHTS. The holders of record of Common Stock and
Preferred Stock (collectively, the "Stock"), the Company's only classes or
series of voting stock currently outstanding, are entitled, as a result of the
Reverse Split, to one vote and 8-1/3 votes respectively for each share held,
except that the Certificate of Incorporation provides for cumulative voting in
all elections of directors. 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. Such outstanding shares of the Stock present in person or
by Proxy representing one third of the votes to which all of the outstanding
shares of Stock are entitled to vote (provided, however, that each share of
Preferred Stock will have 8-1/3 votes) is required for a quorum.
PREFERRED STOCK
GENERAL. The Certificate of Incorporation authorizes the issuance
of 5,000,000 shares of preferred stock, $.001 par value of which the Company has
issued 1,037,461 shares of Preferred Stock. The terms of the Preferred Stock are
included in the Certificate of Designation. The Preferred Stock possesses 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 the Certificate
of Designation. The Preferred Stock does not have any preemptive rights. The
Preferred Stock is not listed on any national securities exchange. Set forth
below is a description of the rights and preferences of the Preferred Stock.
DIVIDEND RIGHTS. Each share of Preferred Stock is entitled to
dividends, pari passu with dividends declared and paid with respect to the
Common Stock, equal to, as a result of the Reverse Split, 81/3 times the amount
declared and paid with respect to each share of Common Stock.
VOTING RIGHTS. Each share of Preferred Stock is entitled, as a
result of the Reverse Split, to 81/3 votes, on any matter submitted to a vote of
stockholders, to be voted together with the Common Stock. The Preferred Stock
has no right to vote separately, as a class, except as provided by law.
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<PAGE>
CONVERSION RIGHTS. Each share of Preferred Stock is convertible,
as a result of the Reverse Split, at any time into 81/3 shares, of Common Stock,
subject to adjustment in certain circumstances. In order to exercise the
conversion privilege, the holder of a share of Preferred Stock shall surrender
the certificate representing such share at the office of the transfer agent for
the 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 Common Stock to be issued.
The number of shares of Common Stock issuable upon the conversion
of shares of Preferred Stock is subject to adjustment under certain
circumstances, including (a) the distribution of additional shares of Common
Stock to all holders of Common Stock; (b) the subdivision of shares of Common
Stock; (c) a combination of shares of Common Stock into a smaller number of
shares of Common Stock; (d) the issuance of any securities in a reclassification
of the Common Stock; and (e) the distribution to all holders of Common Stock of
any shares of the Company's capital stock (other than Common Stock) or evidence
of its indebtedness, assets (other than certain cash dividends or dividends
payable in 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 Common Stock unless, prior thereto, the holders of the
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 Preferred Stock shall rank
prior to the Common Stock and junior to any other preferred stock issued by the
Company, unless the terms of such other preferred stock provide otherwise.
TRANSFER AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Common
Stock is American Stock Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
This offering is self-underwritten; neither the Company nor the
Selling Stockholders have employed an underwriter for the sale of Shares by the
Selling Stockholders. The Company will bear all expenses in connection with the
preparation of this Prospectus. The Selling Stockholders will bear all expenses
associated with the sale of the Shares.
The Shares may be offered for the account of the Selling
Stockholders from time to time on any stock exchange upon which shares of Common
Stock are traded, at fixed prices that may be changed or at negotiated prices.
The Selling Stockholders may effect such transactions by selling shares to or
through broker-dealers, and all such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the Selling Stockholders
and/or the purchasers of Shares for whom such broker-dealers may act as agents
or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Any broker-dealer acquiring Shares from the Selling Stockholders
may sell the shares either directly, in its normal market-making activities,
through or to other brokers on a principal or agency basis or to its customers.
Any such sales may be at prices then prevailing on the NYSE or at prices related
to such prevailing market prices or at negotiated prices to its customers or a
combination of such methods. The Selling Stockholders and any broker- dealers
that act in connection with the sale of the Shares hereunder might be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act; any
commissions received by them and any profit on the resale of shares as principal
might be deemed to be underwriting discounts and commissions under the
Securities Act. Any such commissions, as well as other expenses incurred by the
Selling Stockholders and applicable transfer taxes, are payable by the Selling
Stockholders.
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<PAGE>
EXPERTS
The financial statements and schedule of the Company included in
this 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 in the three
year period ended December 31, 1995, which are included in this 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.
The audited consolidated financial statements of First Medical
Corporation, as of December 31, 1996, and for the year then ended, which is
included in this Prospectus, has been so included in reliance on the report in
the year ended December 31, 1996 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.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby
will be passed upon for the Company by Olshan Grundman Frome & Rosenzweig LLP,
New York, New York.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act covering the securities described herein.
This 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.
The Company hereby undertakes to provide without charge to each
person to whom a copy of this Prospectus has been delivered, on the written or
oral request of any such person, a copy of any or all of the documents referred
to above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Requests for such copies should be
directed to Robert A. Bruno, The Lehigh Group, Inc., 1055 Washington Boulevard,
Stamford, CT 06901, (telephone (203) 327-0900).
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses
which will be paid by the Registrant in connection with the issuance and
distribution of the securities being registered. With the exception of the
registration fee, all amounts shown are estimates.
Registration fee............................................. $_______*
Printing expenses (other than stock certificates)............ 1,000
Printing and engraving of stock certificates................. 10,000
Legal fees and expenses (other than Blue sky)................ 25,000
Accounting fees and expenses................................. 52,000
Transfer Agent and Registrar fees and expenses............... 5,000
Miscellaneous expenses.......................................
Total........................... 95,000
======
- -------------
* Paid in full
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation and
By-laws of the Company contain provisions permitted by the Delaware General
Corporation Law (under which the Company 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 the
Company if they meet certain specified conditions. In addition, the Restated
Certificate of Incorporation of the Company contains provisions that limit the
monetary liability of directors of the Company for certain breaches of their
fiduciary duty of care and provide for the advancement by the Company to
directors and officers of expenses incurred by them in defending suits arising
out of their service as such.
The Registrant's authority to indemnify its
directors and officers is governed by the provisions of Section 145 of the
Delaware General Corporation Law, as follows:
(a) A corporation shall have the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than action by or in the right
of the corporation) by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer,
II-1
<PAGE>
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of this section, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and
(b) of this section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct set
forth in subsections (a) and (b) of this section. Such determination shall be
made (1) by the board of directors by a majority vote of directors who are not
parties to such action, suit or proceeding even though less than a quorum, or
(2) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition or such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of this section shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this section, references to the
"corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had the power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to
"other enterprises" shall include employee benefit plans, references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan, and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries, and a person who acted
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<PAGE>
in good faith and in a manner reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the corporation" as
referred to in this section.
(j) The indemnification and advancement of expenses
provided by, or granted pursuant to, this section shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On August 22, 1994, pursuant to a private
placement, the Company sold 2,575,000 shares of Common Stock at an aggregate
purchase price of $1,030,000 ($.40 per share). On November 18, 1994, the Company
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 October 29, 1996, in connection with the
execution of the Merger Agreement, the Company issued a convertible debenture in
the amount of $300,000 to First Medical Corporation. On February 7, 1997, First
Medical Corporation elected to convert its debenture in 937,500 shares of the
Company's common stock.
ITEM 16. 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(a) Amended and Restated Agreement and Plan of Merger,
dated as of October 29, 1996, between the
Registrant, the Lehigh Management Corp. ("Merger
Sub") and First Medical Corporation ("FMC"),
(incorporated by reference to Appendix A to the
Registrant's Proxy Statement for a Special Meeting
of Shareholders to be held July 9, 1997).
2(b) First Amendment to the Merger Agreement, dated July
9, 1997 between the Registrant, Merger Sub and FMC.
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).
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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).
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 and the tax consequences of the
transaction (incorporated by reference to Exhibit
5.1 to Amendment No. 4 to Registrant's Registration
Statement on Form S-4).
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).
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<PAGE>
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 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).*
*11 Computation of earnings per share
- ------------
* add employment agreements with FMC individuals, stock plans.
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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.
23.3 Consent of Olshan Grundman Frome & Rosenzweig LLP
(included in Exhibit 5.1).
- ------------------
* Filed herewith.
ITEM 17. 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
Registration 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 company 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 of 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:
(1) To file, during any
period in which offers or sales are being made, a
post- effective amendment to this registration
statement to (i) include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price
represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; (iii) include any
material information with respect to the plan of
distribution not previously disclosed in the
registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose
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.
(3) To remove from
registration by means of a post effective amendment
any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby
undertakes that (1) for purposes of determining any
liability under the Securities Act of 1933, the
information omitted from the form of prospectus
filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration
statement as of the time it was declared effective;
and (2) for the purpose of determining any
liability under the Securities Act of 1933, each
post-effective amendment that contains a form of
prospectus 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.
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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 7th day of November, 1997.
THE LEHIGH GROUP INC.
By:
----------------------------
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<PAGE>
POWERS OF ATTORNEY AND SIGNATORIES
Pursuant to the requirements of the Securities Act
of 1933, as amended, this Registration Statement has been signed by the
following persons in the capacities and on the date indicated. Each of the
undersigned officers and directors of The Lehigh Group Inc. hereby constitutes
and appoints Dennis A. Sokol, Salvatore J. Zizza and Robert A. Bruno and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him in his name in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and to prepare any and all exhibits thereto, and other documents in
connection therewith, and to make any applicable state securities law or blue
sky filings, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done to enable The Lehigh Group Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys- in-fact
and agents, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Dennis A. Sokol Chairman of the Board, Director November 7, 1997
- ------------------------ and Chief Executive Officer
Dennis A. Sokol
/s/ Salvatore J. Zizza Executive Vice President, Treasurer, November 7, 1997
- ------------------------ Director and Chief Financial Officer
Salvatore J. Zizza
/s/ Robert A. Bruno Vice President and Secretary November 7, 1997
- ------------------------
Robert A. Bruno
/s/ Melvin E. Levinson Director November 7, 1997
- ------------------------
Melvin E. Levinson
/s/ Elliot H. Cole Vice Chairman of the Board and November 7, 1997
- ------------------------ Director
/s/ Richard Berman Director November 7, 1997
- ------------------------
Richard Berman
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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, as amended (incorporated by reference to
Exhibit 2.1 to the Registrants Proxy Statement for a Special
Meeting of Stockholders to be held July 9, 1997).
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 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
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<PAGE>
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 and the tax
consequences of the transaction (incorporated by reference to
Exhibit 5.1 to Amendment No. 4 to Registrant's Registration
Statement on Form S-4).
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).
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).
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<PAGE>
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 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).
*11 Computation of earnings per share.
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).
- ------------------
* Filed herewith.
II-11
<PAGE>
Exhibit 11
THE LEHIGH GROUP INC.
Computation of Primary and Fully Diluted Earning Per Share
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loss from continuing operations before extraordinary item (920) (558) (410)
Income (loss) before extraordinary item (670) (308) 4,590
Net income (loss) (288) (308) 4,590
Primary Earnings per Share:
Loss from continuing operations before extraordinary item (0.09) (0.05) (0.04)
Income (loss) before extraordinary item 0.07 (0.03) 0.45
Net Income (loss) (0.03) (0.03) 0.45
Fully Diluted Earnings per Share:
Loss from continuing operations before extraordinary item (0.09) (0.05) (0.04)
Income (loss) before extraordinary item (0.07) (0.03) 0.45
Net Income (loss) (0.03) (0.03) 0.45
Weighted average number of shares outstanding 10,339,250 10,339,9250 8,601,750
Assumed issuances under exercise of stock options --(1) --(1) 1,567,396
10,339,250 10,339,250 10,169,000
============= ============= =============
</TABLE>
(1) The options outstanding in 1995 and 1996 were anti-dilutive and
therefore not included.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of:
The Lehigh Group, Inc.
We consent to the inclusion of our report dated February 18, 1996, with respect
to the financial statements of The Lehigh Group, Inc. as of December 31, 1996,
and the related statements of operations, stockholders' deficit, and cash flows
for the year then ended, which report appears in the Amendment No. 1 to Form S-1
(No. 333- 11955) and reference to our firm under the heading "Experts".
BDO Seidman, LLP
November 7, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of:
SPI Managed Care of Broward, Inc.
We consent to the inclusion of our report dated May 17, 1996, with respect to
the financial statements of SPI Managed Care of Broward, Inc. as of December 31,
1995 and 1994, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the two year period ended
December 31, 1995, which report appears in Amendment No. 1 to Form S-1 (No.
333-11955) of The Lehigh Group, Inc. dated November 7, 1997 and reference to our
firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
November 7, 1997
<PAGE>
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 Amendment No. 1 to Form S-1 (No. 333-11955) of The
Lehigh Group, Inc. dated November 7, 1997 and reference to our firm under the
heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
November 7, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of
First Medical Corporation
We consent to the inclusion of our report dated March 25, 1997, with respect to
the consolidated balance sheet of First Medical Corporation as of December 31,
1996 and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended which report appears in Amendment No. 1
to Form S-1 (No. 333-11955) of The Lehigh Group, Inc. dated November 7, 1997 and
reference to our firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
November 7, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of:
Broward Managed Care, Inc.
