As filed with the Securities and Exchange Commission on May ___, 1997
Registration No. 333-11955
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE LEHIGH GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
5063
(Primary Standard Industrial
Classification Code Number)
13-1920670
(I.R.S. Employer
Identification Number)
The Lehigh Group Inc.
810 Seventh Avenue
27th Floor
New York, New York 10019
(212) 333-2620
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------------
Salvatore J. Zizza
The Lehigh Group Inc.
810 Seventh Avenue
27th Floor
New York, New York 10019
(212) 333-2620
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------------
Copy to:
Gary Epstein, Esq. Ilan K. Reich, Esq.
Greenberg Traurig Olshan Grundman Frome & Rosenzweig LLP
1221 Brickell Avenue 505 Park Avenue
Miami, Florida 33131 New York, New York 10022
(305) 579-0623 (212) 753-7200
------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. o
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum Amount of
Title of Each Class of Amount to be Proposed Maximum Aggregate Offering Registration
Securities to be Registered Registered Offering Price Per Share*** Price Fee**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 11,276,250 $0.28125 $3,171,445 $961.04
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Convertible Preferred Stock 1,037,461 $ 0.01 $ 10,375 $ 3.14
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon conversion of 259,365,250 N/A* N/A* N/A*
Series A Convertible Preferred Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Total $964.18
====================================================================================================================================
</TABLE>
<PAGE>
* In accordance with Rule 457(i)
** $3,713 was previously paid on September 13, 1996 and $891.48 was previously
paid on December 27, 1996.
*** Based on the closing price of Lehigh common stock on the New York Stock
Exchange on May 12, 1997.
------------------------------------
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.
================================================================================
<PAGE>
The Lehigh Group Inc.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K Showing the Location
of Information Required by Part I of Form S-4
<TABLE>
<CAPTION>
Item No. Caption Location or Caption in Prospectus
- -------- ------- ---------------------------------
<S> <C> <C>
Item 1 Forepart of Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
Item 2 Inside Front and Outside Back Cover Inside Front Cover Page; Table of
Pages of Prospectus Contents; Available Information
Item 3 Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors; Business
Charges and Other Information Information Regarding Lehigh and Merger
Sub; Business Information Regarding FMC
Item 4 Terms of the Transaction Proposal No. 1 -- The Merger; Certain
Federal Income Tax Consequences;
Description of Lehigh's Capital Stock;
Comparison of Certain Rights of
Stockholders
Item 5 Pro Forma Financial Information Financial Statements
Item 6 Material Contracts with the Company Not Applicable
Being Acquired
Item 7 Additional Information Required for Not Applicable
Reoffering by Persons and Parties
Deemed to Be Underwriters
Item 8 Interests of Named Experts and Counsel Legal Matters; Experts
Item 9 Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
Item 10 Information with Respect to S-3 Not Applicable
Registrants
Item 11 Incorporation of Certain Information by Not Applicable
Reference
Item 12 Information with Respect to S-2 or S-3 Not Applicable
Registrants
Item 13 Incorporation of Certain Information by Not Applicable
Reference
Item 14 Information with Respect to Registrants Summary; Risk Factors; Business
Other than S-2 or S-3 Registrants Information Regarding Lehigh and Merger
Sub; Lehigh Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business Information
Regarding FMC; FMC Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item No. Caption Location or Caption in Prospectus
- -------- ------- ---------------------------------
<S> <C> <C>
Item 15 Information with Respect to S-3 Not Applicable
Companies
Item 16 Information with Respect to S-2 or S-3 Not Applicable
Companies
Item 17 Information with Respect to Companies Not Applicable
Other than S-2 or S-3 Companies
Item 18 Information if Proxies, Consents or Summary; Introduction; Proposal No. 1 --
Authorizations are to be Solicited The Merger; Proposal No. 2 -- The
Certificate Amendments; Proposal No. 3 --
Election of Directors; Proposal No. 4 --
Ratification of Independent Auditors;
Security Ownership of Certain Beneficial
Owners of Lehigh
Item 19 Information if Proxies, Consents or Not Applicable
Authorizations are not to be Solicited, or
in an Exchange Offer
</TABLE>
<PAGE>
THE LEHIGH GROUP INC.
810 Seventh Avenue
27th Floor
New York, New York 10019
April __, 1997
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
The Lehigh Group Inc. ("Lehigh"), which will be held on May __, 1997, at
______________________________________ at ____ Eastern Time (the "Special
Meeting").
At this meeting, you will be asked to consider and vote upon a proposal
(the "Merger Proposal") to approve the proposed merger (the "Merger") of Lehigh
Management Corp., a wholly-owned subsidiary of Lehigh ("Merger Sub"), into First
Medical Corporation ("FMC"), pursuant to an Agreement and Plan of Merger dated
as of October 29, 1996, as amended (the "Merger Agreement"), among Lehigh, FMC
and Merger Sub.
If the Merger Proposal is approved by stockholders, each share of the
Common Stock of FMC (the "FMC Common Stock") would be exchanged for (i)
1,127.675 shares of the Common Stock, $.001 par value per share (the "Lehigh
Common Stock"), of Lehigh and (ii) 103.7461 shares of the Series A Convertible
Preferred Stock, par value $.001 (the "Lehigh Preferred Stock"), of Lehigh. As
more fully described in the accompanying Proxy Statement/Prospectus, each share
of Lehigh Preferred Stock will be convertible into 250 shares of Lehigh Common
Stock and will have a like number of votes per share, voting together with the
Lehigh Common Stock. As a result of these actions, immediately following the
Merger, current Lehigh stockholders and FMC stockholders will each own 50% of
the issued and outstanding shares of Lehigh Common Stock. In the event that all
of the shares of Lehigh Preferred Stock issued to the FMC stockholders are
converted into Lehigh Common Stock, current Lehigh stockholders will own
approximately 4% and FMC stockholders will own approximately 96% of the issued
and outstanding shares of Lehigh Common Stock.
Approval of the Merger will also constitute approval of an amendment to the
Restated Certificate of Incorporation of Lehigh to provide for "blank check"
preferred stock by delegating to the Lehigh Board of Directors the authority to
designate, and to fix the number, rights, preferences, restriction and
limitations of, one or more series of preferred stock (including the Lehigh
Preferred Stock to be issued in connection with the Merger).
You will also be asked at the Special Meeting to vote on: (1) the adoption
of amendments to the Restated Certificate of Incorporation of Lehigh, which will
amend the current Certificate of Incorporation by: (A) eliminating cumulative
voting for directors; (B) eliminating action by stockholders by written consent;
(C) fixing the number of members of the Board of Directors at between seven and
eleven, as determined from time-to-time by the Board of Directors; and (D)
requiring any further amendment to the provisions of the Certificate of
Incorporation addressed by items (A) through (C) to require the vote of the
holders of at least 60% of the outstanding shares of Lehigh Common Stock
(collectively, the "Certificate Amendments"); (2) the adoption of an amendment
to the Restated Certificate of Incorporation of Lehigh, which will amend the
current Certificate of Incorporation by changing the name of the corporation
from "The Lehigh Group Inc." to "First Medical Group, Inc." (subject to
completion of the Merger); (3) the election of five directors to the Board of
Directors (subject to completion of the Merger); (4) ratification of the
appointment of BDO Seidman, LLP as the independent certified public accountants
for Lehigh for the fiscal year ending December 31, 1996; and (5) such other
business as may properly come before the Special Meeting or any adjournments
thereof.
The accompanying Proxy Statement/Prospectus provides detailed information
concerning the Merger and certain additional information. You are urged to read
and carefully consider this information.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER AND THE MERGER AGREEMENT
ARE FAIR TO, AND IN THE BEST INTERESTS OF, LEHIGH. THE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT, AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER PROPOSAL.
<PAGE>
All stockholders are invited to attend the Special Meeting in person.
Approval of the Merger Proposal and the "blank check" preferred stock will
require the affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock. Adoption of the Certificate Amendments eliminating cumulative
voting for directors and fixing the number of directors at between six and nine
requires the affirmative vote of the holders of a majority of the outstanding
shares of Lehigh common stock or 80% of such shares voting at the Special
Meeting, whichever is greater. Adoption of the change of the corporation's name
requires the affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock. The election of directors requires the affirmative vote of a
plurality of the votes cast by all stockholders represented and entitled to vote
thereon. As of the Record Date for the Special Meeting, FMC is the beneficial
owner of approximately 25.4% of the issued and outstanding shares of Lehigh
Common Stock.
Because of the significance of the proposed transaction to Lehigh, your
participation in the Special Meeting, in person or by proxy, is especially
important.
In order that your shares may be represented at the Special Meeting, you
are urged to complete, sign, date and return promptly the accompanying Proxy in
the enclosed envelope, whether or not you plan to attend the Special Meeting. If
you attend the Special Meeting in person, you may, if you wish, vote personally
on all matters brought before the Special Meeting even if you have previously
returned your Proxy.
Sincerely,
Salvatore J. Zizza
President and Chief Executive Officer
<PAGE>
THE LEHIGH GROUP INC.
810 Seventh Avenue
27th Floor
New York, New York 10019
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on May ___, 1997
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders of The
Lehigh Group Inc. ("Lehigh") will be held on May __, 1997, at
_____________________________ at ____ __.m., Eastern Time (the "Special
Meeting"), for the following purposes:
1. To consider and to vote on a proposal (the "Merger Proposal") to approve
the proposed merger (the "Merger") of Lehigh Management Corp., a Delaware
corporation and a wholly-owned subsidiary of Lehigh ("Merger Sub"), with and
into First Medical Corporation, a Delaware corporation ("FMC"), pursuant to an
Agreement and Plan of Merger dated as of October 29, 1996, as amended (the
"Merger Agreement"), among Lehigh, FMC and Merger Sub, a copy of which is
attached to the accompanying Proxy Statement/Prospectus as Appendix A. Approval
of the Merger will also constitute approval of an amendment to the Restated
Certificate of Incorporation of Lehigh to provide for "blank check" preferred
stock by delegating to the Lehigh Board of Directors the authority to designate,
and to fix the number, rights, preferences, restriction and limitations of, one
or more series of preferred stock (including the Series A Convertible Preferred
Stock to be issued in connection with the Merger).
2. To approve the adoption of amendments to the Restated Certificate of
Incorporation of Lehigh which will amend the current Certificate of
Incorporation by: (A) eliminating cumulative voting for directors; (B)
eliminating action by stockholders by written consent; (C) fixing the number of
members of the Board of Director at between seven and eleven, as determined from
time-to-time by the Board of Directors; and (D) requiring any further amendment
to the provisions of the Certificate of Incorporation addressed by items (A)
through (D) to require the vote of the holders of at least 60% of the
outstanding shares of Lehigh Common Stock (collectively, the "Certificate
Amendments").
3. To approve the adoption of an amendment to the Restated Certificate of
Incorporation of Lehigh, which will change the name of the corporation from "The
Lehigh Group Inc." to "First Medical Group, Inc." (subject to completion of the
Merger);
4. To elect five directors of Lehigh to serve for a one year term and until
their successors are elected and qualify (subject to completion of the Merger);
5. To confirm the appointment of BDO Seidman, LLP as the independent
certified public accountants for Lehigh for the year ending December 31, 1996;
and
6. To transact such other business as may properly come before the meeting.
The foregoing items of business are more fully described in the Proxy
Statement/Prospectus accompanying this Notice.
Only stockholders of record at the close of business on ________ __, 1997
are entitled to notice of, and to vote at, the meeting and any adjournments
thereof.
All stockholders are invited to attend the Special Meeting in person.
Approval of the Merger Proposal and the "blank check" preferred stock will
require the affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock. Adoption of the Certificate Amendments eliminating cumulative
voting for directors and fixing the number of directors at between seven and
eleven requires the affirmative vote of the holders of a majority of the
outstanding shares of Lehigh common stock or 80% of such shares voting at the
Special Meeting, whichever is greater. Adoption of the change of the
corporation's name requires the affirmative vote of a majority of the
outstanding shares of Lehigh common stock. The election of directors requires
the affirmative vote of a plurality of the votes cast by all stockholders
represented and entitled to vote thereon. As of the Record Date for the Special
Meeting,
<PAGE>
FMC is the beneficial owner of approximately 25.4% of the issued and outstanding
shares of Lehigh common stock.