We consent to the inclusion of our report dated May 7, 1996, with respect to the
financial statements of Broward Managed Care, Inc. as of December 31, 1995, and
related statements of operations, stockholders' deficit, and cash flows for the
year then ended, which report appears in Amendment No. 1 to Form S-1 (No.
333-11955) of The Lehigh Group, Inc. dated November 7, 1997 and reference to our
firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
November 7, 1997
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
MEDEXEC, INC. AND SUBSIDIARIES; SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.:
Independent Auditors' Report................................................F-2
Combined Balance Sheets - December 31, 1995 and 1994.......................F-3
Combined Statements of Operations for Each of The Years in The
Three-Year Period Ended December 31, 1995................................F-4
Combined Statements of Stockholders' Equity For Each of The
Years in The Three-Year Period Ended December 31, 1995...................F-5
Combined Statements of Cash Flows for Each of The Years
in The Three-Year Period Ended December 31, 1995.........................F-6
Notes to Combined Financial Statements......................................F-7
BROWARD MANAGED CARE, INC.
Independent Auditors' Report..............................................F-23
Balance Sheet - December 31, 1995.........................................F-24
Statement of Operations for the years Ended December 31, 1995.............F-25
Statement of Stockholders' Deficit for the year ended
December 31, 1995.......................................................F-26
Statement of Cash Flows for the year ended Deecmber 31, 1995..............F-27
Notes to Financial Statements.............................................F-28
SPI MANAGED CARE OF BROWARD, INC.
Independent Auditors' Report..............................................F-34
Balance Sheet - December 31, 1995 and 1994................................F-35
Statements of Operations for the years ended December 31, 1995
and 1994................................................................F-36
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995 and 1994........................................F-37
Statements of Cash Flows for the years ended December 31, 1995
and 1994................................................................F-38
Notes to Financial Statements.............................................F-39
FIRST MEDICAL CORPORATION ("FMC"):
Consolidated Balance Sheet - June 30, 1997 (Unaudited)......................F-42
Consolidated Statement of Income for the Six Months Ended
June 30, 1997.............................................................F-43
Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 1997.......................................................F-44
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1997.............................................................F-45
Notes to Consolidated Financial Statements..................................F-46
Independent Auditors' Report................................................F-50
Consolidated Balance Sheet - December 31, 1996..............................F-51
Consolidated Statement of Income for the Year Ended
December 31, 1996.........................................................F-52
Consolidated Statement of Stockholders' Equity for the Year
Ended December 31, 1996...................................................F-53
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996..................................................F-54 - F-55
Notes to Consolidated Financial Statements..................................F-56
THE LEHIGH GROUP INC. ("LEHIGH") AND SUBSIDIARIES:
Report of Independent Certified Public Accountants..........................F-71
Consolidated Balance Sheets as of 12/31/96 and 12/31/95..............F-72 - F-73
Consolidated Statements of Operations for the Years Ended
12/31/96, 12/31/95, and 12/31/94..........................................F-74
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the Years Ended
12/31/96, 12/31/95, and 12/31/94..........................................F-75
Consolidated Statements of Cash Flows for the Years Ended
12/31/96, 12/31/95, and 12/31/94..........................................F-76
Notes to Consolidated Financial Statements..................................F-77
Schedule of Valuation and Qualifying Accounts for the
Years Ended 12/31/96, 12/31/95, and 12/31/94..............................F-86
Consolidated Statements of Operations for the Six Months
Ended 6/30/97.............................................................F-87
Consolidated Balance Sheets for the Six Months Ended 6/30/97.........F-88 - F-89
Consolidated Statement of Changes in Shareholder's Equity
(Deficit) for the Six Months Ended 6/30/97................................F-90
Consolidated Statements of Cash Flowsfor the Six Months
Ended 6/30/97.............................................................F-91
Notes to Consolidated Financial Statements..................................F-92
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction................................................................F-93
Pro Forma Combined Balance Sheet as of June 30, 1997........................F-94
Pro Forma Combined Statement of Operations for First Medical
Corporation, and The Lehigh Group Inc.
for the year ended December 31, 1996......................................F-96
Pro Forma Combined Statement of Operations for the Six Months
Ended June 30, 1997... ...................................................F-97
</TABLE>
F-1
<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.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996, except as to note 15,
which is as of December 23, 1996
F-2
<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
------ ---- ----
Current assets:
<S> <C> <C>
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
--------------------- -----------------------
Commitments and contingencies (note 13)
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
---------------- -----------------------
$ 3,044,578 4,128,480
===================== =======================
</TABLE>
See accompanying notes to combined financial statements.
F-3
<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 18,443,943 16,567,554 8,404,521
-------------- ---------------------- --------------
Gross profit 4,227,959 4,750,333 2,682,169
-------------- ---------------------- --------------
Operating expenses (note 9):
Salaries and related benefits 2,434,241 1,650,970 670,536
Depreciation and amortization 68,499 50,408 46,676
Other 2,131,639 1,720,198 944,237
-------------- ---------------------- --------------
Total operating expenses 4,634,379 3,421,576 1,661,449
-------------- ---------------------- --------------
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>
(56)
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 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-5
<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
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
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:
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-6
<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
stockholders and the same management. SPI and SPI Hillsborough
are 100%-owned by MedExec stockholders. (55)
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 (57-61)
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
F-7
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
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 insured 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
F-8
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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 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 (63)
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
F-9
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
not reported or paid. This amount is to be used by Humana to
pay the centers Part A, Part B and supplemental costs. The
amounts withheld by Humana to cover incurred but not reported
or paid claims varies by center based on the history of the
respective center and is determined solely by Humana. The
amounts withheld are used to pay the centers' medical claims
which Humana pays on the centers' behalf. The remaining amount
after claims have been paid is remitted to the Company. (See
note 1(f))
Management does not believe it has a significant exposure to
effects related to third-party reimbursement programs and the
related revenue recognition policy because they generally
apply to hospitals. Furthermore, FMC has Medicare and Medicaid
contracts only in regard to one facility and fee-for-service
in only one facility. There is a risk, however, even though
FMC is not a direct recipient of third-party payor
arrangements because Medicare and Medicaid may change its
payments.
(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.
(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
F-10
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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 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-
F-11
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
The Company is responsible for payment of medical servicers
provided to is members by third party providers. As a result
of its agreements with Humana, which limits the Company's
exposure as to certain catastrophic and maternity claims, the
Company is reimbursed for the amounts in excess of certain
thresholds. Therefore, these amounts are shown as both
revenues and expenses.
(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.
F-12
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(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
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
F-13
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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).
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 medical 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. Medical expenses paid by Humana
on behalf of the Company, accordingly, are included in the
F-14
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
combined statements of operations. 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.
In the accompanying combined statements of operations, medical
expenses include amounts paid to hospitals, nursing care and
rehabilitative facilities, home health services, diagnostic
services, pharmacy costs, physician referral fees, and
hospital based physician 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
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.
F-15
<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, 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-16
<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:
Estimated
1995 1994 Useful Lives
---- ---- ------------
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 depreciation 187,251 128,805
------- -------
Property and equipment, net $298,060 207,199
======= =======
(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-17
<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>
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.
F-18
<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 $111,459 and $225,288 in administration fee
revenue from SPI Broward during the years ended December 31, 1995 and
1994, respectively.
The Company recorded approximately $162,000 and $116,050 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) --
------- ------- ------
$ -- -- --
========= ======== ======
F-19
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
A reconciliation of income tax expense and the amount that would be computed
using the statutory federal income tax rate is as follows:
<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:
<TABLE>
<CAPTION>
1995 1994
---- ----
Deferred tax assets:
<S> <C> <C>
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
======= ======
</TABLE>
F-20
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
(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.
F-21
<PAGE>
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
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 both
companies, FMC and Lehigh have been named in a lawsuit. In the opinion
of 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-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Broward Managed Care, Inc.:
We have audited the accompanying balance sheets of Broward Managed Care, Inc. as
of December 31, 1995, and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Broward Managed Care, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996
F-23
<PAGE>
BROWARD MANAGED CARE, INC.
BALANCE SHEET
December 31, 1995
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 201,324
Humana IBNR receivable 2,610,941
Claims reserve funds 174,842
Other receivable 1,514
---------
Total current assets 2,988,621
Property and equipment, net 93,843
----------
$3,082,464
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and other accrued expenses 666,169
Accrued medical claims, including amounts incurred but not reported 2,332,102
Due to Humana 99,237
Due to related parties 134,986
Income taxes payable 10,085
---------
Total current liabilities 3,242,579
---------
Commitments and contingencies
Stockholders' deficit:
Capital stock, $.01 par value. Authorized 1,000 shares; issued
and outstanding 500 shares
5
Accumulated deficit (160,120)
-----------
Total stockholders' deficit (160,115)
----------
$3,082,464
==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
BROWARD MANAGED CARE, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1995
Revenue $26,234,531
Medical expenses 23,632,301
----------
Gross profit 2,602,230
Operating expenses:
Salaries and related benefits 894,456
Depreciation and amortization 17,909
Other 1,515,054
----------
Total operating expenses 2,427,419
----------
Income before income taxes 174,811
Income tax expense 10,085
-----------
Net income $ 164,726
==========
See accompanying notes to financial statements.
F-25
<PAGE>
BROWARD MANAGED CARE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1995
Total
Capital Accumulated stockholder's
stock deficit deficit
Balance, December 31, 1994 $ 5 (324,846) (324,841)
Net income - 164,726 164,726
- ------- -------
Balance, December 31, 1995 $ 5 (160,120) (160,115)
= ======= =======
See accompanying notes to financial statements.
F-26
<PAGE>
BROWARD MANAGED CARE, INC.
STATEMENT OF CASH FLOWS
Year ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 164,726
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 17,909
Decrease (increase) in assets:
Humana IBNR receivable 1,104,052
Claims reserve funds (174,842)
Other receivable (1,514)
Decrease in liabilities:
Accounts payable and other accrued expenses (2,298)
Accrued medical claims, including amounts incurred but not
reported (949,597)
Due to Humana (141,303)
Due to related parties (73,676)
------------
Net cash used in operating activities (56,543)
------------
Cash flows from investing activities:
Capital expenditures (69,250)
-----------
Net cash used in investing activities (69,250)
----------
Decrease in cash and cash equivalents (125,793)
Cash and cash equivalents, beginning of year 327,117
----------
Cash and cash equivalents, end of year $ 201,324
==========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
BROWARD MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
(1) ORGANIZATION AND OPERATIONS
(A) ORGANIZATION
Broward Managed Care, Inc. ("BMC") was incorporated in the
state of Florida on January 21, 1994 and is owned 71.25
percent by Broward Medical Management, Inc. ("BMM"), 23.75
percent by MedExec, Inc. ("MedExec") and 5 percent by the
medical director of the BMC centers.
BMC provides health care services subject to affiliated
provider agreements entered into with Humana Medical Plan,
Inc.; Humana Health Plan of Florida, Inc.; and Humana
Health Insurance Company of Florida, Inc. and their
affiliates (collectively known as "Humana"). Health
services are provided to Humana members through BMC's
primary care medical centers and BMC's network of
physicians and health care specialists. For the year ended
December 31, 1995, approximately 99 percent of BMC's
revenue is from such agreements with Humana.
BMC operates two centers in Broward County, Florida
(collectively known as the "BMC centers"): in Margate
("Margate") and in Plantation ("Plantation").
SPI Managed Care of Broward, Inc. ("SPI Broward") was
incorporated in the state of Florida on July 15, 1992, and
manages Margate and Plantation.
(B) AFFILIATED PROVIDER AGREEMENTS
Effective February 1, 1994 and May 1, 1994, BMC through
Margate and Plantation, 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, 1994 under full-risk agreements
for Margate and Plantation.
Services to be provided by the BMC 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. The BMC 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 BMC centers are also financially responsible
for all out-of-area care rendered to a member and provide
direct care as soon as the member is able to return to the
designated medical center.
Humana has agreed to pay the BMC 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").
(Continued)
F-28
<PAGE>
(C) HUMANA IBNR RECEIVABLE
Humana withholds a certain amount each month from the BMC
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 by Humana to pay the centers' Part A,
Part B and supplemental costs. The amounts withheld by
Humana to cover incurred but not reported on paid claims
varies by center based on the history of the respective
center and is determined solely by Humana. The amounts
withheld are used to pay the centers' medical claims which
Humana pays on the centers' behalf. The remaining amount
after claims have been paid is remitted to the Company [see
note 1(d)].
(D) CLAIMS RESERVE FUNDS
Humana withholds a certain amount each month from the BMC
centers' Part A capitation funding. This amount represents
a "catastrophic reserve fund" to be utilized for the
payment of the centers' 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.
(E) DUE TO HUMANA
Due to Humana represents amounts advanced to BMC by Humana
to cover certain operating expenses. No interest is charged
by Humana. No due date is specified on the amounts
advanced.
(F) DUE TO RELATED PARTIES
Due to related parties represents current amounts payable
to MedExec for operating expenses covered by MedExec.
(G) PHYSICIAN CONTRACTS
BMC has entered into employment agreements with its primary
care physicians and has entered into contracts with various
independent physicians, to provide specialty and other
referral services both on a prepaid and a negotiated
fee-for-service basis. Prepaid physicians' service costs
are based upon a fixed fee per member, payable on a monthly
basis. Such costs are included in the accompanying
statement of operations as salaries and related benefits.
(H) MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
BMC maintains professional liability insurance on a
claims-made basis through July 1996, including
retrospective coverage for acts occurring since the
inception of its operations. Incidents and claims reported
during the policy period are anticipated to be covered by
the malpractice carrier. BMC intends to keep such insurance
in force throughout the foreseeable future.
At December 31, 1995, there are no asserted claims against
BMC that were not covered by the policy. Management of BMC
has accrued approximately $189,700 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 BMC.
(I) MEMBERSHIP
At December 31, 1995, Humana members assigned to the BMC
centers include approximately 3,000 Medicare members and
7,400 commercial members.
(J) STOP-LOSS FUNDING
The BMC 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 associated with a
member's health services.
F-29
<PAGE>
For the year ended December 31, 1995, the stop-loss
threshold, which applies to both Part A and Part B costs
for Medicare members, was $40,000 per member per calendar
year. For commercial members, the stop-loss threshold for
both Part A and Part B costs was $20,000 per calendar year.
Since the BMC 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 BMC. These amounts are included in revenue and medical
expenses, respectively, in the accompanying statement of
operations. For the year ended December 31, 1995, stop-loss
funding for the BMC centers was approximately $2,742,000.
(K) MATERNITY FUNDING
The BMC 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 BMC 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 BMC and are included in revenue and medical
expenses, respectively, in the accompanying statement of
operations. For the year ended December 31, 1995, maternity
funding for the BMC centers was approximately $2,473,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the statement of cash flows, BMC considers all
highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
F-30
<PAGE>
(B) 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 BMC centers
and the contractually agreed-upon rates. The BMC centers
receive monthly payments from Humana after all medical
expenses paid by Humana on behalf of the BMC centers,
estimated claims incurred but not reported and claims
reserve fund balances have been determined. Medical
expenses paid by Humana on behalf of the Company,
accordingly, are included in the accompanying statement of
operations. In addition to Humana payments, the BMC 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 as
reflected in the balance sheet are based upon costs
incurred for services 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. In the
accompanying statement of operations medical expenses
include amounts paid to hospitals, nursing care and
rehabilitation facilities, home health services, diagnostic
services, pharmacy costs, physician referral fees and
hospital-based physician costs.
(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) INCOME TAXES
Effective January 1994, BMC adopted the provisions of
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). 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.
(E) USE OF ESTIMATES
Management of BMC 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 those estimates.
F-31
<PAGE>
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
Estimated
useful lives
------------
Computer equipment $113,132 5 years
Medical and office equipment 5,886 5 years
-------
119,018
Less accumulated depreciation 25,175
---------
Property and equipment, net $ 93,843
=======
(4) RELATED PARTY TRANSACTIONS
At December 31, 1995, BMC had a payable of $134,986 to related
parties for operating expenses paid by MedExec on BMC's behalf.
BMC recorded approximately $162,000 in utilization expenses to
MedExec during the year ended December 31, 1995.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, other
receivables, and accounts payable and other accrued expenses
approximates fair value at December 31, 1995 because of the short
maturity of these instruments.
(6) RETIREMENT PLANS
BMC 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, to the
Plans. BMC'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. BMC's matching contribution was
approximately $14,000 for the year ended December 31, 1995.
(7) INCOME TAXES
Income tax expense consists of the following:
Current:
Federal $ 7,590
State 2,495
-------
$10,085
=======
F-32
<PAGE>
BROWARD MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
A reconciliation of income tax expense and the amount that would be
computed using the statutory federal income tax rate is as follows:
Tax expense at the statutory rate $ 59,436
Change in the beginning-of-the-year
balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (22,000)
State taxes, net of related federal
benefit 6,346
Other (24,813)
Decrease in tax liability due to
graduated federal tax rates (8,884)
--------
$ 10,085
========
There are no deferred tax assets or liabilities at December 31,
1995.
The valuation allowance for deferred tax assets at January 1, 1995
was $22,000. The net change in the valuation allowance for the year
ended December 31, 1995 is $22,000.
(8) GOVERNMENTAL REGULATION
BMC'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 BMC.
(9) SUBSEQUENT EVENTS
Effective January 2, 1996, MedExec purchased an additional 71.25
percent interest in BMC from BMM.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SPI Managed Care of Broward, Inc.:
We have audited the accompanying balance sheets of SPI Managed Care of Broward,
Inc. as of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SPI Managed Care of Broward,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996
F-34
<PAGE>
SPI MANAGED CARE OF BROWARD, INC.
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
------ ---- ----
Cash and cash equivalents $ 20,119 46,762
Due from affiliates and related parties, net 85,303 -
Deferred tax asset - 10,060
------- ------
Total current assets 105,422 56,822
Furniture and equipment, net 10,903 14,377
Other assets 760 760
------- ------
$117,085 71,959
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses 14,442 7,760
Due to affiliates and related parties, net - 71,014
Income taxes payable 11,643 -
Deferred tax liabilities 29,473 10,060
------- ------
Total current liabilities 55,558 88,834
------- ------
Commitments and contingencies
Stockholders' equity (deficit):
Capital stock, $.01 par value.
Authorized 1,000 shares; issued
and outstanding 500 shares 5 5
Retained earnings (accumulated deficit) 61,522 (16,880)
------ -------
Total stockholders' equity (deficit) 61,527 (16,875)
------ --------
$117,085 71,959
======= ======
See accompanying notes to financial statements.
F-35
<PAGE>
SPI MANAGED CARE OF BROWARD, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1995 and 1994
1995 1994
---- ----
Management consulting fee income $579,951 682,601
Operating expenses:
Consulting fees to stockholders 222,660 450,576
Salaries 163,132 137,707
Depreciation 3,474 3,165
Other 71,167 91,153
-------- --------
Total operating expenses 460,433 682,601
------- -------
Income before income taxes 119,518 -
Income tax expense 41,116 -
------- ----
Net income $ 78,402 -
======== ====
See accompanying notes to financial statements.
F-36
<PAGE>
SPI MANAGED CARE OF BROWARD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995 and 1994
Total
Accumulated stockholders'
Capital earnings equity
stock (deficit) (deficit)
----- --------- ---------
Balance, December 31, 1993 $ 5 (16,880) (16,875)
Net income - - -
---- -------- --------
Balance, December 31, 1994 5 (16,880) (16,875)
Net income - 78,402 78,402
---- ------- ------
Balance, December 31, 1995 $ 5 61,522 61,527
==== ======= ======
See accompanying notes to financial statements.
F-37
<PAGE>
SPI MANAGED CARE OF BROWARD, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income 78,402 -
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 3,474 3,165
Deferred income taxes 29,473 -
Change in assets and liabilities:
Accounts payable and accrued expenses 6,682 7,760
Due to affiliates and related parties, net (156,317) 44,201
Income taxes payable 11,643 -
------ -------
Net cash (used in) provided by operating activities (26,643) 55,126
------- -------
Cash flows from investing activities:
Capital expenditures - (11,171)
------- ------
(Decrease) increase in cash and cash equivalents (26,643) 43,955
Cash and cash equivalents, beginning of year 46,762 2,807
------ -------
Cash and cash equivalents, end of year $20,119 46,762
====== ======
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
SPI MANAGED CARE OF BROWARD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
(Continued)
(1) ORGANIZATION AND OPERATIONS
SPI Managed Care of Broward County, Inc. ("SPI Broward"),
incorporated in the state of Florida on July 15, 1992, is owned 50
percent by MedExec, Inc. ("MedExec") and 50 percent by Broward
Medical Management, Inc. ("BMM").
SPI Broward has management services agreements with an affiliate of
BMM and a nonaffiliated multispecialty group practice to manage
their managed care divisions.
MedExec and BMM provide management consulting services to SPI
Broward. The cost of such services are included in the statement of
operations as consulting fees to stockholders.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the statements of cash flows, SPI Broward
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(B) FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation on
furniture and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
(C) DUE TO AFFILIATES AND RELATED PARTIES, NET
Due to affiliates and related parties, net represents
amounts paid by affiliates and related parties to cover
certain SPI Broward operating expenses. The amounts bear no
interest and have no due date.
(D) REVENUE RECOGNITION
Revenue is recognized monthly on the basis of the number of
members managed at contractually agreed upon rates,
adjusted by the profits and losses of the respective
companies managed.
SPI Broward receives monthly and quarterly payments based
on the above agreements.
(E) INCOME TAXES
Under the asset and liability method of Statement of
Financial Accounting Standards No. 109 ("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.
F-39
<PAGE>
(F) USE OF ESTIMATES
Management of SPI Broward 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 those estimates.
(3) FURNITURE AND EQUIPMENT, NET
Furniture and equipment, net consists of the following:
Estimated
1995 1994 useful life
---- ---- -----------
Furniture 2,612 2,612 7 years
Equipment 15,513 15,513 5 years
------ ------
18,125 18,125
Less accumulated depreciation 7,222 3,748
------- -------
Furniture and equipment, net 10,903 14,377
====== ======
(4) RELATED-PARTY TRANSACTIONS
At December 31, 1995, SPI Broward had a net receivable from
affiliates and related parties of $85,303 and a net payable to
related parties of $71,014 at December 31, 1994.
At December 31, 1995 and 1994, consulting fees to stockholders
represents SPI Broward's payment of approximate $111,000 and
$225,000, respectively, to each of its stockholders, MedExec and
BMM.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, and
accounts payable and accrued expenses approximate fair value at
December 31, 1995 because of the short maturity of these
instruments.
(6) RETIREMENT PLANS
SPI Broward 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, to the Plans. SPI Broward'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.
SPI Broward's matching contribution was approximately $4,300 and
$100 in 1995 and 1994, respectively.
F-40
<PAGE>
(7) INCOME TAXES
Income tax benefit consists of the following:
1995 1994
---- ----
Current (benefit) expense $11,643 -
Deferred expense (benefit) 29,473 -
------ ----
$41,116 -
====== ====
A reconciliation of income tax expense and the amount that would be
computed using the statutory federal income tax rate is as follows:
Tax expense at statutory rate $40,637
State taxes, net of federal benefit 4,339
Other 5,799
Increase in tax liability due to graduated
federal tax rates (9,659)
-------
$41,116
=======
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Deferred tax assets:
Total deferred tax assets $ - 10,060
Less valuation allowance - -
----- ------
Net deferred tax asset - 10,060
Revenue and expenses recognized for financial - -
reporting purposes in a different period
than for income tax purposes
Deferred tax liabilities (29,473) 10,060
------- ------
Net deferred tax (liability) asset (29,473) 10,060
====== =======
There was no valuation allowance at December 31, 1995 and 1994, and
there was no change in the valuation allowance for the year ended
December 31, 1995.
(8) SUBSEQUENT EVENTS
Effective January 2, 1996, MedExec acquired an additional fifty
percent interest in SPI Broward from BMM.