THE BOARD OF DIRECTORS OF LEHIGH RECOMMENDS THAT STOCKHOLDERS VOTE TO
APPROVE THE MERGER PROPOSAL AND THE OTHER MATTERS TO BE PRESENTED AT THE SPECIAL
MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Robert A. Bruno
Secretary
New York, New York
April __, 1997
YOUR VOTE IS IMPORTANT
To ensure your representation at the meeting, you are urged to mark, sign,
date and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. To revoke a proxy, you must
submit to the Secretary of Lehigh prior to voting, either a signed instrument of
revocation or a duly executed proxy bearing a date or time later than the proxy
being revoked. If you attend the meeting, you may vote in person even if you
previously returned a proxy.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION ....................................................................... 2
SUMMARY ..................................................................................... 3
The Companies ...................................................................... 3
Meeting of Stockholders of Lehigh .................................................. 3
The Merger ......................................................................... 4
Price Range of Lehigh Common Stock ................................................. 8
SELECTED FINANCIAL DATA ..................................................................... 9
RISK FACTORS ................................................................................ 11
INTRODUCTION ................................................................................ 16
Meeting of Stockholders ............................................................ 16
Purpose of Meeting ................................................................. 16
Voting Requirements at the Meeting ................................................. 16
Proxies ............................................................................ 17
PROPOSAL NO. 1 -- THE MERGER ................................................................ 18
General ............................................................................ 18
Background to the Merger .................................................................... 19
Lehigh Reasons For the Merger; Recommendation
of the Lehigh Board ............................................................... 25
Federal Income Tax Consequences .................................................... 27
Accounting Treatment ........................................................................ 27
Interests of Certain Members of Lehigh Management in the Merger .................... 27
Management After the Merger ........................................................ 27
Stock Options ...................................................................... 28
No Appraisal Rights ................................................................ 28
Trading Market ..................................................................... 29
Effective Time ..................................................................... 29
The Merger ......................................................................... 29
Exchange of Shares ................................................................. 29
Fractional Shares .................................................................. 30
Registration and Listing of Share Consideration .................................... 30
Representations and Warranties ..................................................... 30
Covenants .......................................................................... 31
Access to Information .............................................................. 31
Additional Covenants ............................................................... 31
Conditions to the Merger ........................................................... 31
Termination and Termination Expenses ............................................... 32
Governmental and Regulatory Approvals .............................................. 32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ..................................................... 32
Consequences to Lehigh and FMC ..................................................... 33
Consequences to FMC Stockholders ................................................... 33
Consequences to Lehigh Stockholders ................................................ 33
Limitations on Description ......................................................... 33
</TABLE>
<PAGE>
TABLE OF CONTENTS (cont'd)
<TABLE>
<CAPTION>
Page
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<S> <C>
PROPOSAL NO. 2 -- THE CERTIFICATE AMENDMENTS ................................................ 35
Part A -- Eliminating Cumulative Voting for Directors .............................. 35
Part B -- Eliminating Action by Stockholders by Written Consent .................... 37
Part C -- Fixing the Number of Directors at between Seven and Eleven ............... 37
Part D -- Requiring any Further Amendment to the Provisions of the Certificate of
Incorporation addressed by Parts (A) through (C) to Require the Vote of the
holders of at Least 60% of the Outstanding Shares of Lehigh Common Stock .. 38
PROPOSAL NO. 3 -- CHANGING THE NAME OF THE CORPORATION FROM
"THE LEHIGH GROUP INC." TO "FIRST MEDICAL GROUP, INC." ........... 39
PROPOSAL NO. 4 -- ELECTION OF DIRECTORS ..................................................... 40
PROPOSAL NO. 5 -- RATIFICATION OF INDEPENDENT AUDITORS ...................................... 49
BUSINESS INFORMATION REGARDING LEHIGH AND MERGER SUB ........................................ 50
Lehigh ............................................................................. 50
Merger Sub ......................................................................... 55
LEHIGH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................ 56
Results of Operations .............................................................. 56
DESCRIPTION OF LEHIGH'S CAPITAL STOCK ....................................................... 60
BUSINESS INFORMATION REGARDING FMC .......................................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................... 73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LEHIGH ................................... 77
LEGAL MATTERS ............................................................................... 79
EXPERTS ..................................................................................... 80
INDEX TO FINANCIAL STATEMENTS ............................................................... F-1
APPENDIX A .................................................................................. A-1
APPENDIX B .................................................................................. B-1
APPENDIX C .................................................................................. C-1
APPENDIX D .................................................................................. D-1
APPENDIX E .................................................................................. E-1
</TABLE>
<PAGE>
THE LEHIGH GROUP INC.
11,276,250 SHARES OF COMMON STOCK
1,037,461 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK
259,365,250 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
SERIES A CONVERTIBLE PREFERRED STOCK
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY __, 1997
This Proxy Statement/Prospectus and the accompanying forms of proxy are
being furnished in connection with the solicitation of proxies by the Board of
Directors of The Lehigh Group Inc., a Delaware corporation ("Lehigh"), to be
used at the Special Meeting of Stockholders of Lehigh to be held on May __, 1997
at ______ Eastern Time at _______________, (the "Meeting"). This Proxy
Statement/Prospectus and the accompanying form of proxy is first being mailed to
stockholders of Lehigh on or about April __, 1997.
At the Meeting the stockholders of Lehigh will consider and vote on
Proposal No. 1 (the "Merger Proposal") -- to approve and adopt the Agreement and
Plan of Merger dated as of October 29, 1996, as amended, (the "Merger
Agreement"), among Lehigh, First Medical Corporation, a Delaware corporation
("FMC" or the "Company") and Lehigh Management Corp., a Delaware corporation and
a wholly-owned subsidiary of Lehigh ("Merger Sub"). The Merger Agreement
provides for the merger (the "Merger") of Merger Sub with and into FMC, with FMC
to be the surviving corporation (the "Surviving Corporation").
In the Merger, each share of the Common Stock of FMC (the "FMC Common
Stock") would be exchanged for (i) 1,127.675 shares of the Common Stock, $.001
par value per share (the "Lehigh Common Stock"), of Lehigh and (ii) 103.7461
shares of the Series A Convertible Preferred Stock, par value $.001 (the "Lehigh
Preferred Stock"), of Lehigh. Each share of Lehigh Preferred Stock will be
convertible into 250 shares of Lehigh Common Stock and will have a like number
of votes per share, voting together with the Lehigh Common Stock. There are
currently outstanding 10,000 shares of FMC Common Stock. Approval of the Merger
shall also constitute approval of an amendment to the Restated Certificate of
Incorporation of Lehigh to provide for "blank check" preferred stock by
delegating to the Lehigh Board of Directors the authority to designate, and to
fix the number, rights, preferences, restriction and limitations of, one or more
series of preferred stock (including the Lehigh Preferred Stock to be issued in
connection with the Merger). As a result of these actions, immediately following
the Merger, current Lehigh stockholders and FMC stockholders will each own 50%
of the issued and outstanding shares of Lehigh Common Stock. In the event that
all of the shares of Lehigh Preferred Stock issued to the FMC stockholders are
converted into Lehigh Common Stock, current Lehigh stockholders will own
approximately 4% and FMC stockholders will own approximately 96% of the issued
and outstanding shares of Lehigh Common Stock.
At the Meeting, the stockholders of Lehigh will also vote on: Proposal No.
2 -- the adoption of amendments to the Restated Certificate of Incorporation of
Lehigh, which will amend the current Certificate of Incorporation by: (A)
eliminating cumulative voting for directors; (B) eliminating action by
stockholders by written consent; (C) fixing the number of members of the Board
of Directors at between seven and eleven, as determined from time to time by the
Board of Directors; and (D) requiring any further amendment to the provisions of
the Certificate of Incorporation addressed by items (A) through (C) to require
the vote of the holders of at least 60% of the outstanding shares of Lehigh
Common Stock (collectively, the "Certificate Amendments"); Proposal No. 3 --
changing the name of the corporation from "The Lehigh Group Inc." to "First
Medical Group, Inc." (subject to completion of the Merger); Proposal No. 4 --
the election of seven directors to the Board of Directors (subject to completion
of the Merger); and Proposal No. 5 -- ratification of the appointment of BDO
Seidman, LLP as the independent certified public accountants for Lehigh for the
fiscal year ending December 31, 1996.
<PAGE>
STOCKHOLDERS ARE URGED TO CAREFULLY CONSIDER THIS
PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE
FACTORS DISCUSSED UNDER THE HEADING "RISK FACTORS" AT PAGE 12.
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is April __, 1997.
This Proxy Statement/Prospectus also serves as a Prospectus of Lehigh under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of Lehigh Common Stock and Lehigh Preferred Stock issuable in connection
with the Merger, and the shares of Lehigh Common Stock issuable upon conversion
of the Lehigh Preferred Stock.
No person is authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus,
and if given or made, such information or representation should not be relied
upon as having been authorized. This Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Proxy Statement/Prospectus, or the solicitation of a
proxy, in any jurisdiction in which such offer or solicitation may not lawfully
be made. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities pursuant to this Proxy Statement/Prospectus shall,
under any circumstances, create an implication that there has been no change in
the information set forth herein since the date of this Proxy
Statement/Prospectus.
AVAILABLE INFORMATION
Lehigh is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "SEC"). Reports and other information filed by Lehigh can be
inspected and copied at the public reference facilities at the SEC's office at
450 Fifth Street, N.W., Washington, D.C. 20549, at the SEC's Regional Office at
Seven World Trade Center, New York, New York 10048 and at the SEC's Regional
Office at Citicorp Center, 500 W. Madison Street, Chicago, Illinois 60621.
Copies of such material can be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material and other information concerning Lehigh can be inspected and copied at
the offices of the New York Stock Exchange, 20 Broad Street, Inc., New York, New
York 10005. Such material may also be accessed electronically by means of the
SEC's home page on the Internet at http://www.sec.gov.
Lehigh has filed with the SEC a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act covering the securities
described herein. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Statements
contained herein or incorporated herein by reference concerning the provisions
of documents are summaries of such documents, and each statement is qualified in
its entirety by reference to the applicable document if filed with the SEC or
attached as an appendix hereto. For further information, reference is hereby
made to the Registration Statement and the exhibits filed therewith. The
Registration Statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
2
<PAGE>
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This Summary does not contain a complete
statement of all material features of the proposals to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Proxy Statement/Prospectus and in the Appendices annexed hereto.
The Companies
Lehigh.............................. Lehigh (formerly The LVI Group Inc.)
through its wholly-owned subsidiary,
HallMark Electrical Supplies Corp.
("HallMark"), is engaged in the
distribution of electrical supplies for
the construction industry both
domestically (primarily in the New York
Metropolitan area) and for export. See
"Business Information Regarding Lehigh
and Merger Sub."
On ________ __, 1997, there were
11,276,250 shares of Lehigh Common Stock
outstanding and entitled to vote at the
Special Meeting.
Lehigh's executive offices are located
at 810 Seventh Avenue, 27th Floor, New
York, New York 10019, and its telephone
number is (212) 333-2620.
FMC................................. FMC is an owner-manager and provider of
management and consulting services to
physicians, hospitals and other health
care delivery organizations and
facilities. FMC's diversified operations
are currently conducted through three
divisions: (i) a physician practice
management division which provides
physician management services including
the operation of clinical facilities and
management services to Medical Service
Organizations, (ii) an international
division which currently manages western
style medical centers in Eastern Europe
and the Commonwealth of Independent
States (formerly Russia) (the "CIS") and
(iii) a recently formed health care
services division which provides a
variety of administrative and clinical
services to acute care hospitals and
other health care providers. FMC was
formed in January 1996 pursuant to the
transaction between MedExec, Inc., a
Florida corporation, and its
subsidiaries and American Medical
Clinics, Inc., a Delaware corporation,
and its subsidiaries. See "Business
Information Regarding FMC."
Meeting of Stockholders of Lehigh
Time, Date, Place and Purposes...... The Lehigh Special Meeting will be held
on May __, 1997 at _________, Eastern
Time, at _______________________.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
At the Meeting, Lehigh stockholders will
be asked to consider and vote upon
proposals to approve the Merger
Agreement, a copy of which is attached,
hereto as Appendix A. Lehigh
stockholders will also be asked to
consider certain charter amendments and
the election of seven directors. See
"Introduction -- Meeting of Stockholders
and -- Purpose of Meeting."
Record Date, Vote Required.......... The record date for stockholders of
Lehigh entitled to vote upon the Merger
is ________ __, 1997 (the "Record
Date"). Approval of the Merger Proposal
by the Lehigh stockholders requires the
affirmative vote of a majority of the
outstanding shares of Lehigh Common
Stock. If the Merger is not approved by
stockholders, the Merger will not be
effected and the current directors of
Lehigh will continue to serve. The
presence, either in person or by
properly executed proxy, at the Meeting
of the holders of a majority of the
outstanding shares entitled to vote at
such meeting is necessary to constitute
a quorum at each such meeting.
For the effect of abstentions and
"broker non-votes," see "Introduction--
Voting Requirements at Meeting."
The Merger
Effect of the Merger................ If the Merger is approved by the
stockholders of Lehigh, reapproved by
FMC shareholders and other conditions to
closing specified in the Merger
Agreement are satisfied or waived,
Merger Sub will be merged with and into
FMC, with FMC being the surviving
corporation of the Merger. The surviving
corporation will continue to be a
wholly-owned subsidiary of Lehigh whose
name will be changed to "First Medical
Corporation." On the Effective Date of
the Merger, FMC will continue to possess
all of its assets and liabilities, and
the separate corporate existence of
Merger Sub will cease. See "Proposal No.
1 -- The Merger."
Effective Date of the Merger ....... The Merger shall become effective (the
"Effective Time") when the following
actions shall have been completed: (i)
the Merger Agreement shall have been
adopted and approved by the stockholders
of Lehigh and Merger Sub; (ii) all
conditions precedent to the consummation
of the Merger specified in the Merger
Agreement shall have been satisfied or
duly waived by the party entitled to
satisfaction; and (iii) a Certificate of
Merger shall have been filed with the
Secretary of State of Delaware, all of
which must occur on or before June 30,
1997. See "Proposal No. 1 -- The
Merger."
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4
<PAGE>
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Terms of the Merger ................ The Merger Agreement provides that each
share of 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.
Currently there are outstanding 10,000
shares of FMC Common Stock. Each share
of Lehigh Preferred Stock will be
convertible into 250 shares of Lehigh
Common Stock and will have a like number
of votes per share, voting together with
the Lehigh Common Stock. As a result of
these actions, immediately following the
Merger, current Lehigh stockholders and
FMC stockholders will each own 50% of
the issued and outstanding shares of
Lehigh Common Stock. In the event that
all of the shares of Lehigh Preferred
Stock issued to the FMC stockholders are
converted into Lehigh Common Stock,
current Lehigh stockholders will own
approximately 4% and FMC stockholders
will own approximately 96% of the issued
and outstanding shares of Lehigh Common
Stock. See "Proposal No. 1 -- The
Merger."