F-41
<PAGE>
FIRST MEDICAL CORPORATION
BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
Assets
Cash and cash equivalents $ 44,796
Other receivables, net 994,452
Humana IBNR Receivable and claims reserve funds 7,949,681
Due from affiliates and related parties, net 949,943
Prepaid expenses and other current assets 217,082
-----------
Total current assets 10,155,953
Property and equipment, net 384,185
Intangible assets, net 3,032,654
Minority interest 393,474
Investment in Lehigh 818,651
Other assets 352,468
-----------
Total $15,137,385
===========
Liabilities and Stockholders' Equity (Deficit)
Accounts payable and accrued expenses $ 2,347,971
Accrued medical claims, including amounts
incurred but not reported 8,722,325
Corporate deposits 672,738
Loan payable to Humana 268,096
Loans payable to banks 2,650,552
Obligation to certain stockholders 431,267
Income taxes payable 300,000
Deferred income taxes 112,500
-----------
Total current liabilities 15,505,448
Loans payable-Humana 230,202
Obligation to certain stockholders 968,788
Total liabilities -----------
16,704,438
Stockholder (Deficit)
Common stock 100
Additional paid-in capital 379,685
Accumulated (deficit) (1,946,838)
-----------
Total stockholders' (deficit) (1,567,053)
-----------
Total Liabilities & Stockholders' (deficit) $15,137,385
===========
F-42
<PAGE>
FIRST MEDICAL CORPORATION
INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Revenue:
Capitated revenue - Humana $26,887,707 $21,174,669
Fee for service 4,422,702 3,211,798
Other revenue 1,472,932 510,562
----------- -----------
Total revenue 32,783,341 24,897,029
Medical expenses 30,512,939 20,811,449
----------- -----------
Gross Profit 2,270,402 4,085,580
Operating expenses:
Salaries and related benefits 1,331,375 983,686
General and administrative 2,824,385 1,778,175
Depreciation and amortization 325,178 247,320
Preopening and development costs
related to international clinics 0 172,900
Minority interests in net loss of
consolidated subsidiaries (55,397) 0
Equity in net loss of Unconsolidated
Subsidiaries 21,082 0
----------- -----------
Total operating expenses 4,466,623 3,182,081
Income/(Loss) before interest and taxes (2,176,221) 903,499
Other expenses:
Interest Expense, net 94,329 23,384
--------- ------------
Income/(Loss) before taxes (2,270,550) 880,115
Provision for income taxes 0 352,046
----------- ----------
Net income/(loss) ($2,270,550) $ 528,069
========== ==========
F-43
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained stockholders'
stock capital earnings equity (deficit)
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 100 $ 379,685 $ 323,712 $ 703,497
Net loss -- -- (2,270,550) (2,270,550)
===========================================================
Balance at March 31, 1997 $ 100 $ 379,685 $(1,946,838) $(1,567,053)
===========================================================
</TABLE>
F-44
<PAGE>
FIRST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(unaudited)
Cash flows from operating activities:
Net Loss $(2,270,550)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of equipment and intangibles 325,178
Minority interest in net loss of consolidated subsidiaries (55,397)
Equity in net loss of unconsolidated subsidiaries 21,082
Change in assets and liabilities:
Humana IBNR receivable and claims reserve fund (641,199)
Other receivables (1,390,958)
Due from affiliates and related parties 445,398
Other assets (90,425)
Accounts payable and other accrued expenses 310,524
Accrued medical claims, including amounts incurred
but not reported 2,651,819
Income tax payable 0
Corporate deposits (133,738)
------------
Net cash used in operating activities (828,266)
Cash flows from investing activities:
Capital expenditures (50,597)
Organization costs related to merger transaction (245,008)
Investment in Lehigh (839,733)
------------
Net cash used in investing activities (1,135,338)
Cash flows from financing activities:
Proceeds from loan payable to Humana 123,298
Proceeds from loan payable to banks 1,900,552
Net Proceeds from payable to certain shareholders (78,464)
------------
Net cash provided by financing activities 1,945,386
Decrease in cash and cash equivalents (18,218)
Cash and cash equivalents, beginning of period 63,014
------------
Cash and cash equivalents, end of period $ 44,796
Supplemental disclosure cash flow information:
Cash paid during the period for:
Interest $ 94,327
============
Income taxes $ --
============
F-45
<PAGE>
First Medical Corporation
Notes to Financial Statements
June 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals ) considered necessary for a fair presentation have
been included.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits. For purposes of the
consolidated statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or
less to be a cash equivalent.
(b) HUMANA IBNR RECEIVABLE AND CLAIMS RESERVE FUNDS
Humana withholds certain amounts each month from the centers' Part A,
Part B, and supplemental funding in order to cover claims incurred but
not reported or paid. The amount is used by Humana to pay the centers'
Part A, Part B and supplemental costs. The amounts withheld by Humana
to cover incurred but not reported or paid claims varies by center
based on the history of the respective center and is determined solely
by Humana.
Humana also withholds a certain amount each month from the centers'
Part A capitation funding. This amount represents a "catastrophic
reserve fund" to be utilized for the payment of a 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.
The withholdings are used to pay the centers' medical claims, which
Humana pays on the centers' behalf. The remaining amount after claims
have been paid is remitted to the company.
(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. (Medical and office equipment - 5 years and
Furniture and fixtures - 7 years)
(d) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, 15 years. The Company
assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the
F-46
<PAGE>
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
The Company entered into a non-compete agreement with a former
employee and shareholder. This non-compete agreement is being
amortized on a straight-line basis over the life of the agreement
which is two years.
The Company entered into three employment/non-compete agreements with
three shareholders. The agreements consist of guaranteed payments
regardless if any services are rendered. These agreements are being
amortized on a straight line basis over 5 years which is the life of
the agreement (3 years) plus the subsequent non-compete period (2
years).
Deferred organization costs consist principally of legal, consulting
and investment banking fees which were incurred strictly in connection
with the incorporation of FMC and proposed merger with Lehigh. The
costs related to the FMC transaction are being amortized over five
years. The costs related to the Lehigh merger will begin amortizing
when the merger is complete.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement required that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events change in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used in measured by a comparison of the carrying
amount of an asset of future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair values less costs to sell. The Company has no impaired
assets at June 30, 1997.
(f) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
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 are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. 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 due.
(g) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and supplemental
funds is recognized monthly on the basis of the number of Humana
members assigned to the primary care centers and the contractually
agreed-upon rates. The primary care 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. In addition to Humana payments,
the primary care centers receive copayments from commercial members
from each office visit, depending upon the specific plan and options
selected and receive payments from non-Humana members on a
fee-for-services basis.
Medical services are recorded as expenses in the period in which they
are incurred. Accrued medical claims are reflected in the consolidated
balance sheet and are based upon costs incurred for services rendered
prior to and up to June 30, 1997. Included are services
F-47
<PAGE>
incurred but not reported as of June 30, 1997, based upon actual costs
reported subsequent to June 30, 1997 and a reasonable estimate of
additional costs.
AMCMC and AMCD revenues are derived from medical services rendered to
patients and annual membership fees charged to individuals, families
and corporate members. Membership fees are non-refundable and are
recognized as revenue over the term of the membership. Corporate
members are also required to make advance deposits based upon plan
type, number of employees and dependents. The advance deposits are
initially recorded as deferred income and then recognized as revenue
when service is provided. As the advance deposits are utilized,
additional advance deposits are required to be made by corporate
members.
FMC-HS will recognize revenue under the management consulting service
agreements on a fee-for-service basis as services are rendered by
FMC-HS personnel.
Fee-for-service revenue is reported at the estimated net realizable
amounts from patients and third-party payors as services are rendered.
(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 liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, Humana IBNR receivable claims reserve funds, other
receivables, prepaid expenses and other current assets, accounts
payable and other accrued expenses, accrued medical claims, loan
payable to Humana, loans payable to bank and obligations to certain
stockholders approximate fair value at June 30, 1997 because of the
short term maturity of these instruments.
(j) FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are
remeasured into the US dollar functional currency for consolidation
and reporting purposes. Current rates of exchange are used to
remeasure assets and liabilities and revenue and expense are
remeasured at average monthly exchange rates prevailing during the
year.
(k) STOP-LOSS FUNDING
The primary care 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 associated with a member's health services.
For the six months ended June 30, 1997, 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 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 consolidated statement of
income.
F-48
<PAGE>
For Midwest, the stop-loss thresholds for Part A and for Part B costs
for Medicare members were $45,000 and $15,000, respectively, per
member per calendar year and the stop-loss thresholds for Part A and
for Part B commercial members were $60,000 and $15,000 respectively,
per member per calendar year.
(l) MATERNITY FUNDING
The primary care centers are charged a maternity funding fee on
commercial membership for the purpose of limiting the center's
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 fund are recognized by SPI Hillsborough and are
included in revenue and medical expenses, respectively in the
accompanying consolidated statement of operations.
3. INVESTMENT IN LEHIGH
In February, 1997, the Company elected to convert its $300,000 convertible
debenture into 937,500 shares of Lehigh. In addition, the Company purchased
1,920,000 shares in Lehigh for $539,000. As a result of these purchases of
stock, the Company owns 25.4% of Lehigh. As of June 30, 1997, the Company had
advanced Lehigh $135,000 for working capital purposes.
4. SUBSEQUENT EVENTS
Subsequent to the end of the period, as reported on Lehigh's Form 8-K filed on
July 24, 1997. On July 9, 1997 at a Special Meeting (the "Special Meeting") of
stockholders of the Lehigh Group, Inc. ("Lehigh"), the stockholders of Lehigh
approved the merger (the "Merger") pursuant to the terms of the Agreement and
Plan of Merger dated as of October 29, 1996 (the "Merger Agreement") among
Lehigh, First Medical Corporation ("FMC") and Lehigh Management Corp., a
wholly-owned subsidiary of Lehigh ("Merger Sub"). On the same day, Merger Sub
was merged with and into FMC and each outstanding share of common stock of FMC
the "FMC Common Stock"), was exchanged for (i) 1,127.675 shares of Lehigh's
Common Stock, par value $.001 per share ("Lehigh Common Stock") and (ii)
103.7461 shares of Lehigh's Series A Convertible Preferred Stock, par value
$.001 per share (the "Lehigh Preferred Stock"), each of which is convertible
into 250 shares of Lehigh Common Stock. Prior to the Merger, FMC held
apporximately 25.4% of the outstanding shares of Lehigh Common Stock which were
acquired through two series of transactions.
There were outstanding 10,000 shares of FMC Common Stock immediately prior to
the Merger. These share were exchanged for a total of (i) 11,276,750 shares of
Lehigh Common Stock and (ii) 1,037,461 shares of Lehigh Preferred Stock.
FMC and Generale De Sante International, plc ("GDS") are parties to a
Subscription Agreement, dated June 11, 1996, pursuant to which GDS paid
approximately $4,500,000 in order to acquire a variety of ownership interests in
FMC and its subsidiaries, including 10% of the shares of FMC Common Stock (which
were automatically exchanged pursuant to the Merger for shares of Lehigh Common
Stock and Lehigh Preferred Stock) and shares of FMC's 9% Series A
F-49
<PAGE>
Convertible Preferred Stock (the "FMC Preferred Stock") convertible into 10% of
the shares of FMC Common Stock, which shares of FMC Preferred Stock remained
outstanding and convertible following the Merger.
F-50
<PAGE>
Independent Auditors' Report
The Board of Directors
First Medical Corporation:
We have audited the accompanying consolidated balance sheet of First Medical
Corporation as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Medical Corporation as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
March 25, 1997
F-51
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $63,014
Humana IBNR receivable and claims reserve funds (note 10) 7,308,482
Other receivables, net of $50,000 reserve for uncollectible accounts 536,506
Due from related parties, net (note 7) 462,329
Prepaid expenses and other current assets (note 1(d)) 179,125
------------
Total current assets 8,549,456
Property and equipment, net (note 3) 399,841
Intangible assets, net (note 4) 2,735,848
Minority interest 338,077
Other assets (note 1(d)) 300,000
------------
$12,323,222
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued expenses $2,037,447
Accrued medical claims, including amounts incurred but not reported 6,070,506
Corporate deposits 806,476
Loans payable to Humana (note 5) 97,628
Loans payable to banks (note 6) 750,000
Obligations to certain stockholders (note 7) 421,600
Deferred income taxes, net (note 8) 112,500
Income taxes payable (note 8) 300,000
------------
Total current liabilities 10,596,157
Loans payable to Humana, net of current maturities (note 5) 277,372
Obligations to certain stockholders, net of current maturities (note 7) 746,196
-----------
Total liabilities 11,619,725
-----------
Stockholders' equity:
Capital stock 15,000 shares authorized; 10,000 shares issued and outstanding at 100
par value, $.01 per share
Additional paid-in capital 379,685
Retained earnings 323,712
-----------
Total stockholders' equity 703,497
-----------
Commitments and contingencies (note 12)
$12,323,222
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Capitated revenue - Humana (note 10) $ 45,069,743
Fee for service 7,075,458
Other revenue 869,124
----------
Total revenue 53,014,325
-----------
Medical expenses 43,526,181
-----------
Gross profit 9,488,144
Operating expenses:
Salaries and related benefits (note 7) 3,502,860
General and administrative 4,172,568
Depreciation and amortization 530,490
Minority interest in net loss of consolidated subsidiaries (338,077)
Preopening and development costs related to international clinics 828,568
-----------
Total operating expenses 8,696,409
Income before interest, taxes, and other 791,735
-----------
Other expense:
Interest expense, net (55,523)
Other expense (55,523)
-------
Income before taxes 736,212
Provision for income taxes (note 8) 412,500
-----------
Net income $ 323,712
===========
</TABLE>
See accompanying notes to consolidated financial statements
F-53
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1996
<TABLE>
<CAPTION>
Additional Total
Capital paid- Retained stockholders'
Stock in capital earnings equity
----- ---------- -------- ------
<S> <C> <C> <C>
Balance, December 31, 1995 $1,500 $1,200 $224,595 $227,295
FMC Corporate transaction (1,400) 225,995 (224,595) --
Capital contribution to AMCD -- 152,490 -- 152,490
Net income -- -- 323,712 323,712
------ -------- -------- --------
Balance, December 31, 1996 $ 100 $379,685 $323,712 $703,497
====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
Cash flows from operating activities:
<TABLE>
<CAPTION>
<S> <C>
Net income $323,712
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 530,490
Gain on equity investments (78,259)
Minority interest in net loss of consolidated subsidiaries (338,077)
Change in assets and liabilities, net of acquisitions :
Increase in Humana IBNR receivable and claims reserve funds (2,343,563)
Increase in other receivables (536,506)
Increase in due from related parties, net (457,447)
Increase in prepaid expenses and other current assets (94,438)
Increase in other assets (300,000)
Increase in accounts payable and other accrued expenses 450,634
Increase in accrued medical claims, including amounts incurred but not reported 1,858,086
Increase in corporate deposits 56,201
Increase in income taxes payable 278,272
Increase in deferred income taxes liability, net 83,027
--------
Net cash used in operating activities (567,868)
-----------
Cash flows used in investing activities:
Capital expenditures (119,328)
Organizational costs (477,790)
Acquisition of additional ownership interests in BMC, SPI Broward, and Midwest, net (151,249)
of cash acquired
Proceeds from sale of investment 300,000
---------
Net cash used in investing activities (448,367)
----------
Cash flows provided by financing activities:
Proceeds from loan payable to Humana 325,000
Proceeds from loans payable to banks 650,000
Repayment of loans payable to banks (250,000)
Proceeds from payable to stockholders 374,596
Payment of obligation to stockholders (371,600)
Contribution to capital of AMCD 152,490
---------
Net cash provided by financing activities 880,486
---------
Decrease in cash and cash equivalents (135,749)
Cash and cash equivalents, beginning of year 198,763
---------
Cash and cash equivalents, end of year $ 63,014
========
Supplemental disclosure cash flow information: Cash paid during the year for:
Interest $ 48,748
========
Income taxes $ 33,291
========
</TABLE>
F-55
<PAGE>
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Supplemental disclosure of noncash flow:
(1) As described in note (1), AMCMC purchased certain assets and assumed
certain liabilities in the amount of $1,020,275 which is included in
goodwill at December 31, 1996 (note 4).
(2) The Company entered into a noncompete agreement with a shareholder and
former employee in the amount of $200,000.
(3) Effective January 1, 1996, the Company acquired a controlling interest in
two of its equity investments (see note 1(a)). The fair value of the assets
acquired and liabilities assumed were:
Assets Liabilities Net Assets
------ ----------- ----------
SPI Broward $ 117,085 55,558 61,527
Broward $3,082,464 3,242,579 (160,155)
(4) The Company entered into employment/non-compete agreements with three
executives in the amount of $964,800.
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND OPERATION
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 operations are
conducted through three divisions: (a) a physician practice management division
which provides physician management services including the operation of clinical
facilities and management services to medical groups, (b) an international
division which manages medical centers in Eastern Europe and the Commonwealth of
Independent States (the former Soviet Union) ("CIS"), and (c) a recently formed
hospital services division which will provide a variety of administrative and
clinical services to proprietary acute care hospitals and other health care
providers.
The consolidated financial statements include the accounts of FMC and its
majority owned subsidiaries: MedExec, Inc. and subsidiaries ("MedExec");
American Medical Clinics Management Company, Inc. ("AMCMC"); American Medical
Clinics Development Corporation, Limited ("AMCD") and FMC Healthcare Services,
Inc. ("FMC-HS"). All significant intercompany balances and transactions have
been eliminated in consolidation.
MedExec, Inc. ("MedExec") was incorporated on March 14, 1991.
On January 1, 1996 MedExec and American Medical Clinics, Inc. (AMC) entered into
a transaction which consisted of the following:
* AMC and MedExec incorporated FMC;
* All of the outstanding shares of MedExec and AMC were converted into shares
of FMC;
* The shareholders of MedExec and AMC received 48% and 52% of the shares of
FMC, respectively;
* 100% of the AMC shares were distributed to the shareholders of FMC (former
shareholders of MedExec received 48% of the distributed shares of AMC);
* In connection with the above transaction, FMC entered into separate
employment contracts with three executives of MedExec whereby the
respective executives are guaranteed payments regardless if any services
are rendered. The agreements are for a three year period and when the
contracts expire they include an additional two year covenant not to
compete. The employment/non-compete agreements have been classified as
intangible assets in the financial statements and are being authorized over
five years. (See Note 4).
The above transaction was accounted for under the purchase method of accounting
with MedExec being deemed the accounting acquirer despite the fact that AMC
received 52% of the shares of FMC. This result was reached due to among other
factors the fact that immediately after this transaction, the FMC Board of
Directors was comprised of four former shareholders of MedExec and three former
shareholders of AMC and the fact that MedExec constituted the larger share of
operations. Because of the short term monetary nature of AMC's assets and
liabilities, historical book values constituted fair value on the transaction
date resulting in no purchase price adjustments under Accounting Principles
Board No. 16.
F-57
<PAGE>
On January 2, 1996, AMCMC, a newly formed subsidiary of FMC, acquired from AMC a
membership list (contracts to provide medical services to customers) and assumed
certain liabilities of AMC. The transaction was accounted for under the purchase
method of accounting because, in essence, the purchase of the membership list
represented the acquisition. AMCMC acquired the income stream of an operating
enterprise. Goodwill was recorded in the amount of $1,020,275 related to this
transaction.
AMCMC, a wholly owned subsidiary of the Company, has entered into a management
services agreement with the AMC clinics located in the CIS, whereby the AMC
clinics provide medical services to AMCMC customers (see note 7). AMCMC collects
all of the revenues directly from its members, which it is legally entitled to
collect. AMCMC also pays all of AMC's expenses, including but not limited to the
salaries of the physicians, which it is legally obligated to pay.
On January 20, 1996, the Company entered into an agreement with Generale 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 CIS. The Company and GDS's shareholderings in AMCD
Common Stock, as revised, are 51% and 49%, respectively. The authorized share
capital of AMCD is comprised of 1,000 shares of Common Stock, $1.00 par value.
As consideration for the shares, the Company agreed to contribute certain assets
at historical cost in the amount of $300,001. 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. These contributions resulted in total capital of
AMCD of $600,000. Included in the statement of cash flows for the year ended
December 31, 1996 is $152,490 for GDS's capital contribution of $299,999. GDS
has an option to purchase up to 51% of the AMCD's Common stock in the event
certain changes in management control occur. The additional consideration will
be determined by the Company and GDS.
(A) PHYSICIAN PRACTICE MANAGEMENT DIVISION - MEDEXEC
The Company's physician practice management operations are currently conducted
through MedExec. MedExec functions in two capacities as a management services
organization: (i) owning and operating nine primary care centers (located in
Florida and Indiana) which have full risk contracts for primary care and part B
services and partial risk (50%) for part A services, and (ii) managing sixteen
multi-specialty groups (located in Florida and Texas) with fee-for service and
full risk contracts for primary care and part B services and partial risk (50%)
for part A services. Full risk contracts are contracts with managed care
companies where FMC assumes essentially all responsibility for a managed care
members' medical costs and partial risk contracts are contracts where FMC
assumes partial responsibility for a managed care members' medical costs.
Ownership and operation of primary care centers ("centers") with full risk
contracts are achieved through MedExec's subsidiaries: SPI Managed Care, Inc.
("SPI"), incorporated on February 19, 1988, SPI Managed Care of Hillsborough
County, Inc. ("SPI Hillsborough"), incorporated on April 20, 1993, Broward
Managed Care, Inc. ("BMC"), incorporated on January 21, 1994, and Midwest
Managed Care, Inc. ("Midwest"), incorporated on March 29, 1995.
F-58
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
SPI, SPI Hillsborough, and BMC provide health care services subject to
affiliated provider agreements entered into with Humana Medical Plan, Inc.;
Humana Health Plan of Florida, Inc.; and 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.; and 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 year ended December 31, 1996, 85 percent of
the Company's revenue is from such agreements with Humana.
SPI operates two centers in Dade County, Florida located in Kendall and Cutler
Ridge.
SPI Hillsborough operates four centers in the west coast of Florida located in
Plant City, New Port Richey, Lutz, and South Dale Mabry. The affiliated provider
agreements to operate the centers in New Port Richey, Lutz and South Dale Mabry
were entered into in 1996.
BMC operates two centers in Broward County, Florida located in Plantation and
Sunrise.
During 1996, Midwest operated one center in Hammond, Indiana. In February 1997,
Midwest also began to operate an additional center in Gary, Indiana.
Health services are provided to Humana members through the centers and their
networks of physicians and health care specialists. Services to be provided by
the 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 incidental, drugs and medical supplies. The centers are responsible
for providing all such services and for directing and authorizing all other care
for Humana members. The centers are financially responsible for all out-of-area
care rendered to a member and provide direct care as soon as the member is able
to return to the designated medical center.
Humana has agreed to pay the 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"). For new or start-up centers like the Gary center, Humana has
guaranteed a monthly amount to cover the costs of providing primary care
services and other operating costs. The guaranteed payments are made until the
earlier of the date on which the center achieves a certain membership level or
six months to one calendar year from the commencement date of the agreement at
which point Humana will pay the center a capitation.
SPI Managed Care of Broward, Inc. ("SPI Broward"), incorporated in the State of
Florida on July 15, 1992, manages the full risk managed care segment of a
nonaffiliated multi-specialty group practice in Broward County, Florida.
Effective February 1, 1996, First Medical Corporation-Texas Division
("FMC-Texas") began managing a multi-specialty medical practice in Houston,
Texas ("Houston medical practice") that has a full risk contract with Humana and
fee-for-service.
On December 31, 1995, FMC had a 23.75% and 50% investment, respectively, in BMC
and SPI Broward. Effective January 1, 1996 the Company acquired 71.25% and 50%
interest, respectively, in 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 ending December 31, 1996 and 1997. The multiple is three for
cash consideration, and 3.5 times for a combination of stock and cash. Based
upon the earnings of BMC for the year ended December 31, 1996 and assuming that
the multiple used is 3.5 times, the purchase price for the acquisition would
F-59
<PAGE>
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
approximate $1.7 million. This acquisition gives the Company a 95% and 100%
investment in BMC and SPI Broward, respectively. The final value of the
consideration is not yet determinable as the seller has the option of obtaining
cash and/or stock and as the price is based on the average of 1996 and 1997
earnings. Additional goodwill will be recorded at the time the transaction is
finalized in accordance with the purchase method of accounting. Goodwill at
December 31, 1996 amounted to $327,778.
On December 31, 1995, the Company had a 66 2/3% investment in Midwest. Effective
January 1, 1996, the Company acquired the remaining investment and recorded
goodwill of $150,855 as a result of the purchase method of accounting. Book
value constituted fair value on the transaction date.
(B) HOSPITAL SERVICES DIVISION- FMC-HS
FMC-HS was incorporated on June 13, 1996 and is 51% owned by the Company and 49%
owned by General de Sante International, PLC ("GDS"). The Company commenced
operations in August 1996 and plans to provide management, consulting, and
financial services to troubled not-for-profits and other health care providers.
(C) PROPOSED LEHIGH MERGER
On October 29, 1996, the Company entered into a proposed merger agreement with
the Lehigh Group, Inc. ("Lehigh") whereby upon merger, FMC would control
approximately 96% of Lehigh. The proposed merger is subject to stockholder
approval of Lehigh and the Company. Under the terms of the proposed merger, each
share of the FMC Common Stock would be exchanged for (i) 1,127.675 shares of
Lehigh Common Stock and (ii) 103.7461 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. Currently, there are outstanding 10,000 shares of
FMC Stock. As a result of these actions, immediately following the merger,
current Lehigh stockholders and FMC stockholders will each own 50% of the issued
F-60
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
and outstanding shares of Lehigh Common Stock. In the event that all of the
shares of Lehigh Preferred Stock issued to the Company's stockholders are
converted into Lehigh Stock, Lehigh stockholders will own approximately 4% and
the Company's stockholders will own approximately 96% of the issued and
outstanding shares of Lehigh Common Stock. In addition, under the terms of the
proposed merger agreement, Lehigh will be renamed "First Medical Group, Inc."
In connection with the proposed merger, Lehigh issued a convertible debenture to
the Company in the amount of $300,000 with interest at two percent per annum
over the prime lending rate. The debenture is recorded in other assets. In
addition, the Company advanced $50,000 to Lehigh. The advance is included in
prepaid expenses and other current assets.
On February 12, 1997, the Company purchased 1,920,757 shares of Lehigh stock for
$.281 per share.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits. For purposes of the consolidated
statement of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be a cash
equivalent.
(B) HUMANA IBNR RECEIVABLE AND CLAIMS RESERVE FUNDS (63)
Humana withholds certain amounts each month from the centers' Part A, Part B,
and supplemental funding in order to cover claims incurred but not reported or
paid. The amount is used by Humana to pay the centers' Part A, Part B and
supplemental costs. The amounts withheld by Humana to cover incurred but not
reported or paid claims varies by center based on the history of the respective
center and is determined solely by Humana.
Humana also withholds a certain amount each month from the centers' Part A
capitation funding. This amount represents a "catastrophic reserve fund" to be
utilized for the payment of a 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.
The withholdings are used to pay the centers' medical claims, which Humana pays
on the centers' behalf. The remaining amount after claims have been paid is
remitted to the company.