The Board of Directors and Upon consummation of the Merger, only
Management of Lehigh Following one of the six members of Lehigh's Board
Consummation of the Merger; of Directors will be a current director
Change of Control................. of Lehigh, and Mr. Dennis A. Sokol,
currently the Chairman of the Board of
FMC, will be the Chairman of the Board
and Chief Executive Officer of Lehigh
(which will be renamed "First Medical
Group, Inc."), thereby effectively
causing a change of control of Lehigh.
Mr. Salvatore J. Zizza, the Chairman and
Chief Executive Officer of Lehigh, will
become Executive Vice President and
Treasurer, and Mr. Robert A. Bruno,
Esq., Vice President and General Counsel
of Lehigh, will become Vice President
and Secretary. See "Proposal No. 3 --
Election of Directors."
Arrangements with Major Investor; FMC and Generale De Sante International,
Potential Change of Control of PLC ("GDS") are parties to a
Lehigh............................ Subscription Agreement, dated June 11,
1996, pursuant to which at the Effective
Time of the Merger GDS will pay $5
million in order to acquire a variety of
ownership interests in Lehigh and its
subsidiaries. See "Subscription
Agreement with GDS; Potential Change of
Control of Lehigh." Pursuant to this
agreement, GDS will become Lehigh's
largest single stockholder following the
Merger, with an approximately 22.7%
ownership and voting interest.
Furthermore, until the fifth anniversary
of the Merger, GDS will have the option
to increase its ownership interest in
Lehigh to 51%, at a price equal to 110%
of the average 30-day trailing market
price. This increase in ownership would
occur through the issuance of new stock
by Lehigh; as a result, all other
stockholders' ownership interests would
be diluted and GDS would gain control of
Lehigh.
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5
<PAGE>
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Conditions to the Merger;
Termination....................... Lehigh's obligation to consummate the
Merger is subject to the approval of its
stockholders and a number of other
conditions, each of which may be waived
either before or after the vote. Such
other conditions include, but are not
limited to, that on or before the
Effective Time (i) no action, lawsuit or
other proceeding shall have been
instituted which seeks to or does
prohibit or restrain consummation of the
Merger (no such action or lawsuit
currently exists); and (ii) there shall
not have been any material adverse
change affecting either Lehigh or FMC
since October 29, 1996. The Board of
Directors and stockholders of FMC
approved the Merger Agreement and the
consummation of the Merger on October
25, 1996. The Merger Agreement may be
terminated at any time before the
Effective Time, whether before or after
the Meeting, by the mutual written
consent of the parties, by any party if
it is not willing to waive a condition
that another party cannot satisfy by the
Effective Time, or by any party if the
Merger is not consummated by June 30,
1997 for any reason other than a breach
by the party giving such notice, unless
such date is extended by mutual
agreement of the parties. Lehigh does
not intend on waiving any material
conditions. (7) In addition, Lehigh may
terminate the Merger Agreement if it
consummates a business combination with
any other party which, in the opinion of
the Board of Directors of Lehigh, is
more favorable to Lehigh and its
stockholders than the Merger (an
"Alternate Combination"). In the event
Lehigh consummates an Alternate
Combination, Lehigh shall pay FMC the
sum of $1.5 million. See "Proposal No. 1
-- The Merger."
Recommendation of the Board of
Directors of Lehigh............... The Board of Directors of Lehigh has
approved the Merger Agreement and the
transactions contemplated thereby. THE
BOARD OF DIRECTORS OF LEHIGH RECOMMENDS
APPROVAL OF THE MERGER AGREEMENT BY
STOCKHOLDERS. For a discussion of the
reasons favoring the Merger considered
by Lehigh's Board of Directors in
approving the Merger, see "Proposal No.
1 -- The Merger."
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6
<PAGE>
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Significant Stockholders' Voting
Intentions.......................... FMC, the holder of approximately 25.4%
of the outstanding Lehigh Common Stock,
will vote its ownership interest in
favor of the Merger Proposal. Mr. Zizza
intends to vote in favor of the proposed
merger. The 37.7% of stock that Mr.
Zizza beneficially owns is broken down
as follows; (i) an option to purchase
6,000,000 shares or 35% of Lehigh Common
Stock at an exercise price of $0.50 per
share, (ii) 382 shares owned by trust
accounts for the benefit of Mr. Zizza's
minor children as to which he disclaims
beneficial ownership and (iii) 255,884
or 2.5% that Mr. Zizza owns outright.
Mr. Zizza has agreed not to exercise any
of his options or warrants prior to the
consummation of the proposed merger. As
part of Mr. Zizza's employment contract
dated August 22, 1994 the Board agreed
to grant Mr. Zizza options to purchase
10,250,000 shares of Lehigh's common
stock at prices ranging from $0.50 to
$1.00 per share. Mr. Zizza subsequently
purchased warrants from Mr. Bassani, to
purchase 7,750,000 shares of Lehigh's
common stock at prices ranging from
$0.50 to $1.00 per share. Mr. Zizza and
the Board agreed that simultaneously
upon consummation of the proposed
merger, all of Mr. Zizza's options and
warrants shall convert into 3% of
Lehigh's common stock at an exercise
price of $0.875 per share. (8) In
addition, certain officers, directors
and other stockholders of Lehigh, who
together hold approximately 10% of the
Lehigh Common Stock, have verbally
indicated their intention to vote in
favor of the Merger Proposal. No
director or officer has indicated they
will vote against the merger. (8) See
"Proposal No. 1 -- The Merger."
Opinion of Financial Advisor........ Neither Lehigh nor FMC has requested or
obtained the opinion of any financial
advisor in connection with the Merger.
See "Proposal No. 1 -- The Merger --
Lehigh Reasons for the Merger;
Recommendation of the Lehigh Board."
Governmental and Regulatory Neither Lehigh nor FMC believes that any
Approvals......................... government or regulatory approvals are
required for consummation of the Merger,
other than compliance with applicable
securities laws and the filing of the
Certificate of Merger under Delaware
law. See "Proposal No. 1 -- The Merger."
Certain United States Federal Income See "Certain Federal Income Tax
Tax Consequences.................. Consequences" for a discussion of the
treatment of the Merger for federal
income tax purposes.
Accounting Treatment................ Both Lehigh and FMC intend to treat the
Merger as a "purchase" of Lehigh by FMC
for accounting and financial reporting
purposes. See "Unaudited Pro Forma
Combined Financial Statements" in the
Financial Statements portion of this
Proxy Statement/Prospectus.
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7
<PAGE>
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Appraisal Rights.................... The stockholders of Lehigh will not have
any appraisal rights in connection with
the Merger. See "Proposal No. 1 -- The
Merger."
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8
<PAGE>
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Price Range of Lehigh Common Stock
The following table reflects the range of the reported high and low closing
or last sale prices of Lehigh Common Stock on the NYSE Composite Tape for the
calendar quarters indicated. The information in the table and in the following
paragraph has been adjusted to reflect retroactively all applicable stock splits
and stock dividends.
Lehigh Common Stock
-------------------
High Low
---- ---
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
1997:
First quarter ........................... $ 1/4 $13/32
Second quarter
(through April 7, 1997) ................. 9/32 1/4
On October 28, 1996, the last full trading day prior to the execution and
public announcement of the execution of the Merger Agreement, the closing price
of the Lehigh Common Stock was $0.34 per share, as reported on the NYSE
Composite Tape. On April __, 1997, the most recent practicable date prior to the
mailing of this Proxy Statement/Prospectus the last sale price of Lehigh Common
Stock was $___ per share, as reported on the NYSE Composite Tape. Lehigh
stockholders are encouraged to obtain a current market quotation.
Lehigh has not paid any cash dividends since January 1, 1995.
9
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<PAGE>
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SELECTED FINANCIAL DATA
(Amounts in thousands, except share and per share data)
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 First Medical Corporation.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1992(1) 1993(1) 1994(1) 1995(1) 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues:
Capitated revenue $ 5,406 $ 10,563 $ 20,253 $ 21,744 45,070
Fee-for-service 53 96 200 182 7,075
Other 398 428 865 746 869
-------- -------- -------- -------- --------
Total revenue 5,857 11,087 21,318 22,672 53,014
Medical expenses 4,480 8,405 16,568 18,444 43,526
Gross profit 1,377 2,682 4,750 4,228 9,488
Operating expenses:
Salaries and related benefits 561 670 1,651 2,434 3,503
Other operating expenses 573 991 1,771 2,200 4,236
-------- -------- -------- -------- --------
Total operating expenses 1,134 1,661 3,422 4,634 7,739
Income (loss) from operations 243 1,021 1,328 (406) 1,749
Other expenses (income) 4 218 (35) (42) 884
Net income (loss) before taxes 247 803 1,364 (364) 865
Pro forma adjustments for income
taxes(2) 99 321 545 -- 413
-------- -------- -------- -------- --------
Pro forma net income (loss) from
continuing operations $ 148 $ 482 $ 818 ($ 364) 452
======== ======== ======== ======== ========
Pro forma net income (loss) from
continuing operations per share $ 14.80 $ 48.20 $ 81.80 $ (36.40) 45.20
Pro forma weighted average
number of FMC shares currently
outstanding (3) 10,000 10,000 10,000 10,000 10,000
Cash Dividends as Declared 12 17 117 38 --
Balance Sheet Data: 7
Working Capital $ 83 $ 279 $ 272 $ (302) (1,747)
Total Assets 840 2,739 4,128 3,045 12,452
Current Liabilities 657 1,341 3,157 2,817 10,596
Stockholder's Equity 183 1,398 972 227 832
Book Value per share 18 140 97 23 $ 83.20
</TABLE>
(1) The selected 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. As described in note 1 of FMC's audited consolidated financial
statements, on January 21, 1996, MedExec and American Medical Clinics, Inc.
entered into a transaction to form FMC.
(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 currently issued and outstanding is 10,000.
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10
<PAGE>
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THE LEHIGH GROUP INC. & SUBSIDIARIES
Selected Financial Information
(in Thousands, Except For Per Share Data)
Statement of Operations Data
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues earned $ 10,446 $ 12,105 $ 12,247 $ 12,890 $ 10,729
Loss from continuing operations $ (920) $ (558) $ (410) $ (250) $ (2,048)
Loss per common share from continuing
operations $ (0.09) $ (0.05) $ (0.04) $ (0.03) $ (0.19)
Cash dividends declared per
common share -- -- -- -- --
<CAPTION>
Balance Sheet Data
December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 2,560 $ 2,437 $ 3,233 $ 2,800 ($28,700)
Total assets 5,625 $ 6,622 $ 7,441 $ 7,050 $ 13,753
Long-term debt 2,725 $ 2,080 $ 2,361 $ 2,524 $ 12,787
Total debt (A) 3,115 $ 2,950 $ 3,240 $ 3,615 $ 45,882
Shareholders' equity (deficit) (86) $ 202 $ 510 $ (5,099) $(45,041)
Book Value per share (.01) (.02) $ (0.05) $ (6.92) $ (6.15)
</TABLE>
(A) Includes long term debt, current maturities of long term debt and Note
payable - bank.
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11
<PAGE>
RISK FACTORS
Holders of Lehigh Common Stock should consider carefully all of the
information set forth in this Proxy Statement/Prospectus including the
information in the Appendix and, in particular, should evaluate the specific
factors set forth below for risks associated with the Merger and ownership of
Lehigh Common Stock. These risk factors should be considered in conjunction with
the other information included and incorporated by reference in this Proxy
Statement/Prospectus.
RISK FACTORS RELATED TO LEHIGH
Dilution of Ownership of Lehigh Stockholders. Following the consummation of
the Merger and assuming the conversion of the shares of Lehigh Preferred Stock
issued in connection therewith, the former stockholders of FMC as a group will
beneficially own approximately 96% of the Lehigh Common Stock and the existing
stockholders of Lehigh will own approximately 4% of Lehigh. This represents
substantial dilution of the ownership interests of Lehigh's current stockholders
after consummation of the Merger, by diluting earnings per share of existing
Lehigh stockholders by 96 percent. Inasmuch as Lehigh has reported losses for
the past few years, the practical effect of this dilution will be to
substantially reduce the historical loss per share attributable to Lehigh
stockholders. See "Proposal No. 1 -- The Merger -- Exchange of Shares."
Change of Control of Lehigh. Upon consummation of the Merger, Mr. Dennis A.
Sokol, Chairman of FMC will own approximately 5.77% of Lehigh's Common Stock and
5.77% of the Lehigh Preferred Stock. See "Proposal No. 1 -- The Merger --
Management After the Merger." In addition, assuming the persons nominated as
directors in Proposal No. 4 are elected, only one of the seven members of the
Board of Directors of Lehigh following consummation of the Merger will be
current directors of Lehigh. Accordingly, the former stockholders of FMC as a
group, and Mr. Sokol in particular, will be in a position to control the
election of directors and other corporate matters that require the vote of
Lehigh stockholders. FMC and Generale De Sante International, PLC ("GDS") are
parties to a Subscription Agreement, dated June 11, 1996, pursuant to which at
the Effective Time of the Merger GDS will pay $5 million in order to acquire a
variety of ownership interests in Lehigh and its subsidiaries. See "Subscription
Agreement with GDS; Potential Change of Control of Lehigh." Pursuant to this
agreement, GDS will become Lehigh's largest single stockholder following the
Merger, with an approximately 22.7% ownership and voting interest. Furthermore,
until the fifth anniversary of the Merger, GDS will have the option to increase
its ownership interest in Lehigh to 51%, at a price equal to 110% of the average
30-day trailing market price. This increase in ownership would occur through the
issuance of new stock by Lehigh; as a result, all other stockholders' ownership
interest would be diluted and GDS would gain control of Lehigh.