(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. (Medical and office equipment - 5 years and Furniture and fixtures - 7
years)
(D) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, 15 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
F-61
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
The Company entered into a non-compete agreement with a former employee and
shareholder. This non-compete agreement is being amortized on a straight line
basis over the life of the agreement which is two years.
The Company entered into three employment/non-compete agreements with three
shareholders. The agreements consist of guaranteed payments regardless if any
services are rendreed. These agreements are being amortized on a straight line
basis over 5 years which is the life of the agreement (3 years) plus the
subsequent non-compete period (2 years).
Deferred organization costs consist principally of legal, consulting and
investment banking fees which were incurred strictly in connection with the
incorporation of FMC and proposed merger with Lehigh. The costs related to the
FMC transaction are being amortized over five years. The costs related to the
subsequent Lehigh merger will begin amortizing when the merger is complete.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement required that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events change in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset of future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair values less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity. The Company has no
impaired assets at December 31, 1996.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method. 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 are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. 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.
(G) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and supplemental funds is
recognized monthly on the basis of the number of Humana members assigned to the
primary care centers and the contractually agreed-upon rates. The primary care
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. In addition to Humana payments, the
primary care centers receive copayments from commercial members from each office
visit, depending upon the specific plan and options selected and receive
payments from non-Humana members on a fee-for-service basis.
F-62
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims are reflected in the consolidated balance sheet
and are based upon costs incurred for services rendered prior to and up to
December 31, 1996. Included are services incurred but not reported as of
December 31, 1996, based upon actual costs reported subsequent to December 31,
1996 and a reasonable estimate of additional costs.
AMCMC and AMCD revenues are derived from medical services rendered to patients
and annual membership fees charged to individuals, families and corporate
members. Membership fees are non-refundable and are recognized as revenue over
the term of the membership. Corporate members are also required to make advance
deposits based upon plan type, number of employees and dependents. The advance
deposits are initially recorded as deferred income and then recognized as
revenue when service is provided. As the advance deposits are utilized,
additional advance deposits are required to be made by corporate members.
FMC-HS will recognize revenue under the management consulting service agreements
on a fee-for-service basis as services are rendered by FMC-HS personnel.
Fee-for-service revenue is reported at the estimated net realizable amounts from
patients and third-party payors as services are rendered.
(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 liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, Humana IBNR receivable and claims reserve funds, other receivables,
prepaid expenses and other current assets, accounts payable and other accrued
expenses, accrued medical claims, loan payable to Humana, loans payable to bank
and obligations to certain stockholders approximate fair value at December 31,
1996 because of the short term maturity of these instruments.
(J) FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are remeasured
into the US dollar functional currency for consolidation and reporting purposes.
Current rates of exchange are used to remeasure assets and liabilities and
revenue and expense are remeasured at average monthly exchange rates prevailing
during the year.
(K) STOP-LOSS FUNDING
The primary care 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
associated with a member's heath services.
F-63
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
For the year ended December 31, 1996, 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
consolidated statement of income. Stop-loss funding for the SPI and SPI
Hillsborough centers for the year ended December 31, 1996 was approximately
$4,733,000.
For Midwest, the stop-loss thresholds for Part A and for Part B costs for
Medicare members were $45,000 and $15,000, respectively, per member per calendar
year and the stop-loss thresholds for Part A and for Part B for commercial
members were $60,000 and $15,000 respectively, per member per calendar year.
(L) MATERNITY FUNDING
The primary care centers are charged a maternity funding fee on commercial
membership for the purpose of limiting the center's 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 fund are recognized by SPI and SPI Hillsborough and are
included in revenue and medical expenses, respectively in the accompanying
consolidated statement of operations. Maternity funding for the SPI and SPI
Hillsborough centers for the year ended December 31, 1996 was approximately
$1,403,000.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1996 consists of the following:
Medical, computer and office equipment $703,793
Furniture and fixtures 37,986
--------
741,779
Less: accumulated depreciation 341,938
---------
Property and equipment, net $399,841
=========
F-64
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1996 consist of:
Goodwill $1,498,908
Employment/non-compete agreements
with executives 964,800
Organization costs 480,337
Noncompete agreement with former
shareholder 200,000
----------
3,144,045
Less: accumulated amortization 408,197
----------
$2,735,848
==========
As stated in note 1, the following transactions created goodwill at December 31,
1996:
AMCMC $1,020,275
BMC and SPI Broward 327,778
Midwest Managed Care 150,855
----------
$1,498,908
==========
The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangible assets as well as the amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying value and estimates of useful lives. At this time, the Company believes
that no significant impairment of goodwill or other intangible assets has
occurred and that no reduction of the amortization periods is warranted.
(5) LOANS PAYABLE TO HUMANA
Loans payable to Humana at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Secured loan for $250,000 bearing interest at 9.5%. Payable in 48 monthly
installments beginning in February 1997 of $6,850 which includes principal
and interest. The loan is secured by the Company's equipment and
furnishings at the Houston Medical Practice. Proceeds from the loan were
used primarily for the purchase of equipment at the Houston medical
practice. $ 250,000
</TABLE>
F-65
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Secured loan for $75,000 bearing interest at 9.5%. Payable in twelve
monthly installments beginning in February 1997 which includes principal
and interest of $7,172. The loan is secured by the Company's equipment and
furnishings at the Houston Medical Practice. Proceeds from the loan were
used primarily for working capital needs of the Houston medical practice. 75,000
Advance of $50,000 bearing interest at 10% per year for the purchase and
installation of a computer system and related training at the Midwest
locations. The loan is due by September 30, 2000. Monthly installments to
Humana will be a minimum of 10% of any positive balance in Midwest's Part A
Fund. In the event no positive balance exists in the Part A fund, Midwest
will make a minimum monthly payment of $1,268 until the loan is repaid.
50,000
--------
Total long-term loans payable to Humana 375,000
Less current installments 97,628
--------
Loans payable to Humana, excluding current installments $ 277,372
===========
</TABLE>
The aggregate maturities of loans payable to Humana for each of the five years
subsequent to December 31, 1996 are as follows:
1997 $ 97,628
1998 81,751
1999 82,688
2000 106,097
2001 6,836
--------
$375,000
========
(6) LOANS PAYABLE TO BANKS
Loans payable to banks at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Unsecured line of credit for $200,000 bearing interest at prime (8.25% at
December 31, 1996). The line of credit is personally guaranteed by several
stockholders of the Company and other individuals. The principal balance is
due on June 2, 1997. Interest is due monthly. The $200,000 drawn under this
line of credit was used primarily for development costs relating to
Midwest. $ 200,000
</TABLE>
F-66
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Line of credit for $1,500,000 bearing interest at 1/2% above prime (8.75%
at December 31, 1996). $900,000 of the line is secured by MedExec's cash
and certain net assets of the Company. Secured assets total $1,237,976 at
December 31, 1996. The principal balance is due on May 31, 1997 and
interest is due monthly. In order to borrow the additional $600,000
(unsecured portion of line), the bank would require the personal guarantee
of a stockholder of the Company. The $550,000 drawn under this line of
credit was used primarily for working capital requirements. 550,000
---------
$ 750,000
=========
</TABLE>
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 1/2% (8.75% at December 31,
1996). The purpose of the loan is to provide financing for the Lehigh 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 are issuable to FMC.
The various debt agreements contain certain covenants. Under the most
restrictive of these provisions, certain stockholders of the Company must
personally guarantee $600,000 for the $1,500,000 line of credit as well as the
additional $3,300,000 line of credit.
(7) RELATED PARTY TRANSACTIONS
At December 31, 1996, obligations to certain shareholders includes the
following:
<TABLE>
<CAPTION>
<S> <C>
Obligation to pay consulting fees to three stockholders in connection with
the transaction between MedExec and AMC. Obligations have been recorded as
a liability due to the stockholders not having to provide any services for
this consideration to be paid. Payable monthly in the amount of $26,800.
Obligations will be repaid by December 31, 1998. The amount of
consideration paid in 1996 related to these agreements was $321,600. $ 643,200
Credit facility bearing interest at 4.5% from General de Sante
International, plc of up to $1,200,000 to be used for the development of
the clinics of AMCD. $100,000 is to be repaid on demand at any time after
July 10, 2001, $100,000 is to be repaid on demand at any time after August
9, 2001 and $174,596 on demand any time after January 17, 2002, or on the
date GDS subscribes for shares in FMC under the subscription agreement (see
note 12). 374,596
</TABLE>
F-67
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Obligation under non compete agreement with a former employee and
stockholder payable in monthly installments of $8,333 until June 1998 (note
4). 150,000
-------
Total obligations to stockholders 1,167,796
Less current installments 421,600
----------
Total obligations to stockholders, excluding current installments $ 746,196
==========
</TABLE>
The aggregate maturities of obligations to stockholders for each of the five
years subsequent to December 31, 1996 are as follows:
1997 $421,600
1998 371,600
1999 --
2000 --
2001 200,000
Thereafter 174,596
----------
Total $1,167,796
==========
The Company paid salaries or consulting fees to stockholders of approximately
$1,520,700 which is included in the consolidated statement of income for the
year ended December 31, 1996.
Certain stockholders have guaranteed the $200,000 outstanding loan with the
financial institution which is described in note 6. In addition, a stockholder
will guarantee any amount in excess of $900,000 which becomes outstanding
related to the $1,500,000 line of credit described in note 6.
On January 24, 1997 the Company acquired director and officer liability
insurance in the amount of $3,000,000 with coverage expiring on December 5,
1997. Coverage under this policy extends to all duly elected or appointed
directors and officers (past, present and future).
At December 31, 1996, the Company has amounts outstanding from the AMC clinics
under its management agreement with AMCMC which total $462,329.
(8) INCOME TAXES
CURRENT DEFERRED TOTAL
US Federal $256,000 $112,500 $368,500
State and Local 44,000 -- 44,000
-------- -------- --------
$300,000 $112,500 $412,500
======== ======== ========
F-68
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Income tax expense differed from the amounts computed by applying the US
federal income tax rate of 34% to pretax income as a result of the following:
Income tax expense at the statutory rate $250,300
Reduction in valuation allowance (29,300)
Unutilized net operating losses of AMCD 122,000
State taxes, net of federal benefit 31,500
Nondeductible merger costs and meals and entertainment 38,000
--------
Income tax expense recorded in financial statements $412,500
========
The tax effects that give rise to a significant portion of the deferred income
tax assets for the year ended December 31, 1996 are as follows:
Deferred tax assets:
Executive compensation $250,616
Net loss carryforward 58,703
--------
Deferred tax asset 309,319
Valuation allowance (102,403)
--------
Net deferred tax asset 206,916
Deferred tax liabilities:
Goodwill asset 319,416
--------
Net deferred tax liability $112,500
========
The Company has provided a valuation allowance for deferred tax assets as of
December 31, 1996 for $102,403. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
or a portion of the deferred assets will be realized in the near future.
(9) LEASES
The Company has several noncancelable operating leases primarily for
office space and equipment that expire throughout 2001. Future minimum
lease payments required under noncancelable operating leases at
December 31, 1996 are as follows:
F-69
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Year ending
December 31,
------------
1997 $ 349,327
1998 339,834
1999 120,487
2000 55,204
2001 49,656
--------
Total minimum lease payments $914,508
========
Rental expense during 1996 amounted to approximately $259,000.
(10) BUSINESS AND CREDIT CONCENTRATIONS
The Company derives the majority of its revenue from its affiliated
provider agreements with Humana 85% or approximately $45,070,000 of the
revenue of the Company for the year ended December 31, 1996 was derived
from such agreements with Humana. The amount of revenue is based on the
number of members assigned to each of the centers. Humana members
include 10,287 Medicare members and 10,420 commercial members at
December 31, 1996. The fluctuation of the number of members
significantly affects the Company's business. The receivable from
Humana at December 31, 1996 is $7,308,482.
Revenue generated by services provided by the AMC clinics in the CIS
represents 12% or approximately $6,534,000 of the revenue of the
Company for the year ended December 31, 1996.
(11) RETIREMENT PLANS
The Company sponsors 401(k) plans (the "Plans") for its domestic
operations. Employees who have worked a minimum of six months or 1000
hours and are at least 21 years of age may participate in the Plans.
Employees may contribute to the Plans up to 14 percent of their annual
salary, not to exceed $9,500 in 1996. 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 $35,000 for the year
ended December 31, 1996.
(12) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company and certain stockholders are defendants in a lawsuit
brought on by a stockholder and former employee. The plaintiff is
seeking damages in excess of $1 million. Management, stockholders and
legal counsel for the Company intends to vigorously defend this action.
They are not able to determine the extent of damages, if any, at this
time. Therefore, no accrual has been recorded in the financial
statements at December 31, 1996.
To the best of the Company's knowledge, there are no material claims,
disputes or other unsettled matters (including retroactive adjustments)
concerning third party reimbursements that would have a material effect
on the consolidated financial statements of the Company.
F-70
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
GOVERNMENTAL REGULATIONS
The Company's operations have been and may 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.
PHYSICIAN CONTRACTS
The Company has entered into employment agreements of two to three
years 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. Such costs
are included in the consolidated statement of income as medical
expense.
SUBSCRIPTION AGREEMENT
In June 1996, FMC entered into a subscription agreement with GDS by
which GDS has the right to purchase various percentages of interest in
both FMC and its subsidiaries.
MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance on a claims-made
basis through November 1, 1997 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, 1996, there
are no asserted claims made against the Company that were not covered
by the policy.
Physicians providing medical services to members are provided
malpractice insurance coverage (claim-made basis), including
retrospective coverage for acts occurring since their affiliation with
the Company.
F-71
<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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
/S/ BDO SEIDMAN, LLP
--------------------
BDO Seidman, LLP
New York, New York
February 18, 1997
F-72
<PAGE>
LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(in thousands except for per share data)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 471 $ 347
Accounts receivable, net of allowance for 3,581 4,335
doubtful accounts of $342 and $174 (Notes 6 and 10)
Inventories (Note 6) 1,215 1,823
Prepaid expenses and other current assets 279 22
------- -------
Total current assets 5,546 6,527
Property, plant and equipment, net of 50 61
accumulated depreciation and amortization
(Note 5 and 6)
Other assets 29 34
------- -------
Total assets $5,625 $6,622
====== ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-73
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
` (in thousands except for per share data)
LIABILITIES AND SHAREHOLDERS'
EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 6) $ 390 $ 510
Note payable -bank (Note 6) -- 360
Accounts payable 954 1,839
Accrued expenses and other current liabilities (Notes 5, 6 and 8) 1,642 1,381
------ -----
Total current liabilities 2,986 4,090
----- -----
Long-term debt, net of current maturities 2,725 2,080
----- ------
(Note 6)
Deferred credit applicable to the sale of continued -- 250
------- -------
operations (Note 4)
Commitments and Contingencies (Notes 6 and 8)
Shareholders' equity (Deficit)
Preferred stock, par value $.001; authorized
5,000,000 shares, none issued -- --
Common stock, par value $.001 authorized shares 100,000,000 , in 1996 and 1995;
shares issued 10,339,250 in 1996 and 1995
which excludes 3,016,249 and 3,016,249
shares held as treasury stock in 1996 and
1995 , respectively 11 11
Additional paid-in capital (Note 6) 106,594 106,594
Accumulated deficit from January 1, 1986 (105,037) (104,749)
Treasury stock - at cost (1,654) (1,654)
--------- ---------
Total shareholders' equity (Deficit) (86) 202
---------- ---------
Total liabilities and shareholders' equity (Deficit) $ 5,625 $ 6,622
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-74
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands except for per share
data)
<S> <C> <C> <C>
Revenues earned (Note 10) $10,446 $12,105 $12,247
Costs of revenues earned 7,134 8,628 8,577
------ ------ ------
Gross Profit 3,312 3,477 3,670
Selling, general and administrative expenses 3,874 3,994 4,187
------ ------ ------
Operating loss (562) (517) (517)
------- ------- -------
Other income (expense):
Interest expense (471) (433) (398)
Interest and other income (Note 6) 113 392 505
----- ------ -----
(358) (41) 107
------ ------- -----
Loss before discontinued operations and
extraordinary item (920) (558) (410)
Income from discontinued operations (Note 250 250 5,000
----- ----- -----
4)
Income (loss) before extraordinary item (670) (308) 4,590
Extraordinary item:
Gain on early extinguishment of debt
(Note 6) 382 -- --
----- ------ ------
Net income (loss) $ (288) $ (308) $ 4,590
======== ======== =======
EARNINGS PER SHARE - PRIMARY AND FULLY
DILUTED
Loss before discontinued operations and
extraordinary item $ (0.09) $ (0.05) $ (0.04)
Income from discontinued operations 0.02 0.02 0.49
Income (loss) before extraordinary item (0.07) (0.03) 0.45
Net Income (loss) (0.03) (0.03) 0.45
Weighted average Common Shares
and share equivalents outstanding
Primary and Fully diluted 10,339,250 10,339,250 10,169,000
============ ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-75
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(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 January 1, 1994 -- $-- 7,658 $11 $105,575 $(109,031) $(1,654) $(5,099)
Issuance of common
stock in connection
with private placement 2,681 1,019 1,109
-- $ -- -- -- 4,590 -- $ 4,590
--- ------ ------ ------ ------ ------------ ------ --------
Net Income ------------ -------
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
--- ------ ====== === ======== =========== ======== --------
Net Loss -- -- -- $-- $ (288) -- $(288)
--- ------ ------ ---- ------ ----------- ------ --------
Balance December 31, 1996 -- $ -- 10,339 $11 $106,594 ($105,037) $(1,654) $ (86)
--- ------ ====== === ======== ========= ========= --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-76
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 11)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) (288) $ (308) $4,590
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on early extinguishment of debt (382) -- --
Depreciation and amortization 29 65 59
Deferred credit applicable to sale of discontinued operations (250) (250) (5,000)
Changes in assets and liabilities:
Accounts receivable 754 276 93
Inventories 608 (78) (108)
Prepaid expenses and other current assets (257) 55
Other assets 5 (1) 6
Accounts payable (885) (72) 64
Accrued expenses and other current liabilities 442 101 81
----- ------ -----
Net cash used in operating
activities (224) (267) (160)
------- ------- ------
Cash flows from investing activities:
Capital expenditures (18) (21) (39)
------ ------ -----
Cash flows from financing activities:
Repayment of capital leases (10) (20) (3)
Net payments under bank debt (2,340) (270) (360)
Payment on subordinated debenture (9) -- --
Net proceeds from sale of stock --- -- 1,019
Issuance of convertible debenture 300 -- --
Net borrowings from C.I.T. revolver 2,425 -- --
------ ----- -----
Net cash provided by (used in) financing
activities 366 (290) 656
--------- ------- ------
Net change in cash and cash equivalents 124 (578) 457
Cash and cash equivalents at beginning of period 347 925 468
----- ----- -----
Cash and cash equivalents at end of period $ 471 $ 347 $ 925
====== ====== ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-77
<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 70% of HallMark's sales are domestic and 30% are
export. Export sales are made by sales agents retained by HallMark. Distribution
is made in approximately 26 countries.
EXPORT SALES AS A PERCENTAGE OF TOTAL SALES ARE SUMMARIZED AS FOLLOWS:
December 31,
1996 1995 1994
Central America 10% 16% 14%
South America 8% 18% 16%
Caribbean 6% 6% --
West Indies 2% -- 6%
OTHER 4% -- 2%
- ---------------------- --- ---- ---
Total 30% 40% 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 - The Company uses 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 statement and taxes bases of assets and
liabilities. The consolidated financial statements do not include a provision
for income taxes due to the Company's net operating losses.
F-78
<PAGE>
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 - The Company uses the intrinsic value method of accounting for
employee stock options as permitted by statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation". Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount the employee must pay to acquire the stock. The compensation is
recognized over the vesting period of the options.
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 - The Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" in 1996. The Company reviews certain
long-lived assets identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. In that regard, the Company assesses the recoverability of such
assets based upon estimated non-discounted cash flow forecasts. The Company has
determined that no impairment loss needs to be recognized for long lived assets.
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, 1996, 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 - Merger
On October 29, 1996, the Company and First Medical Corporation ("FMC")
entered into a Merger Agreement. 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. Currently, there are outstanding 10,000 shares of
FMC 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.".
Although the Company has entered into this merger agreement there can be no
assurance at this time that the Company will be able to consummate this
transaction.
F-79
<PAGE>
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
1996 $ 250
5 - Property, Plant and Equipment
December 31
------------------------- Estimated
Useful Lives
------------
1996 1995
---- ----------
Machinery and equipment $ 483 $ 475 3 to 5 years
Leasehold improvements 295 285 Term of leases
----- -----
778 760
Less accumulated depreciation and
amortization (728) (699)
------ ------
$ 50 $ 61
====== ======
6 - Long-Term Debt
December 31,
-----------------------------------------------
INTEREST RATE 1996 1995
-------------
Subordinated Debentures 14-7/8% $ 290 $ 400
Senior Subordinated Notes 13-1/2% 100 100
Convertible Debenture 10.25% 300 --
Note Payable-BNL 10.56% -- 2,440
Revolving Credit Facility-C.I.T. 10.56% 2,425 --
Other Long-Term Debt Various -- 10
-------- --------
3,115 2,950
F-80
<PAGE>
Less Current Portion (390) (870)
--------- ---------
Total Long-Term Debt $ 2,725 $ 2,080
======= =========
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 $628,000 and $653,000 of interest past due as of December 31,
1996 and 1995) 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 1996 and 1995 is approximately
$106,000 and $380,00 respectively of other income which represents an adjustment
to the value of certain items which relate to the Company's 1991 Restructuring.
During 1996, the Company retired $110,000 of the 14-7/8% debentures
plus accrued and unpaid interest of $181,000 for approximately $9,000. The gain
on extinguishment of debt of approximately $282,000 is included in extraordinary
item of $382,000.
F-81
<PAGE>
REVOLVING CREDIT FACILITY
In November 1996, HallMark entered into a three year revolving credit
facility with a financial institution, which provides a maximum line of credit
equal to the lesser of eligible accounts receivable and inventory or $5 million.
The credit facility bears interest at the prime rate plus 2%, and is
collaterized by the Company's accounts receivable, inventory and property and
equipment.
The Company used proceeds from the revolving credit facility to pay
down its outstanding note payable with a bank. The extinguishment of debt
resulted in a gain of approximately $100,000. This gain is included in the
extraordinary item of $382,000.
Convertible Debenture
On October 29, 1996 in connection with the execution of the definitive
merger agreement described in Note 3 between the Company and FMC, the Company
issued a convertible debenture in the amount of $300,000 plus interest at two
(2%) percent per annum over the prime lending rate of Chase Manhattan Bank, N.A.
payable on the first day of each subsequent month next ensuing through and
including twenty four months thereafter. On the twenty fourth month, the
outstanding principal balance and all accrued interest shall become due and
payable.
The proceecs of the loan from FMC were used to satisfy the loan the
Company previously obtained from DHB Capital Group Inc. on June 11, 1996. On
February 7, 1997, First Medical Corporation elected to convert the debenture in
937,500 shares of the Company's common stock.
7 - Income Taxes
At December 31, 1996 and 1995, the Company had a net deferred tax asset
amounting to approximately $2.2 million and $1.6 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 due to uncertainty regarding its ultimate utilization. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities:
DECEMBER 31, 1996 1995
- ------------
Deferred tax assets:
Nondeductible accruals and allowances $ 206 $ 65
Net operating loss carryforward 2,008 1,575
------ ------
2,214 1,640
Deferred tax liabilities:
Depreciation and amortization 30 30
------ -----
Net deferred tax asset $2,184 $1,610
Less: Valuation Allowance 2,184 1,610
----- -----
Deferred Income Taxes --- ---
------ -----
--- ---
====== =====
The Company did not have Federal taxable income in 1996, 1995, and 1994
and, accordingly, no Federal taxes have been provided in the accompanying
consolidated statements of operations. As of December 31, 1996, the Company had
NOL carryforwards of approximately $5 million expiring through 2011.
F-82
<PAGE>
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 $165,000, $177,000 and $148,000, for
the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum annual lease commitments, primarily for office and
warehouse space, with respect to noncancellable leases are as follows:
1997 104
1998 105
1999 114
2000 118
2001 121
Thereafter 313
-------
$ 875
======
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 December 20, 1996, the Company agreed to
extend Mr. Zizza's employment contract through December 31, 2000.
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. On December 20, 1996, the Company agreed to extend Mr.
Bruno's employment agreement through December 31, 2000. Mr. Bruno reduced his
annual salary to $120,000 no part of which shall be deferred pending
consummation of the proposed merger with First Medical Corporation.
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.
F-83
<PAGE>
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, 1996. The Company filed a timely
appeal appealing the decision and the matter was argued before the Maine Supreme
Judicial Court on December 7, 1995. On February 18, 1997 the Supreme Judicial
Court of Maine affirmed the Superior Court's decision. The Company is currently
considering an appeal to the United States Supreme Court. 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, 1996:
<TABLE>
<CAPTION>
Exercise price Weighted average
Option shares range per share price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1994 0 0 0
Granted 18,402,187 $0.50 to $1.00 $0.75
Exercised 0 0 0
Forfeited 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 18,402,187 $0.50 to $1.00 $0.75
Granted 295,000 $0.50 $0.50
Exercised 0 0 0
Forfeited 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 18,697,187 $0.50 to $1.00 $0.75
Granted 55,000 $0.50 $0.50
Exercised 0 0 0
</TABLE>
F-84
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Forfeited 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 18,752,187 $0.50 to $1.00 $0.75
</TABLE>
The Company issues stock options from time to time to certain employees
and outside directors. The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees", and related Interpretations in accounting for stock
options issued. Under APB Opinion 25, because the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation cost is recognized.