Possible Volatility of Stock Price. Upon consummation of the Merger, the
market price of the Lehigh Common Stock may be highly volatile. In addition, the
trading volume of Lehigh Common Stock on the New York Stock Exchange, Inc. (the
"NYSE") has been limited. Also, the price of Lehigh Common Stock following
consummation of the Merger will be sensitive to the performance and prospects of
the combined companies.
No Dividends. Lehigh has paid no cash dividends on Lehigh Common Stock and
does not anticipate paying cash dividends in the foreseeable future. Lehigh's
ability to pay dividends is dependent upon, among other things, future earnings,
the operating results and financial condition of Lehigh, its capital
requirements, general business conditions and other pertinent factors, and is
subject to the discretion of the Board of Directors. The Board is authorized to
issue, at any time hereafter, up to
12
<PAGE>
5,000,000 shares of preferred stock on such terms and conditions as it may
determine, which may include preferences as to dividends. Accordingly, there is
no assurance that any dividends will ever be paid on Lehigh Common Stock.
Authorization and Discretionary Issuance of Preferred Stock; Issuance of
Lehigh Preferred Stock in the Merger; Anti-Takeover Effects. Lehigh's
Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares
of preferred stock and approval of the Merger Agreement will also constitute
approval of an amendment to the Lehigh Certificate of Incorporation providing
for "blank check" preferred stock, with such designations, rights, and
preferences as may be determined from time to time by the Board of Directors.
See "Description of Lehigh's Capital Stock -- 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
Lehigh's Common Stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying, or
preventing a change in control of Lehigh. Lehigh's Board expects to approve the
issuance of 1,037,461 shares of Lehigh Preferred Stock to be issued pursuant to
the Merger. The issuance of the Lehigh Preferred Stock could adversely affect
the interests of the holders of Lehigh Common Stock.
The issuance of preferred stock, by discouraging, delaying or preventing a
change in control, may prevent a third-party from making a tender offer which
might be beneficial to Lehigh and its stockholders, or even though some
shareholders might otherwise desire such a tender offer. In particular, the
issuance may discourage a third-party from seeking to acquire Lehigh 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 will have the effect of insulating management of Lehigh from certain
efforts to remove it, or affording 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 First
Medical Corporation (Company's) business. Certain proposals, such as cutbacks in
the Medicare and Medicaid programs, containment of health care costs on an
interim basis by means that could include a freeze on prices charged by
physicians, hospitals and other health care providers, and permitting states
greater flexibility in the administration of Medicaid, could adversely affect
the Company. There can be no assurance that currently proposed or future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company's operating results. See "Business--Government Regulation." In addition,
concern about the proposed reform measures and their potential effect has
contributed to the volatility of stock prices of companies in health care and
related industries and may similarly affect the price of the Common Stock
following the Offering.
13
<PAGE>
Dependence on Capitated Fee Revenue. For the year ended December 31, 1996,
approximately 85.0%, of the Company's net revenues derived from contracts
pursuant to which the Company received a fixed, prepaid monthly fee, or
capitated fee, for each covered life in exchange for assuming the responsibility
for providing of medical services. See following discussion in "Significant
Dependence on One Client" for additional information. The Company's success
under these contracts is dependent upon effective utilization controls,
competitive pricing for purchased services and favorable agreements with payers.
To the extent that the patients or enrollees covered under a capitated fee
contract require more frequent or extensive care than was anticipated by the
Company, the revenue to the Company under the contract may be insufficient to
cover the costs of the care that was provided. All of the Company's capitated
fee contracts contain aggregate expense limitations on each covered life. Given
the increasing pressures from health care payers to restrain costs, changes in
health care practices, inflation, new technologies, major epidemics, natural
disasters and numerous other factors affecting the delivery and cost of health
care, most of which are beyond the Company's control, there can be no assurance
that capitated fee contracts will be profitable for the Company in the future.
Inability of the Company to Obtain New Contracts and Manage Costs. A
significant portion of the Company's historical and planned growth in revenues
has resulted from, and is expected to continue to result from, the addition of
new contracts in the physician management division. Obtaining new contracts,
which may involve a competitive bidding process, requires that the Company
accurately assess the costs it will incur in providing services so that it
undertakes contracts where the Company can expect to realize adequate profit
margins or otherwise meet its objectives. The acquisition of new contracts, as
well as the maintenance of existing contracts, is made more difficult by
increasing pressures from health care payors to restrict or reduce reimbursement
rates at a time when the cost of providing medical services continues to
increase. To the extent that enrollees require more frequent or extensive care
than as anticipated by the Company, the revenue to the Company under a contract
may be insufficient to cover the costs of the care that was provided. Any
failure of the Company to manage the cost of providing health care services or
price its services appropriately may have a material adverse effect on the
Company's operations.
Highly Competitive Business. The provision of physician management services
for HMOs is a highly competitive business in which the Company competes for
contracts with several national and many regional and local providers of
physician management services. Furthermore, the Company competes with
traditional managers of health care services, such as hospitals and HMOs, some
of which directly recruit and manage physicians. While competition is generally
based on cost and quality of care, it is not possible to predict the extent of
competition that present or future activities of the Company will encounter
because of changing competitive conditions, changes in laws and regulations,
government budgeting, technological and economic developments and other factors.
Certain of the Company's competitors have access to substantially greater
financial resources than the Company. See "Business--Competition."
Significant Dependence on One Client. A substantial portion of the revenues
of the Company's managed care business are derived from prepaid contractual
arrangements with Humana Medical Plan, Inc. and its affiliates (collectively,
"Humana"), pursuant to which Humana pays the Company a capitated fee. 85% or
approximately $45,070,000 (9) of the Company's managed care business revenue for
the year ended December 31, 1996 are derived from such prepaid contractual
agreements with Humana. In the ordinary course of business, the Company may in
the future enter into significant additional capitation arrangements with
Humana. The Company's operating results could be adversely affected by the loss
of any such agreements or business relationships. In addition, a significant
decline in an HMO client's number of enrollees could have a material adverse
effect on the Company's operating results.
14
<PAGE>
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 the Company believes it
complies in all material respects with state fee splitting and corporate
practice of medicine laws, based on consultations with the Company's
healthcare/managed care inside legal counsel , (10) there can be no assurance
that, given varying and uncertain interpretations of such laws, the Company
would be found to be in compliance with all restrictions on fee splitting and
the corporate practice of medicine in all states. The Company has not received a
written opinion from its inside legal counsel about compliance with the
violation of state laws regarding fee splitting and the corporate practice of
medicine. (10) The Company 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 the Company 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 the Company to operate through such a structure. The
Company does not employ physicians at the medical facility it manages in Texas.
(12) A determination that the Company is in violation of applicable restrictions
on fee splitting and the corporate practice of medicine, that employment of
physicians could be interpreted as a violation of state laws that prohibit the
corporate practice of medicine, (12) or a change in the law in any state in
which it operates could have a material adverse effect on the Company.
The company currently operates in only one state that prohibits the
corporate practice of medicine, which state is Texas. Risks associated with
expanding the Company's business into other states that have this type of
prohibition include (i) the issue of consolidation of revenues and (ii)
preventing the Company from exploiting the physician-patient relationship in
pursuit of profits. The Company does not consolidate the revenues from Texas,
but operates as a management services organization under a management contract.
If the Company 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. (11)
Corporate Exposure to Professional Liabilities Exceeding the Limits of
Available Insurance Coverage. Due to the nature of its business, the Company
from time to time becomes involved as a defendant in medical malpractice
lawsuits, some of which are currently ongoing, and is subject to the attendant
risk of substantial damage awards. The most significant source of potential
liability in this regard is the negligence of health care professionals employed
or contracted by the Company. To the extent such health care professionals are
employees of the Company or were regarded as agents of the Company in the
practice of medicine, the Company could be held liable for their negligence. In
addition, the Company could be found in certain instances to have been negligent
in performing its contract management services even if no agency relationship
with the health care professional exists. The Company maintains professional
liability insurance on a claims made basis in amounts deemed appropriate by
management, based upon historical claims and the nature and risks of its
business. There can be no assurance, however, that a future claim or claims will
not exceed the limits of available insurance coverage, that any insurer will
remain solvent and able to meet its obligations to provide coverage for any
claim or claims or that such coverage will continue to be available or available
with sufficient limits and at a reasonable cost to adequately and economically
insure the Company's operations in the future. See "Business--Professional
Liability Insurance."
Loss of Other Insurance. The Company attempts to mitigate the risk of
potentially high medical costs incurred in catastrophic cases through stop-loss
provisions, reinsurance and other special reserves which limit the Company's
financial risk. To date, such protection has been provided to the Company
through its provider agreements with Humana. There can be no assurances that the
agreements which provide such insurance to the Company will continue. If
assumption of capitated payments risk through contracts with HMOs could be
construed as insurance, FMC believes there would be no effect from state
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insurance laws due to the circumstance that all of FMC's contracts with HMOs
provides for stop-loss coverage by the HMOs. Any determination of material
noncompliance with insurance regulations or any change in the stop-loss coverage
by the HMOs could adversely affect the operations of FMC.
Reduction in Governmental Reimbursement. The Company assumes the financial
risks related to changes in patient volume, payer mix and reimbursement rates.
There are increasing public and private sector pressures to restrain health care
costs and to restrict reimbursement rates for medical services. During the past
decade, federal and state governments have implemented legislation designed to
slow the rise of health care costs and it is anticipated that such legislative
initiatives will continue. Any such legislation could result in reductions in
reimbursement for the care of patients in governmental programs such as
Medicare, Medicaid and workers' compensation. 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 the Company's operating results. See
"Business--Government Regulation." While the Company believes it is in material
compliance with applicable Medicare and Medicaid reimbursement regulations, all
Medicare and Medicaid providers and practitioners are subject to claims review
and audits. There can be no assurance that the Company would be found to be in
compliance in all respects with such regulations. A determination that the
Company is in violation of such regulations could result in retroactive
adjustments and recoupments and have a material adverse effect on the Company.
International Operations
The Company is subject to numerous factors relating to the business
environments of those developing countries in which the Company conducts
business operations. In particular, fundamental economic and political changes
occurring in Eastern Europe and the CIS could have a material impact on the
Company's international operations and on the Company's ability to continue the
development of its international businesses. There can be no assurance that such
developments in Eastern Europe and the CIS will not have a material adverse
effect on the Company's business operations. See "Potential Political and
Economic Instability in the Eastern Europe and the CIS," "Foreign Government
Regulation."
Potential Political and Economic Instability in Eastern Europe and the CIS.
Eastern Europe and the CIS are undergoing fundamental political and economic
changes, including the introduction of market economies. Consequently, such
countries have only recently begun the process of developing the necessary
framework and infrastructure to support this transition. Laws and regulations
are sometimes adopted without widespread notification, which can delay full
knowledge of their scope and impact, and the enforcement and administration
thereof are often inconsistent and without precedents. As a result, governments
will continue to exercise influence over their country's economy. Uncertainties
will continue to exist with respect to the future governance of, and economic
policies in, such countries. Such involvement could include, but not be limited
to, expropriation, confiscatory taxation, foreign exchange restrictions or
nationalization, all of which could materially effect the Company's
international operations.
Foreign Government Regulation. The Company's operations in Eastern Europe
and the CIS are subject to diverse laws and regulations primarily relating to
foreign investment and numerous national and local laws and regulations. Failure
to comply with such laws or regulations could have a material adverse effect on
the Company. At the present time, the Company is unaware of any restrictions on
foreign investment that could materially affect the Company's business. The
Company believes it is in compliance with foreign government regulations.
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Other Risks Related to FMC
Dependence on Key Personnel. The Company is dependent upon the services of
certain of its executive officers for the management of the Company and the
implementation of its strategy, including, Dennis A. Sokol, Elias M. Nemnom,
Shannon Slusher, and Michael Slouchier, M.D. The Company does not maintain key
man life insurance policies for these individuals. The loss to the Company of
the services of any of these executive officers could adversely affect the
Company's operations.
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INTRODUCTION
Meeting of Stockholders
This Proxy Statement/Prospectus is being furnished to the holders of Lehigh
Common Stock in connection with the solicitation of proxies by and on behalf of
the Lehigh Board for use at the Meeting to be held at ________________, Eastern
Time, on May __, 1997, at _________________________, and at any adjournments
thereof. The Lehigh Board has fixed the close of business on ________ __, 1997
(the "Lehigh Record Date") as the record date for determining the stockholders
of Lehigh entitled to vote at the Meeting. This Proxy Statement/Prospectus and
the enclosed proxy are first being sent to holders of Lehigh Common Stock on or
about April ___, 1997.
Purpose of Meeting
At the Meeting, Lehigh's stockholders will consider and vote upon Proposal
No. 1 -- The Merger Proposal. Approval of the Merger shall also constitute
approval of an amendment to the Restated Certificate of Incorporation of Lehigh
to provide for "blank check" preferred stock by delegating to the Lehigh Board
of Directors the authority to designate, and to fix the number, rights,
preferences, restriction and limitations of, one or more series of preferred
stock (including the Lehigh Preferred Stock to be issued in connection with the
Merger). Lehigh stockholders will also consider and vote at the Meeting on:
Proposal No. 2 -- The adoption of amendments to the Restated Certificate of
Incorporation of Lehigh, which will amend the current Certificate of
Incorporation by: (A) eliminating cumulative voting for directors; (B)
eliminating action by stockholders by written consent; (C) fixing the number of
members of the Board of Directors at between seven and eleven, as determined by
the Board of Directors; and (D) requiring any further amendment to the
provisions of the Certificate of Incorporation addressed by items (A) through
(C) to require the vote of the holders of at least 60% of the outstanding shares
of the Lehigh Common Stock (collectively, the "Certificate Amendments");
Proposal No. 3 -- The adoption of an amendment to the Restated Certificate of
Incorporation of Lehigh, which will change the name of the corporation from "The
Lehigh Group Inc." to "First Medical Group, Inc." (subject to completion of the
merger); Proposal No. 4 -- The election of seven directors to the Board of
Directors (subject to completion of the merger); Proposal No. 5 -- ratification
of the appointment of BDO Seidman, LLP as the independent certified public
accountants for Lehigh for the fiscal year ending December 31, 1996; and such
other business as may properly come before the Meeting or any adjournments
thereof.
If the Merger Proposal is not approved by the stockholders of Lehigh then
Proposals No. 3 and 4 will be deemed withdrawn from a vote of the stockholders;
Lehigh's name will remain unchanged and the current directors of Lehigh will
remain in office. The submission of Proposal No. 2 -- The Certificate
Amendments, to a vote of the stockholders of Lehigh is not dependant upon the
approval of the Merger Proposal.
FMC, the holder of approximately 25.4% of the outstanding shares of Lehigh
Common Stock, will vote its ownership interest at the Meeting in favor of the
Merger Proposal and all of the other proposals being presented at the Meeting.
Mr. Zizza intends to vote in favor of the proposed merger. The 37.7% of stock
that Mr. Zizza beneficially owns is broken down as follows; (i) an option to
purchase 6,000,000 shares or 35% of Lehigh Common Stock at an exercise price of
$0.50 per share, (ii) 382 shares owned by trust accounts for the benefit of Mr.
Zizza's minor children as to which he disclaims beneficial ownership and (iii)
255,884 or 2.5% that Mr. Zizza owns outright. Mr. Zizza has agreed not to
exercise any of his options or warrants prior to the consummation of the
proposed merger. As part of Mr. Zizza's employment contract dated August 22,
1994 the Board agreed to grant Mr. Zizza options to purchase 10,250,000 shares
of Lehigh's common stock at prices ranging from $0.50 to $1.00 per share. Mr.
Zizza
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subsequently purchased warrants from Mr. Bassani, to purchase 7,750,000 shares
of Lehigh's common stock at prices ranging from $0.50 to $1.00 per share. Mr.
Zizza and the Board agreed that simultaneously upon consummation of the proposed
merger, all of Mr. Zizza's options and warrants shall convert into 3% of
Lehigh's common stock at an exercise price of $0.875 per share. (8) In addition,
certain officers, directors and other stockholders of Lehigh, who together hold
approximately 10% of the Lehigh Common Stock, have verbally indicated their
intention to vote in favor of the Merger Proposal and the other proposals. No
director or officer has indicated they will vote against the merger. (8)
Voting Requirements at the Meeting
At the Meeting, approval and adoption of the Merger Proposal (Proposal No.
1) and the "blank check" preferred stock will require the affirmative vote of
majority of the outstanding shares of Lehigh Common Stock. Approval of the
Certificate Amendments (Proposal No. 2) requires the affirmative vote of holders
of a majority of the outstanding Lehigh Common Stock, except with respect to the
Certificate Amendments eliminating cumulative voting for directors and fixing
the number of directors at between seven and eleven in the discretion of the
Board, which require the affirmative vote of the holders of a majority of the
outstanding shares of Lehigh Common Stock or 80% of such shares voting at the
Meeting, whichever is greater. The change in the corporation's name (Proposal
No. 3) requires the affirmative vote of holders of a majority of the outstanding
Lehigh Common Stock. The election of directors at the Meeting (Proposal No. 4)
requires a plurality of votes cast by the Lehigh stockholders entitled to vote
thereon at the Meeting. Ratification of the selection of BDO Seidman, LLP as
Lehigh's independent public accountants for the year ending December 31, 1996
(Proposal No. 5) requires the affirmative vote of a majority of the votes cast
at the Meeting by holders of Lehigh Common Stock.
The presence at the Meeting, in person or by proxy, of the holders of
one-third of the total number of shares of Lehigh Common Stock outstanding on
the Lehigh Record Date will constitute a quorum for the transaction of business
by such holders at the Meeting. On the Lehigh Record Date, there were 11,276,250
outstanding shares of Lehigh Common Stock, each holder of which is entitled to
one vote per share with respect to each matter to be voted on at the Meeting,
except that, pursuant to the provisions of the Certificate of Incorporation of
Lehigh, voting for directors is cumulative whereby each stockholder may give any
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of shares held by such stockholder, or may distribute
such votes on the same principle among as many candidates as the stockholder
determines. Lehigh has no class or series of stock outstanding other than Lehigh
Common Stock entitled to vote at the Meeting.
At the Meeting, abstentions and broker non-votes (as hereinafter defined)
will be counted as present for the purpose of determining the presence of a
quorum. For the purpose of computing the vote required for approval of matters
to be voted on at the Meeting, shares held by stockholders who abstain from
voting will be treated as being "present" and "entitled to vote" on the matter
and, thus, an abstention has the same legal effect as a vote against the matter,
except that abstentions will have no effect on the election of directors of
Lehigh or on the ratification of independent accountants for Lehigh. However, in
the case of a broker non-vote or where a stockholder withholds authority from
his proxy to vote the proxy as to a particular matter, such shares will not be
treated as "present" and "entitled to vote" on the matter and, thus, a broker
non-vote or the withholding of a proxy's authority will have no effect on the
outcome of the vote on the matter. A "broker non-vote" refers to shares
represented at the Meeting in person or by proxy by a broker or nominee where
such broker or nominee (i) has not received voting instructions on a particular
matter from the beneficial owners or persons entitled to vote and (ii) the
broker or nominee does not have discretionary voting power on such matter.
Proxies
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All proxies that are properly executed by holders of Lehigh Common Stock
and received by Lehigh prior to the Meeting will be voted in accordance with the
instructions noted thereon. Any proxy that does not specify to the contrary will
be voted in favor of the Merger Proposal, the Certificate Amendments, the
nominees for election as directors and in favor of the ratification of Lehigh's
independent certified public accountants and for any other matter that may be
properly brought before the Meeting in accordance with the judgment of person or
persons voting the proxies. Any holder of Lehigh Common Stock who submits a
proxy will have the right to revoke it, at any time before it is voted, by
filing with the Secretary of Lehigh written notice of revocation or a duly
executed later-dated proxy, or by attending the Meeting and voting such Lehigh
Common Stock in person.
All costs relating to the solicitation of proxies of holders of Lehigh
Common Stock will be borne by Lehigh. Proxies may be solicited by officers,
directors and regular employees of Lehigh and FMC and its subsidiaries
personally, by mail or by telephone or otherwise. Although there is no formal
agreement to do so, Lehigh may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries holding shares of stock in their names or
those of their nominees for their reasonable expenses in sending solicitation
material to their principals.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the Meeting in person are urged to mark, sign and date the
respective accompanying proxy and mail it in the enclosed return envelope, which
requires no postage if mailed in the United States, so that their votes can be
recorded.
PROPOSAL NO. 1 -- THE MERGER
General
This section of the Proxy Statement/Prospectus describes certain aspects of
the Merger, the Merger Agreement and other related matters. The following
description does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. All Lehigh
stockholders are urged to read the Merger Agreement in its entirety.
The Merger Agreement provides that, subject to the satisfaction or waiver
of certain conditions, including, but not limited, to the receipt of all
necessary third party, regulatory and stockholder approvals, Merger Sub will be
merged with and into FMC. As a result of the Merger, the separate corporate
existence of Merger Sub will cease and FMC, as the Surviving Corporation, shall
continue to possess all of its rights and property as constituted immediately
prior to the Effective Date of the Merger and shall succeed, without transfer,
to all of the rights and property of Merger Sub and shall continue to be subject
to all of its debts and liabilities as the same shall have existed immediately
prior to the Effective Date of the Merger, and shall become subject to all the
debts and liabilities of Merger Sub in the same manner as if FMC had itself
incurred them, all as more fully provided under the Delaware General Corporation
law.
In the Merger, each share of FMC Common Stock would be exchanged for (i)
1,127.675 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. There are currently
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
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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.
On October 25, 1996, the Board of Directors and stockholders of FMC approved the
Merger. All of the shares held by FMC will be voted in favor of the Merger.
As part of Proposal No. 1 stockholders will be asked to vote on an
amendment to the Restated Certificate of Incorporation of Lehigh to provide for
"blank check" preferred stock. This is necessary to provide for the Lehigh
Preferred Stock to be issued as part of the Merger consideration.
Background to the Merger
Prior to 1994, Lehigh, through its wholly owned subsidiaries, had been
engaged in the following other businesses: (i) interior construction; (ii)
asbestos abatement; (iii) the design, production and sale of electrical
products; (iv) the manufacture and sale of dredging equipment and precision
machined castings; and (v) energy recovery and power generation and landfill
closure services. All of such other businesses were transferred or sold prior to
1994.
Following that restructuring, in which Lehigh eliminated approximately $46
million of indebtedness, Messrs. Zizza and Bruno remained the only executive
officers of Lehigh and embarked on a mission of continuing to reduce Lehigh's
indebtedness, seek to raise working capital to allow Lehigh to remain viable,
and at the same time locate an acquisition candidate with the potential of
increasing shareholder value.
During the last three years, the management of Lehigh has held discussions
with approximately twenty companies who were purportedly interested in an
acquisition by, or a business combination transaction with, Lehigh. None of
those discussions resulted in a contract or understanding except that on
December 21, 1995, Lehigh and Consolidated Technology Group Ltd.
("Consolidated") signed a letter of intent whereby Consolidated agreed in
principle to merge with Lehigh in a transaction whereby the stockholders of
Consolidated would own approximately 75% of the combined company after the
merger. Lehigh and Consolidated were unable to proceed, mainly due to the lack
of progress in Consolidated's earnings projections, hence Lehigh would not be
able to meet the continuing listing requirements of the New York Stock Exchange.
During Consolidated's meetings with Lehigh, Consolidated made projections of
what its future earnings would be. Subsequently, Consolidated did not meet its
projected earnings and incurred large losses and as a result both Lehigh and
Consolidated decided not to go forward with the merger. Consolidated had a
negative net worth as a result of the losses it incurred and therefore, it
failed to meet the net tangible asset requirement pursuant to the continued
listing criteria of the New York Stock Exchange.
The material terms of the Consolidated transaction were that (i) the
holders of issued and outstanding shares of Consolidated's common stock would
receive approximately 7,500,000 shares of Lehigh Common Stock and (ii) Lehigh
would be recapitalized so that former Lehigh shareholders would own 2,500,000
shares. On May 15, 1996 Lehigh and Consolidated jointly announced that after
extensive negotiations they were unable to proceed further with the business
transaction contemplated by the letter of intent, which was terminated.
Prior to the termination of the letter of intent with Consolidated,
preliminary discussions between Mr. Dennis A. Sokol, Chairman of the Board of
FMC, and Lehigh concerning a possible business combination had commenced on
March 8, 1996. Messrs. Zizza and Bruno deemed it their fiduciary duty and in the
best interests of the Lehigh shareholders to discuss a possible business
combination with FMC
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in order to determine what transaction would be the best for Lehigh
Shareholders. Lehigh began discussions with FMC prior to the termination of
letter of intent because the opportunity presented itself. At all times Lehigh
disclosed to both Consolidated and FMC the status of its negotiations with the
other. Messrs. Zizza and Bruno met again with Mr. Sokol on April 11, 1996, May
14, 1996 and had several phone conversations from time to time during this
period regarding the structure of the proposed merger and the ability of FMC to
provide a $300,000 bridge loan to Lehigh so that Lehigh could meet its working
capital requirements. The working capital requirements that Lehigh intended to
address with the $300,000 bridge loan from FMC was to continue to pay Lehigh's
rent, accounting fees in connection with the annual report and preparation of
this Proxy Statement/Prospectus, legal fees in connection with this Proxy
Statement/Prospectus, the salaries of Lehigh's Vice President and secretary (Mr.
Zizza has deferred his salary for approximately two years, and the Company
continues to accrue it), transfer agent fees, New York Stock Exchange fees and
other miscellaneous expenses. Discussions between FMC and Lehigh terminated on
the morning of June 12, 1996 due to FMC's inability to provide the bridge
financing which Lehigh required. Also at that time, Lehigh commenced discussions
with DHB Capital Group, Inc. ("DHB"). On or about May 30, 1996, David Brooks,
Chairman of the Board of DHB called Lehigh for the purpose of discussing a
possible business combination with Lehigh. Messrs. Zizza and Bruno spoke with
Mr. Brooks, and the parties met later that day to further discuss the proposed
business combination. Several more meetings were held which occurred on May 30,
1996 and June 11, 1996. The discussions centered around the $300,000 bridge loan
to Lehigh and the value Lehigh shareholders would receive in a combined company.