FASB Statement 123, "Accounting for Stock-Based Compensation", requires
the Company provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair market value based method prescribed in
FASB Statement 123. The Company estimates the fair value of each stock option at
the grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995 and 1996,
respectively: no dividends paid for both years; expected volatility of 30% for
both years; risk-free interest rates of 6.78% and 6.42%; and expected lives of 4
and 5 years.
Under the accounting provisions of FASB Statement 123, the Company's
net loss per share would have been adjusted to the pro forma amounts indicated
below:
1996 1995
---- ----
Net Loss
As reported (288) (308)
Pro forma (304) (310)
Primary earnings per share
As reported (0.03) (0.03)
Pro forma (0.03) (0.03)
Fully diluted earnings per share
As reported (0.03) (0.03)
Pro forma (0.03) (0.03)
F-85
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Prices
--------------- ----------- ---- ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
$0.50 to $1.00 18,752,187 3 years $0.75 6,752,187 $0.50
</TABLE>
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 21%, 25% and 22% for years ended
December 31, 1996, 1995 and 1994, respectively. This customer accounted for
approximately 14%, 21% and 15 % of accounts receivable on December 31, 1996,
1995 and 1994, respectively.
11 - Supplementary Information
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
Cash paid during the year for:
Interest $252 $278 $264
Income taxes 1 12 78
Supplemental disclosure of non-cash financing activities:
DECEMBER 31, 1996 and 1995
Accounts payable and operating loss were both reduced by approximately $106,000
and $380,000 for December 31, 1996 and 1995, respectively relating to an
adjustment to the value of certain items which relate to the Company's 1991
Restructuring.
F-86
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Charged to Other Charges Balance at End
Dec. 31, Description Year Expenses Other Accounts Add (Deduct) of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 Allowance for doubtful accounts $174 38 -- 206 $342
Inventory obsolescence reserve $158 -- 33 50 $175
1995 Allowance for doubtful accounts $275 -- -- (101) $174
Inventory obsolescence reserve $158 -- -- $158
1994 Allowance for doubtful accounts $300 -- -- (25) $275
Inventory obsolescence reserve $158 -- -- -- $158
</TABLE>
F-87
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED MARCH 31, 1997 1996
- --------------------------------------------------------------------------------
Revenues earned $ 5,765 $ 5,988
Cost of revenues earned 3,776 4,201
------------ ------------
Gross profit 1,989 1,787
Selling, general and administrative expenses 1,966 1,969
------------ ------------
Operating income (loss) 23 (182)
Other income (expense):
Interest expense (236) (220)
Interest and other income 12 7
Amortization of deferred finance (14) --
------------ ------------
(238) (213)
Loss before income taxes (215) (395)
------------ ------------
Net Loss $ (216) $ (396)
============ ============
Loss per share-Primary and Fully Diluted
Net Loss $ (0.02) $ (0.04)
Weighted average Common Shares
and share equivalents outstanding
Primary and Fully diluted 11,089,000 10,339,250
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-88
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 463 $ 471
Accounts receivable, net of
allowance for doubtful
accounts of $404 and $342 4,897 3,581
Inventories, net 1,645 1,215
Prepaid expenses and other current assets 91 279
------ ------
Total current assets 7,096 5,546
Property, plant and equipment, net of
accumulated depreciation and
amortization 55 50
Other assets 26 29
------ ------
Total assets $7,177 $5,625
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-89
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited) (Audited)
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 390 $ 390
Accounts payable 1,585 954
Accrued expenses and other liabilities 1,775 1,642
--------- ---------
Total current liabilities 3,750 2,986
--------- ---------
Long-term debt, net of current maturities 3,429 2,725
--------- ---------
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 1996 and 1995; shares issued
10,339,250 in 1996 and 1995
which excludes 3,016,249 shares
held as treasury stock in 1996 and 1995,
respectively 12 11
Additional paid-in capital 106,893 106,594
Accumulated deficit from January 1, 1986 (105,253) (105,037)
Treasury stock - at cost (1,654) (1,654)
--------- ---------
Total shareholders' equity (deficit) (2) (86)
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 7,177 $ 5,625
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-90
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Accumulated Treasury
Common Paid in Deficit From Stock
Stock Capital Jan. 1, 1986 At Cost Total
-------- -------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1996 $ 11 $ 106,594 $(104,749) $ (1,654) $ 202
Net loss -- -- (396) -- (396)
Balance June 30, 1996 $ 11 $ 106,594 $(105,145) $ (1,654) $ (194)
========= ========= ========= ========= =========
Balance January 1, 1997 $ 11 $ 106,594 $(105,037) $ (1,654) $ (86)
Debenture Conversion $ 1 299 -- -- 300
Net loss -- -- (216) -- (216)
Balance June 30, 1997 $ 12 $ 106,893 $(105,253) $ (1,654) $ (2)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-91
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(216) $(396)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 43 18
Changes in assets and liabilities:
Accounts Receivable (1,316) (134)
Inventories-net (430) (230)
Prepaid and other current assets 188 (28)
Accounts payable 631 159
Accrued expenses 129 155
----- -----
Net cash used in operating activities (971) 4
----- -----
Cash flows from investing activities:
Capital expenditures -- --
Net cash provided by (used in) investing activities (41) (11)
----- -----
Cash flows from financing activities:
Net borrowings from C.I.T. Revolver 1,004 --
Net payments under bank debt -- (180)
Repayment of Capital leases -- (7)
Convertible Debenture -- 300
Net cash provided by (used in) financing activities 1,004 113
----- -----
Net changes in cash (8) 106
Cash at beginning of period 471 347
----- -----
Cash at end of period $ 463 $ 453
===== =====
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-92
<PAGE>
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information for the six months ended June 30, 1997 and 1996 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, 1996 Report on Form 10-K.
The results of operations for the six month period ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
Loss per common share is calculated by dividing net loss by the weighted average
number of common shares and share equivalents outstanding. For the periods
presented, there were no common stock equivalents included in the calculation,
since they would be anti-dilutive.
2. SUPPLEMENTARY SCHEDULE
1997 1996
---- ----
(in thousands)
Statement of cash flows
Six months ended June 30,
Cash paid during the six months for:
Interest $155 $134
Income taxes 1 1
Supplemental disclosure of non-cash financing activities:
On February 7, 1997, First Medical Corporation elected to convert the debenture
into 937,500 shares of the Company's common stock.
F-93
<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 June 30, 1997 gives effect to the
reverse acquisition of Lehigh by FMC. The adjustments are presented as if, at
such date, FMC had acquired Lehigh (which was expected to be finalized during
the third quarter 1997).
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
The pro forma combined financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto of FMC and
the audited 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-94
<PAGE>
First Medical Corporation and subsidiaries and Lehigh Group Inc.
and subsidiaries Pro Forma Combined Balance Sheet
June 30, 1997
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FMC LEHIGH Adjustments Proforma
--- ------ ----------- --------
(1) (2) (3)
--- --- ---
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C> <C>
Cash $ 45 463 -- -- $4,512 $5,020
Accounts and receivable, net 194 4,897 -- -- -- 5,891
Humana IBNR receivable and claims
reserve funds 7,950 -- -- -- 7,950
Due from related parties 950 -- -- -- 950
Inventories -- 1,645 -- -- -- 1,645
Prepaid assets 217 91 -- -- -- 308
------ ----- ------ ------ ----- -----
Total current assets 10,156 7,096 -- -- 4,512 21,764
Property and equipment, net 384 55 -- -- -- 439
Goodwill related to Lehigh Group -- -- 3,319 -- -- 3,319
Investment in Lehigh 819 -- (819) -- -- --
Other Intangible assets 3,033 -- -- -- -- 3,033
Other assets 746 26 -- -- -- -- 772
----- ----- ---------- ----- ---- ------
TOTAL $15,137 $7,177 $2,500 $ -- $4,512 $29,326
LIABILITIES AND SHAREHOLDERS' EQUITY (Deficit)
Current liabilities:
Accounts payable and accrued
expenses $2,348 $3,360 -- -- -- $5,708
Accrued medical claims 8,722 -- -- -- -- 8,722
Current portion of long-term
obligations 268 390 -- -- -- 658
Corporate deposits 673 -- -- -- -- 673
Loans payable to banks 2,651 -- -- -- -- 2,651
Obligations to certain shareholders 431 -- -- -- -- 431
Other liabilities 413 -- -- -- -- 413
----- ---- ----- ----- ----- ------
Total current liabilities 15,505 3,750 -- -- -- 19,255
Other long-term liabilities 230 3,429 -- -- -- 3,659
Obligations to certain
shareholders', net of current
portion 969 -- (488) 481
Stockholders' equity (deficit)
Common stock -- 12 (12) -- -- --
Additional paid in capital 380 106,893 (104,315) -- 5,000 7,958
Retained earnings (deficit) (1,947) (105,253) 106,827 (1,654) -- (2,027)
Treasury stock, at cost -- (1,654) -- 1,654 -- --
----- -------- ------ ------- ----- -----
Total stockholders' equity (deficit):(1,567) (2) 2,500 -- 5,000 5,931
TOTAL $15,137 $7,177 $2,500 $ -- $4,512 $29,326
</TABLE>
F-95
<PAGE>
Adjustments
(1) To record the conversion of Lehigh note payable to FMC by issuing
additional shares to FMC prior to the consummation of the merger and to
record the issuance of shares of FMC for the reverse acquisition and the
resulting goodwill on the issuance of 10,000,000 shares at approximately
$.25 per share.
(2) To retire Lehigh's treasury stock.
(3) To record GDS's capital contribution of $5 million net of $488 previously
provided by GDS, of which $5 million will be contributed as capital to FMC
for shares which upon conversion will represent 22.7% of the ownership of
the combined entity. FMC will issue the following securities to GDS:
1. 10% of FMC Common Stock, which will automatically be exchanged in the
Merger for 1,127,675 shares of Lehigh Common Stock and 103.7461 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 1,127,675 shares of Lehigh Common Stock and 103.7461 shares of
Lehigh Preferred Stock. Together with the shares issued in step 1 above,
these shares will give GDS a total of approximately 22.7% ownership
interest and voting power of Lehigh.
3. 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.
F-96
<PAGE>
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND
SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(unaudited)
(unaudited in thousands except share and per share data)
<TABLE>
<CAPTION>
Combined
FMC Lehigh Adjustments(1) Proforma
--- ------ -------------- --------
<S> <C> <C> <C> <C>
REVENUE $53,014 $10,446 -- $63,460
Medical expense 43,526 -- -- 43,526
Cost of sales -- 7,134 -- 7,134
------- -------- -------- --------
Group profit 9,488 3,312 12,800
Selling, general and administrative
expenses 8,696 3,874 -- 12,570
--------- -------- --------- ---------
Operating Income (loss) 792 (562) -- 230
Other Income (expense):
Interest expense (55) (471) -- (526)
Other Income -- 113 -- 113
--------- -------- --------- ---------
(55) (358) (413)
Amortization of goodwill-Lehigh -- -- 147 (147)
Income (loss) before taxes,
discontinued operations and
extraordinary item 737 (920) (147) (330)
Provision for income taxes 413 -- -- 413
-------- --------- --------- ----------
Income (loss) before discontinued
operations and extraordinary item 324 (920) (147) (743)
Income from discontinued operations -- 250 -- 250
-------- --------- --------- ---------
Income (loss) before extraordinary
item 324 (670) (147) (493)
Extraordinary item-gain on early -- 382 -- 382
-------- --------- --------- ----------
extinguishment of debt
Net Income (loss) $ 324 $ (288) $ (147) $ (111)
Net loss per share ($0.001)
Weighted average number of shares
outstanding after consummation of
the merger 237,000,000
</TABLE>
1. To amortize the goodwill on the FMC and Lehigh acquisition over a period of
15 years.
F-97
<PAGE>
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND
SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1997
(unaudited)
(unaudited in thousands except share and per share data)
<TABLE>
<CAPTION>
Combined
FMC Lehigh Adjustments Proforma
--- ------ ----------- --------
<S> <C> <C> <C> <C>
Revenue $32,783 $5,765 -- $38,548
Medical expense 30,513 -- -- 30,513
Cost of sales -- 3,776 -- 3,776
------- ------ -------- -------
Gross profit 2,270 1,989 4,259
Selling, general and administrative expenses(2) 4,426 1,966 (21) 6,371
------- ------- -------- -------
Operating income (loss) (2,155) 23 21 (2,112)
Other income (expense):
Interest expense (94) (236) -- (330)
Other income (expense) (21) (2) -- (23)
------ ------- ------- -------
(115) (238) -- (353)
Amortization of goodwill-Lehigh(1) -- -- (101) (101)
Income (loss) before taxes (2,271) (215) (80) (2,566)
Provision for income taxes 0 1 -- 1
------ ------- ------- -------
Net Income (loss) $(2,271) $ (216) $ (80) ($2,567)
Net loss per share $(0.0108)
Weighted average number of shares
outstanding after consummation of the
merger 237,000,000
</TABLE>
1. To amortize the goodwill on the FMC and Lehigh acquisition over a period
of 15 years.
2. To reverse equity loss in Lehigh recorded by FMC.
F-98