These discussions culminated with the execution on June 11, 1996 of a letter of
intent whereby DHB agreed in principle to merge with and into Merger Sub with
DHB being the surviving corporation. On or about July 8, 1996, DHB and Lehigh
entered into a Merger Agreement (the "DHB Merger Agreement") pursuant to which,
among other things, DHB would merge with and into Merger Sub and in exchange for
all of the issued and outstanding capital stock of DHB. The DHB transaction was
similar to the current transaction in that, the DHB stockholders would receive
on a fully diluted basis, approximately 97% the issued and outstanding Lehigh
Common Stock.
On July 12, 1996 Southwicke Corporation and its affiliates ("Southwicke")
filed a Schedule 13D indicating that they had acquired beneficial ownership,
through purchases and irrevocable proxies, of an aggregate of 2,670,757 shares
of Lehigh Common Stock (approximately 25.8%). The purpose in acquiring that
ownership position was stated as "investment", and the Schedule 13D also stated
the intention to seek representation on Lehigh's Board of Directors.
Messrs. Zizza and Bruno first met with William L. Remley and Richard Kramer
of Mentmore on or about February 5, 1996. Messrs. Zizza and Bruno originally met
in February, 1996 because they were contacted by Mentmore who requested the
meeting to discuss a possible business combination. Mr. Zizza requested that
Mentmore submit its written proposal to Lehigh. The proposal never came and on
July 2, 1996 Mentmore again requested that Lehigh attend a meeting to hear a
proposal. On the same day both Messrs. Zizza and Bruno attended another meeting
with Mentmore and were informed a proposal would be forthcoming. Finally, on
August 28, 1996 Lehigh received a proposal. Messrs. Zizza and Bruno met with
Mentmore prior to receiving a written proposal because Mentmore requested them
to meet and because they felt it was prudent to hear what Mentmore had to say.
Mentmore presented its proposal to Messrs. Zizza and Bruno on behalf of the
Board. The majority of the Board deliberated on the Mentmore proposal on
September 25, 1996.
On July 17, 1996 Lehigh's Board of Directors met to consider the Schedule
13D filing by Southwicke Corporation and its affiliates and to consider certain
amendments to Lehigh's By-laws. Mr. Zizza reported that he had not received any
proposal from Southwicke regarding a potential acquisition of Lehigh.
Thereafter, the Board of Directors adopted amendments to Lehigh's By-laws which
(i) eliminate the ability of stockholders to call a special meeting, and (ii)
add provisions which give the Board
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of Directors the power to set a record date for any proposed stockholder action
by written consent and provide a procedure for managing actions by written
consent. These amendments were designed to foreclose the ability of a
significant stockholder (such as Southwicke) to control the timing of the
presentation of matters to a vote by stockholders and, conversely, to clarify
and enhance the authority of the Board of Directors with respect to such
matters.
Prior to the termination of the DHB Merger Agreement, on August 28, 1996,
Lehigh received a letter from Southwicke. The Southwicke letter contained a
demand that the Board of Directors of Lehigh should commence a derivative action
to rescind Mr. Zizza's option to DHB, terminate the Merger Agreement and rescind
the By-law amendments which were enacted on July 17, 1996. Mr. Zizza granted DHB
an option to purchase Mr. Zizza's shares at the same price Mr. Zizza was
entitled to acquire the shares from Lehigh. Southwicke took the position that
the option Mr. Zizza granted to DHB would be an invalid transfer of Mr. Zizza's
non-transferable options. Lehigh disagreed with Southwicke's position since Mr.
Zizza was not transferring his options; instead, he planned to first exercise
his options and then sell those shares (at his cost) to DHB pursuant to DHB's
option.
Also on August 28, 1996, Lehigh received a letter from Mentmore Holdings
Corporation ("Mentmore"), which appears to be an indirect affiliate of
Southwicke. The Mentmore letter asked for an opportunity to meet with Lehigh's
Board of Directors so that an acquisition proposal could be discussed; it went
on to present the outlines of such a proposal. The Mentmore proposal envisioned
in general that Mentmore would contribute $3 million while the equity of
Lehigh's current stockholders would be valued at $3 million (less any amounts
payable under employment or severance agreements), and that each party's
ownership in the surviving company would be based on their proportionate shares
of that valuation. Mr. Zizza and Mr. Bruno met again with representatives of
Mentmore in February 1996, and on July 2, 1996 and September 17, 1996 to discuss
Mentmore's proposal and opposition to the proposed merger of Lehigh and DHB in
an effort to clarify Mentmore's proposal, and opposition to the proposed merger
of Lehigh and DHB. Mentmore's proposal was subsequently presented to Lehigh's
Board. Lehigh's Board unanimously rejected the Mentmore proposal predominantly
due to (i) the increased shareholder value Lehigh shareholders would receive
under the DHB transaction, and (ii) the fact that Mentmore did not have an
operating business with which Lehigh could complete a business combination, so
as to satisfy the listing requirements of the New York Stock Exchange. The
Lehigh stockholders would have retained 50% ownership under the Mentmore
proposal.
The average closing price for DHB stock during the 30 day period (August
16, 1996 through September 17, 1996) was approximately $6.20 per share. Since
there were approximately 22,954,529 shares of DHB common stock outstanding, the
market had placed a value on DHB of approximately $142,000,000. Based on the
market giving DHB a valuation of $142,000,000; if current shareholders received
3% of that valuation it would equal $4,260,000 which is more than the valuation
proposed by Mentmore.
Mentmore's offer of $3,000,000, less contingencies of $1,600,000, had
effectively offered the Lehigh shareholders only $1,400,000. The Board did
consider the dilution to shareholders under both the DHB and Mentmore proposals.
In considering the aggregate dollar value Lehigh shareholders were to
receive based on the DHB and Mentmore proposals the Board determined that the
aggregate dollar value to Lehigh shareholders under the DHB proposal would be
approximately $4,260,000 and the aggregate value under the Mentmore proposal
would be approximately $1,400,000. The Board concluded that the aggregate value
to Lehigh shareholders under the DHB proposal was superior to the Mentmore
proposal. In addition, at the close of business on July 2, 1996 Lehigh had a
market value of approximately $2,500,000 (approximately
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10,000,000 shares outstanding multiplied by $.025 per share), therefore, the
dilution to Lehigh shareholders would be insignificant for the DHB proposal
since Lehigh shareholders would be receiving more value than they currently had.
The Board did not consider any other factors except as disclosed herein. (15)
One of the NYSE continued listing requirements is that the Company continue
to have satisfactory operating results. Therefore, if Lehigh were to accept the
proposal of Mentmore, a company, without an operating business it would be
difficult to meet this criteria.
On September 25, 1996, Lehigh formed an independent committee consisting of
only outside directors to review the allegations raised by Southwicke and also
notified Southwicke of the same. The outside directors on the independent
committee are Richard L. Bready, Charles A. Gargano, Anthony F.L. Amhurst and
Salvatore Salibello. On October 1, 1996 Southwicke commenced an action against
Lehigh and its entire Board. The Southwicke lawsuit was commenced in the Supreme
Court of the State of New York, County of New York, Index # 96/604932. The
grounds Southwicke alleged to prevent the DHB or FMC transaction were as
follows: (i) that all of the directors breached their fiduciary duty by not
obtaining the best available price for Lehigh; (ii) that Messrs. Zizza and Bruno
breached their fiduciary duty by engaging in self-dealing; (iii) that Southwicke
would suffer irreparable harm if the merger were consummated with either DHB or
FMC; (iv) that the Lehigh Board froze out the minority shareholders and (v) that
Mr. Zizza transferred a non-transferable option. On October 11, 1996, DHB
notified Lehigh of its decision to terminate the DHB Merger Agreement and the
related option agreement due to the pendency of the Southwicke lawsuit. On
November 13, 1996 Lehigh and its board served its answer to Southwicke's lawsuit
generally denying the allegations and raising various affirmative defenses.
Shortly following the termination of the DHB Merger Agreement, discussions
between FMC and Lehigh concerning a possible business combination were renewed.
Messrs. Zizza and Bruno as Lehigh's management continued to discuss
opportunities with FMC because they deemed it their fiduciary duty and in the
best interests of the Lehigh shareholders to discuss possible business
combinations which might be beneficial to the shareholders. Lehigh began
discussions with FMC prior to the termination of the merger agreement with DHB
because the opportunity presented itself. At all times Lehigh disclosed to both
DHB and FMC the status of its negotiations with the other. Following numerous
discussions between Mr. Zizza, Mr. Bruno and Mr. Sokol, the Chairman of the
Board and Chief Executive of FMC, the parties met to further discuss the
proposed business combination. Most of the discussions between FMC and Lehigh
took place by phone almost on a daily basis from approximately August 28, 1996
onward. Messrs. Sokol, Zizza and Bruno met on October 3, 1996 and October 29,
1996. Mr. Zizza also met Mr. Sokol without Mr. Bruno on October 15, and 18,
1996. The discussions focused predominantly on FMC providing a $300,000 bridge
loan so that Lehigh could repay DHB and the structure of a transaction which
would procure for Lehigh stockholders an equity participation, however small, in
FMC's business. The terms of the $300,000 debenture were for a period of two
years with interest at the rate of two percent above the prime lending rate of
Chase Manhattan Bank, NA, with interest payable monthly. The bridge loan from
FMC was used to repay Lehigh's indebtedness to DHB. (16) Mr. Zizza subsequently
visited the corporate headquarters of MedExec, Inc., a subsidiary of FMC in
Miami, Florida, where senior management was interviewed and due diligence
conducted. Mr. Zizza conducted his due diligence with the aid of Mr. Bruno and
Lehigh's independent auditors, BDO Seidman LLP. On or about October 16, 1996,
Lehigh's Board of Directors was apprised of the discussions with FMC. Following
several meetings between Lehigh and FMC, the parties entered into the Merger
Agreement. Lehigh's Board of Directors approved the Merger Agreement by written
consent dated October 21, 1996. In addition, FMC's Board of Directors and
stockholders approved the Merger Agreement on October 25, 1996. The Merger
Agreement was entered into by the parties on October 29, 1996. A new approval of
the Merger Agreement by shareholders of FMC is being sought concurrently with
the Lehigh Special Meeting of Stockholders.
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In addition to the reasons set forth in "Lehigh Reasons For The Merger;
Recommendation of the Lehigh Board" it was the opinion of the Lehigh Board that
the current stockholders of Lehigh would receive more value if a business
combination was consummated with FMC as opposed to Mentmore predominantly due to
the increased shareholder value Lehigh shareholders would receive as compared to
the DHB transaction. This consideration was based on the current market value of
Lehigh stock and the pro-forma market value of Lehigh stock after giving effect
to the FMC merger. The Lehigh Board was of the opinion that the proposed FMC
merger was fair and in the best interest of the Lehigh stockholders.
On December 9, 1996 Southwicke filed an amended complaint to its lawsuit,
which substituted FMC as a defendant for DHB. The substantive allegations on the
amended complaint were substantially similar to the original complaint involving
the DHB merger proposal.
Under the terms of the Merger Agreement, each share of the FMC Common Stock
would be exchanged for (i) 1,127.675 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 Common Stock. As a result
of these actions, immediately following the Merger, current Lehigh stockholders
and FMC stockholders will each own 50% of the issued and outstanding shares of
Lehigh Common Stock. In the event that all of the shares of Lehigh Preferred
Stock issued to the FMC stockholders are converted into Lehigh Common Stock,
current Lehigh stockholders will own approximately 4% and FMC stockholders will
own approximately 96% of the issued and outstanding shares of Lehigh Common
Stock. In addition, under the terms of the Merger Agreement Lehigh will be
renamed "First Medical Group, Inc." Following the Merger, Mr. Sokol will become
Chairman and Chief Executive Officer of the combined company, Mr. Zizza will
become Executive Vice President and Treasurer and Mr. Bruno will continue as
Vice President and Secretary.
Concurrently with the execution of the Merger Agreement, on October 29,
1996 Mr. Zizza sold to FMC in consideration of a note in the principal amount of
$100,000, an option to purchase up to six million shares (approximately 37%) of
Lehigh Common Stock at $0.50 per share, which is the price at which Mr. Zizza is
entitled to acquire those shares from Lehigh under pre-existing agreements. This
option was terminated on February 7, 1997 in conjunction with the settlement of
the Southwicke litigation, as described below. Mr. Zizza received those options
through the following transactions. On August 22, 1994 Lehigh granted (i) Mr.
Zizza options to purchase a total of 10,250,000 shares of Lehigh Common Stock;
4,250,000 exercisable at $.50 per share, 3,000,000 exercisable at $.75 per
share, and 3,000,000 exercisable at $1.00 per share; and (ii) Mr. Bassani
warrants to purchase a total of 7,750,000 shares of Common Stock; 1,750,000
exercisable at $.50 per share, 3,000,000 at $.75 per share and 3,000,000 at
$1.00 per share. In July 1995, Mr. Zizza purchased all the warrants held by Mr.
Bassani. At the time of such purchase, the Board consented to the transaction
and amended the Bassani warrants to make their expiration date co-terminus with
the other warrants which had been issued to Mr. Zizza. The $.50 per share
options are currently exercisable; the $.75 and $1.00 per share options will not
be exercisable until such time as (i) Lehigh has raised at least $10 million of
equity, (ii) Lehigh has consummated an acquisition of a business with annual
revenues in the year immediately prior to such acquisition of at least $25
million, and (iii) the fair market value of the Lehigh Common Stock (as measured
over a period of 30 consecutive days) has equalled or exceeded $1.00 per share.
The options and warrants held by Mr. Zizza (including those purchased from Mr.
Bassani) will terminate on August 22, 1999, subject to earlier termination under
certain circumstances in the event of his death or the termination of his
employment.
On January 27, 1997, Southwicke and Lehigh entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement"), whereby Southwicke and Lehigh agreed
to mutual releases from all litigation between them and to jointly file all
appropriate motions for the dismissal of all litigation between
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them with prejudice. Under Stock Purchase Agreement, Southwicke agreed to sell
to Lehigh 1,920,757 shares of Lehigh Common Stock (the "Southwicke Shares") for
$0.28 per share, for a total purchase price of $537,812. Southwicke also granted
Lehigh or its designee (FMC) an irrevocable proxy on all shares of Lehigh Common
Stock which it beneficially owns.
On February 7, 1997, Lehigh designated FMC as the purchaser of the
Southwicke Shares under the same terms and conditions as the Stock Purchase
Agreement, and the option sold to FMC by Mr. Zizza was terminated. Also on that
date, FMC purchased the Southwicke Shares, thereby becoming the owner of
approximately 25.4% of Lehigh's Common Stock.
Subscription Agreement with GDS; Potential Change of Control of Lehigh
FMC and Generale De Sante International, PLC ("GDS") are parties to a
Subscription Agreement, dated February 8, 1996, which was subsequently modified
on June 11, 1996 and April 3, 1997 (the "Subscription Agreement"), a copy of
which is attached hereto as Appendix C, pursuant to which at the Effective Time
of the Merger GDS will pay $5 million in order to acquire the following
ownership interests and rights:
1. 10% of FMC Common Stock, which will automatically be exchanged in the
Merger for 1,127.675 shares of Lehigh Common Stock and 103.7461 shares of Lehigh
Preferred Stock.
2. Shares of FMC's 9% Series A Convertible Preferred Stock 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 23% ownership interest and voting power of Lehigh.
3. A 49% common stock interest in FMC Healthcare Services, Inc. (formerly
WHEN, Inc.) ("FMC Healthcare"). This subsidiary of FMC is engaged in the
business of providing management, consulting and financial services to troubled
not-for-profit hospitals and other health care providers.
The purchase price for the common and preferred stock of FMC to be acquired
under steps 1. and 2. above is $4 million. The purchase price for a 49%
ownership interest in FMC Healthcare to be acquired under step 3. above is $1
million.
4. Until the fifth anniversary of the Merger, GDS will have the option to
increase its ownership interest in Lehigh to 51%, at a price equal to 110% of
the average 30-day trailing market price. This increase in ownership would occur
through the issuance of new stock by Lehigh; as a result, all other
stockholders' ownership interests would be diluted and GDS would gain control of
Lehigh. GDS may exercise its option on one occasion .
5. In addition to the foregoing option to acquire control of Lehigh, GDS
has the option to increase its ownership interest in FMC Healthcare to 52%, also
through the issuance of new stock. This option may be exercised from the second
to the fifth anniversary of the Merger, upon payment of (i) $3 million cash, or
(ii) the shares of Lehigh Common Stock and Lehigh Preferred Stock issued to GDS
in the Merger under step 1. above. Furthermore, upon the exercise of this option
GDS has the option to
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acquire all of the remaining equity in FMC Healthcare at the "fair market price"
as determined by an independent investment banker.
6. Alternatively, until the third anniversary of the Merger, GDS can "put"
to FMC its 49% ownership interest in FMC Healthcare for (i) $1 million, plus
(ii) the "fair market value" of that investment as determined by an independent
investment banker.
7. GDS also has the option to acquire 52% of the common stock of American
Medical Clinics Development Corporation, an Irish corporation which is a
subsidiary of FMC ("AMCDC"). AMCDC is engaged in the business of managing health
care facilities in Eastern Europe.
The $5 million proceeds to be received from GDS at the Effective Time of
the Merger can only be utilized to purchase capital assets to be used in the
business of FMC Healthcare and/or AMCDC.
In the event GDS exercises its option under step 5. above to increase its
ownership interest in FMC Healthcare to 52%, then FMC Healthcare will be
obligated to enter into a two year management agreement with Lehigh or its
designee, for a fee that will be based on the cost of management plus a
reasonable success fee to be determined by Lehigh and GDS.
In conjunction with the Subscription Agreement, as of the Effective Time of
the Merger FMC and GDS agreed to terminate various pre-existing loans and option
arrangements. In consideration for those terminations, GDS will acquire
approximately 500 shares of FMC Common Stock.
The Subscription Agreement also provides for the following senior
management arrangements:
1. GDS has the right to designate one-half of the members of the Board of
Directors of FMC Healthcare as of the Effective Time of the Merger.
2. The Executive Committee of FMC and FMC Healthcare includes the chairman
of FMC, the CEO of FMC, and a designee of GDS. All extraordinary capital
investments are approved by a unanimous vote of those Executive Committees.
Conversion and Exchange Ratio
At the Effective Time of the Merger, all of the outstanding shares of FMC
Common Stock (other than shares of FMC Common Stock held in FMC's treasury, if
any) will be converted into shares of Lehigh Common Stock and Lehigh Preferred
Stock. Each outstanding share of FMC Common Stock shall be exchanged for (i)
1,127.675 shares of Lehigh Common Stock and (ii) 103.7461 shares of Lehigh
Preferred Stock and each of the stockholders of FMC, as of the Effective Time of
the Merger, shall be entitled to exchange certificates representing all of the
issued and outstanding shares of FMC Common Stock held by such FMC stockholder
for certificates representing the shares of Lehigh Common Stock and Lehigh
Preferred Stock issuable to such FMC stockholder pursuant to the Merger. At the
Effective Time of the Merger, shares of FMC Common Stock, if any, held in FMC's
treasury shall be canceled and shall cease to exist. Such conversion ratio was
established through arms-length negotiations between Lehigh and FMC. Also at the
Effective Time of the Merger, all of the shares of Lehigh Common Stock owned by
FMC will be cancelled.
In addition to the reasons set forth in "Lehigh Reasons For The Merger;
Recommendation of the Lehigh Board" it was the opinion of the Lehigh Board that
the current stockholders of Lehigh would receive more value if a business
combination was consummated with FMC as opposed to Mentmore
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predominantly due to the increased shareholder value Lehigh shareholders would
receive as compared to the DHB transaction. This consideration was based on the
current market value of Lehigh stock and the pro-forma market value of Lehigh
stock after giving effect to the FMC merger.
Lehigh Reasons For the Merger; Recommendation of the Lehigh Board
The Lehigh Board has unanimously approved the Merger and has determined
that the Merger and the Merger Agreement and the related transactions are in the
best interests of Lehigh and are fair to Lehigh's stockholders from a financial
point of view. The Lehigh Board unanimously recommends that the stockholders of
Lehigh vote FOR approval of the Merger Proposal.
It was the opinion of the Lehigh Board that the current stockholders of
Lehigh would receive more value if a business combination was consummated with
FMC as opposed to Mentmore predominantly due to the increased shareholder value
Lehigh shareholders would receive. This consideration was based on the current
market value of Lehigh stock and the pro-forma market value of Lehigh stock
after giving effect to the FMC merger.
At the close of business July 2, 1996 Lehigh had approximately 10,000,000
shares of common stock outstanding and trading at approximately $.25 per share,
giving Lehigh a market value of $2,500,000. At the same period of time, DHB had
approximately 15,000,000 shares of common stock outstanding trading at
approximately $12.00 per share on the NASDAQ Bulletin Board and the Boston Stock
Exchange giving DHB a market value of approximately $180,000,000. Since the
current shareholders of Lehigh were to receive three percent of the post merged
company ($180,000,000 x 3%) the current Lehigh shareholders value would be equal
to $5,400,000. The value to Lehigh shareholders under the Mentmore proposal
would have been $1,400,000. The value to Lehigh shareholders under the Mentmore
proposal was calculated by taking Mentmore's offer to purchase 50% of Lehigh for
$3,000,000 less contingencies of $1,600,000 whcih effectively would leave
Lehigh's shareholders with approximately $1,400,000 in value. (17(a)) The Board
determined the value of FMC, a privately held corporation , by applying a
multiple of between 20 to 30 times projected earnings before taxes of
approximately $2,000,000 for 1996, which equals between $40,000,000 to
$60,000,000. The Board and management, through its general business knowledge
concluded that companies in this industry would be valued at multiples of
earnings ranging 20x to 30x. The Board did not rely on any third party valuation
analysis or identify a specific transaction. (17(b)) Since current Lehigh
shareholders are to receive four percent of the post merged company, the current
value to Lehigh shareholders would be approximately $1,600,000 to $2,400,000.
The Lehigh Board concluded the proposed FMC merger was fair for several
reasons, such as the current Lehigh shareholders would be receiving between
$1,600,000 to $2,400,000 as compared to Lehigh's current market value of
approximately $2,500,000, the lack of any other viable acquisition candidate and
the percentage of stock current Lehigh shareholders would retain. The
calculation underlying the conclusion that Lehigh shareholders would be
receiving between $1.6 million and $2.4 million is based on the 4% interest the
shareholders would have in FMC (i.e., $40,000,000 multiplied by 4% which equals
$1,600,000 and $60,000,000 multiplied by 4% which equals $2,400,000). (18(a))
The exchange ratio is equivalent to the current Lehigh shareholders retaining
four percent of Lehigh's common stock on a fully diluted basis which, in the
opinion of the Board, is consistent to similar transactions in the market place.
The similar transactions that the Board considered are based on general business
experience and informal discussions with individuals knowledgeable about the
industry. The Board did not identify any specific transaction nor specific
dilutive basis regarding the 4% interest Lehigh's shareholders would retain and
relied on its general business knowledge. The Board relied on no specific
transaction. (18(b))
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One of the major reasons why the Lehigh Board believes the FMC merger is
superior to all others is based partly on the expanding medical industry and the
growing future needs for the type of services FMC can perform, in these growing
markets.
During a two year period, Lehigh investigated approximately 20 different
acquisition candidates. The terms of the FMC proposed merger are superior to all
other "offers" Lehigh preliminarily discussed during this period. All such
offers and discussions took into account the continuation of the employment
contracts with Messrs. Zizza and Bruno. During the course of its deliberations,
the Board of Directors considered, without assigning relative weights to, the
following factors: (i) the historical and prospective operations of Lehigh,
including, among other things, the current financial condition and future
prospects of Lehigh, (ii) the terms and conditions of the Merger Agreement and
related documentation, (iii) a review of the operations of FMC, including, among
other things, the current financial condition and future prospects of FMC, (iv)
a review of Lehigh's efforts over the past two years in trying to locate a
suitable acquisition candidate and the absence of any other competing offer from
any other business proposing a business combination with Lehigh, (v) the ability
of a combination with FMC to increase Lehigh's market capitalization, (vi) the
increase in the market value of the Lehigh Common Stock held by Lehigh
stockholders which could result from the Merger even after giving effect to the
dilutive impact of the merger on Lehigh stockholders, and (vii) the management
contracts and continued services of Messrs. Zizza and Bruno with Lehigh. The
Lehigh Board of Directors was aware of the Subscription Agreement between GDS
and FMC, and considered it to be beneficial due to the significant new capital
($5 million) which would be contributed upon consummation of the Merger. The
Lehigh board did not, however, consider the dilutive effects of the Subscription
Agreement because they were immaterial to former Lehigh stockholders as compared
to FMC stockholders. The Board concluded that the dilutive effect on the
Subscription Agreement on the current shareholders was immaterial because the
current holders would only have a four percent interest.
The Lehigh Board also considered certain potentially negative factors in
its deliberations concerning the Merger, including, among others: (i) the change
of control of Lehigh after the Merger, (ii) the risks associated with FMC's
business including competitive factors, and (iii) the absence of an investment
banker's opinion regarding the transaction. In this regard the Board did not
feel an investment banker's opinion would be an appropriate use of corporate
funds. It was the opinion of the Board that the expense that Lehigh would incur
to hire an investment banker to obtain an opinion was outweighed by Lehigh's
need to conserve its limited amount of working capital. In addition, the Lehigh
Board is comprised of lawyers, accountants and successful entrepreneurs, who
were able to evaluate FMC based on their own knowledge and experience. In
addition, the Lehigh Board considered generally the risk factors associated with
the potential effects of Health Care Reform legislation, dependence on capitated
fee revenue, the ability to obtain new contracts and manage costs, the highly
competitive nature of the industry, significant dependence on one client,
professional liabilities exceeding the policy limits of insurance coverage,
reduction of government reimbursement, potential political and economic
instability in Eastern Europe, foreign government regulations and dependence on
key personnel, see "Risk Factors Relating to FMC". (19)
In view of the wide variety of factors considered by the Lehigh Board, the
Lehigh Board did not quantify or otherwise attempt to assign relative weights to
the specific factors considered in making its determination. However, in the
view of the Lehigh Board, the potentially negative factors considered by it were
not sufficient, either individually or collectively, to outweigh the positive
factors it considered in its deliberations relating to the Merger.
The foregoing discussion of the information and factors considered by the
Lehigh Board is not intended to be exhaustive but is believed to include all
material factors considered by the Lehigh Board.
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THE LEHIGH BOARD RECOMMENDS THAT LEHIGH STOCKHOLDERS VOTE FOR APPROVAL OF
THE MERGER PROPOSAL.
Federal Income Tax Consequences
For a discussion of the federal income tax consequences of the Merger, see
"Certain Federal Income Tax Consequences of the Merger."
Accounting Treatment
Lehigh intends to treat the Merger as a "purchase" for accounting and
financial reporting purposes with FMC as the acquiring company. See "Unaudited
Pro Forma Combined Financial Statements" contained in the Financial Statements
portion of this Proxy Statement/Prospectus.
Interests of Certain Members of Lehigh Management in the Merger
In considering the Merger, Lehigh stockholders should be aware that certain
members of the Board and management of Lehigh have certain interests that are in
addition to the interests of Lehigh stockholders generally and may cause them to
have potential conflicts of interest.
At the Effective Time, Dennis A. Sokol, currently the Chairman of the Board
and Chief Executive Officer of FMC, will become the Chairman and Chief Executive
Officer of Lehigh (which will be renamed "First Medical Group, Inc." if the
Certificate Amendments are approved). It is anticipated that senior officers and
employees of FMC will participate in Lehigh stock option plans and other benefit
arrangements.
At the Effective Time, Mr. Salvatore J. Zizza, the Chairman and CEO of
Lehigh, will become Executive Vice President and Treasurer and Mr. Robert A.
Bruno, Esq., Vice President of Lehigh, will continue in that position and will
become Secretary. In addition, as of the Effective Time of the Merger,
amendments to their respective employment agreements will become effective. See
"Proposal No. 3 -- Election of Directors -- Executive Compensation."
Management After the Merger
Directors
Assuming they are elected at the Meeting, the directors of Lehigh after
consummation of the Merger will be Dennis A. Sokol, Salvatore J. Zizza, Elliot
H. Cole, Melvin E. Levinson, M.D. and Paul Murphy. See "Proposal No. 3 --
Election of Directors -- Proposed Directors and Executive Officers."
Executive Officers
Assuming election of the Board of Directors recommended by the Lehigh Board
in Proposal No. 3, it is expected that the principal executive officers of
Lehigh to be appointed after consummation of the Merger will be as follows:
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Name Title
---- -----
Dennis A. Sokol Chairman and Chief
Executive Officer
Elias M. Nemnom Chief Financial Officer
Salvatore J. Zizza Executive Vice President
and Treasurer
Robert A. Bruno Vice President and
Secretary
Stock Options
Salvatore J. Zizza, currently Chairman of the Board, President and Chief
Executive Officer of Lehigh owns options and warrants to purchase an aggregate
of 12,000,000 shares of Lehigh Common Stock, at exercise prices ranging from
$.50 to $1.00 per share, and Robert A. Bruno, currently Vice President, General
Counsel, Secretary and a director of Lehigh, owns options to purchase an
aggregate of 250,000 shares of Lehigh Common Stock at an exercise price of $.50
per share. In addition, Messrs. Bready, Gargano, Anthony F.L. Amhurst, and
Salvatore M. Salibello, current directors of Lehigh, own options to purchase,
respectively, 15,000 shares, 10,000 shares, 10,000 shares and 10,000 shares of
Lehigh Common Stock at exercise prices of $.50 per share. See "Proposal No. 3 -
Election of Directors - Certain Relationships and Related Transactions" and " -
Executive Compensation." During 1996, Lehigh issued options to purchase an
aggregate of 10,000 shares of Lehigh Common Stock at an exercise price of $.50
per share to each of Messrs. Bready, Gargano, Amhurst and Salibello in lieu of
cash compensation for 1996.
No Appraisal Rights
Delaware law provides appraisal rights for certain mergers and
consolidations. Appraisal rights are not available to holders of (i) shares
listed on a national securities exchange or held of record by more than 2,000
stockholders or (ii) shares of the surviving corporation of the merger, if the
merger did not require the approval of the stockholders of such corporation,
unless in either case, the holders of such stock are required pursuant to the
merger to accept anything other than (A) shares of stock of the surviving
corporation, (B) shares of stock of another corporation which are also listed on
a national securities exchange or held by more than 2,000 holders, or (C) cash
in lieu of fractional shares of such stock. Consequently, the holders of Lehigh
Common Stock are not entitled to appraisal rights in connection with the Merger.
Trading Market
The outstanding shares of Lehigh Common Stock are listed for trading on the
NYSE. Lehigh will use its best efforts to cause the shares of Lehigh Common
Stock issuable as Merger consideration to be approved for listing on the NYSE.
Lehigh will not resolicit shareholder votes if the NYSE does not list Lehigh's
stock. If Lehigh's stock is delisted it will seek listing on The American Stock
Exchange or NASDAQ. Lehigh has not met the continued listing requirements of the
NYSE since 1991. The listing of Lehigh's stock on either exchange will have no
effect on the company. (20)
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Effective Time
The Merger Agreement provides that the Merger will become effective at the
time a certificate of merger (the "Certificate of Merger") is duly filed with
the Secretary of the State of the State of Delaware. The time at which the
Merger will become effective is referred to herein as the "Effective Time." Such
filing, together with all other filings or recordings required by Delaware law
in connection with the Merger, will be made upon the satisfaction or, to the
extent permitted under the Merger Agreement, waiver of all conditions to the
Merger contained in the Merger Agreement.
The Merger
At the Effective Time, Merger Sub will be merged with and into FMC, at
which time the separate corporate existence of Merger Sub will cease and FMC, as
the Surviving Corporation, (i) shall continue to possess all of its rights and
property as constituted immediately prior to the Effective Date of the Merger
and shall succeed, without transfer, to all of the rights and property of Merger
Sub and (ii) shall continue subject to all of its debts and liabilities as the
same shall have existed immediately prior to the Effective Date of the Merger,
and become subject to all the debts and liabilities of Merger Sub in the same
manner as if FMC had itself incurred them, all as more fully provided under the
Delaware General Corporation law.
Exchange of Shares
As part of the Merger, each share of FMC Common Stock would be exchanged
for (i) 1,127.675 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. There are currently
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 approximately 50% of the issued and outstanding
shares of Lehigh Common Stock. In the event that all of the shares of Lehigh
Preferred Stock issued to the FMC stockholders are converted into Lehigh Common
Stock, current Lehigh stockholders will own approximately 4% and FMC
stockholders will own approximately 96% of the issued and outstanding shares of
Lehigh Common Stock. Lehigh will then be renamed "First Medical Group, Inc."
Before the Effective Time, Lehigh will deposit with its transfer agent, for
the benefit of holders of FMC Common Stock, certificates representing shares of
Lehigh Common Stock and Lehigh Preferred Stock issuable pursuant to the Merger
Agreement in exchange for shares of FMC Common Stock evidencing the right to
receive (i) 1,127.675 shares of Lehigh Common Stock and (ii) 103.7461 shares of
Lehigh Preferred Stock, for each share of FMC Common Stock. Promptly after the
Effective Time, Lehigh will, or will cause the transfer agent to, send to each
holder of FMC Common Stock at the Effective Time a letter of transmittal to be
used in such exchange.
Each holder of shares of FMC Common Stock, upon surrender to the transfer
agent of a certificate or certificates representing such FMC Common Stock,
together with a properly completed letter of transmittal, will be entitled to
receive in exchange therefor the number of shares of Lehigh Common Stock and
Lehigh Preferred Stock which such holder has the right to receive pursuant to
the Merger Agreement and cash in lieu of any fractional shares of Lehigh Common
Stock, as contemplated by the Merger Agreement. The certificate or certificates
for shares of FMC Common Stock so surrendered shall be canceled. Until so
surrendered, each such certificate will, after the Effective Time, represent for
all
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purposes only the right to receive Lehigh Common Stock and Lehigh Preferred
Stock pursuant to the terms of the Merger Agreement.
If any shares of Lehigh Common Stock and/or Lehigh Preferred Stock are to
be issued to any person other than the registered holder of the shares of FMC
Common Stock represented by the certificate or certificates surrendered in
exchange therefor, it will be a condition to such issuance that the certificate
or certificates so surrendered be properly endorsed or otherwise be in proper
form for transfer and that the person requesting such issuance shall pay to the
transfer agent any transfer or other taxes required as a result of such
issuance.
No dividends or other distributions on shares of Lehigh Common Stock or
Lehigh Preferred Stock will be paid to the holder of any certificates
representing shares of FMC Common Stock until such certificates are surrendered
for exchange as provided in the Merger Agreement. Upon such surrender, there
will be paid, without interest, to the person in whose name the certificates
representing the shares of Lehigh Common Stock and Lehigh Preferred Stock into
which such shares were converted are registered, all dividends and other
distributions, if any, paid in respect of such Lehigh Common Stock or Lehigh
Preferred Stock on a date subsequent to, and in respect of a record date after,
the Effective Time.
Fractional Shares
No fractional shares of Lehigh Common Stock will be issued in the Merger or
upon conversion of the Lehigh Preferred Stock, if any. All fractional shares of
Lehigh Common Stock that a holder of shares of FMC Common Stock or Lehigh Common
Stock would otherwise be entitled to receive as a result of the Merger will be
aggregated, and the transfer agent will sell such shares in the public market
and distribute to each such holder entitled thereto a pro rata portion of the
net proceeds of such sale. No cash in lieu of fractional shares of Lehigh Common
Stock will be paid to any holder of shares of FMC Common Stock or Lehigh Common
Stock until certificates representing such shares are surrendered and exchanged.
Registration and Listing of Share Consideration
Lehigh has agreed that it will cause the offer and sale of Lehigh Common
Stock and Lehigh Preferred Stock issuable in the Merger, as well as the Lehigh
Common Stock issuable upon conversion of the Lehigh Preferred Stock, to be
registered under the Securities Act. Lehigh has agreed to use its best efforts
to have such shares listed for trading on the NYSE. Such listing is not a
condition to the consummation of the Merger.
Representations and Warranties
The Merger Agreement contains representations and warranties by each of
Lehigh and FMC that are customary and usual for transactions similar to that
contemplated by the Merger Agreement. These include, but are not limited to
corporate existence and authority to enter into the Merger Agreement; the
capitalization of each of Lehigh and FMC; that the shares to be issued by Lehigh
to the stockholders of FMC will be validly authorized and issued and fully-paid
and nonassessable; and that the financial statements furnished by each party
present fairly their financial position and results of operations and have been
prepared in conformity with generally accounting principles consistently
applied.
Covenants
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The Merger Agreement also contains covenants by each of Lehigh and FMC,
principally as to the conduct of their respective business between the date of
the Merger Agreement and the Effective Date of the Merger. The principal
covenants are that Lehigh and FMC will conduct their business only in the usual
and ordinary course; neither shall amend their Certificates of Incorporation or
By-Laws unless it is deemed reasonably necessary to consummate the Merger; and
neither will declare any dividends or distributions on their outstanding shares
of capital stock.
Access to Information
In addition to each party having the opportunity to investigate the
properties and financial and legal condition of the other prior to the execution
of the Merger Agreement, Lehigh and FMC agreed that if matters come to the
attention of either party requiring additional due diligence, each will permit
the other and its authorized agents or representatives to have full access to
its premises and to all of its books and records and officers of the respective
companies will furnish the party making such investigation with such financial
and operating data and other information with respect to its business and
properties as the party making such investigation shall reasonably request.
Additional Covenants
Additional covenants between the parties include Lehigh's covenant to apply
for listing on the New York Stock Exchange of the Lehigh shares to be delivered
to FMC stockholders; compliance by Lehigh with state securities laws; reasonable
efforts by both parties to obtain any required approvals or consents of
government or other authorities to the transactions contemplated by the Merger
Agreement; and for Lehigh and FMC to cooperate with each other and with their
respective counsel and accountants with respect to action required to be taken
as part of their obligations under the Merger Agreement, including the
preparation of financial statements and the supplying of information in
connection with the preparation of the Proxy Statement/Prospectus.
Conditions to the Merger
The Merger Agreement contains certain conditions which are to be satisfied
by Lehigh and FMC to each other's satisfaction on or before the closing of the
Merger. These conditions include, but are not limited to, approval of the Merger
Agreement by the vote of a majority of the outstanding shares of common stock of
Lehigh and FMC; Lehigh and FMC shall have furnished each other with appropriate
stockholder and Board of Directors resolutions approving the Merger Agreement;
appropriate and customary opinions of counsel with respect to various aspects of
the transactions; and that the representation and warranties of each party as
set forth in the Merger Agreement are true in all material respects as of the
Closing Date. Lehigh does not intend on waiving any material conditions. (7)
FMC's obligation to close is subject to the further condition that a
certificate of designation respecting the shares of Lehigh Preferred Stock
issuable pursuant to the Merger shall be filed with the Secretary of State for
the State of Delaware; that the Board of Directors of Lehigh shall be
constituted as set forth herein upon effectiveness of the Merger; and that
Lehigh's name shall have been changed to "First Medical Group, Inc." effective
upon the Merger.
Termination and Termination Expenses
The parties to the Merger Agreement desired a vehicle by which the Merger
Agreement could be terminated in the event legal action was taken by a third
party to prevent the proposed merger. Given the uncertainty of the outcome of
any potential litigation and the length of time it could take to resolve a
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dispute the parties did not want to be bound to an agreement while one of the
parties was engaged in litigation for several years.
The Merger Agreement provides that it may be terminated at any time prior
to the Closing Date by (i) mutual consent of the parties or (ii) upon written
notice to the other party, by either party upon authorization of its Board of
Directors if in its reasonably exercised judgment since October 29, 1996 there
shall have occurred a material adverse change in the financial condition or
business of the other party or the other party shall have suffered a material
loss or damage to any of its property or assets, which change, loss or damage
materially affects or impairs the ability of the other party to conduct its
business, or if any previously undisclosed condition which materially adversely
affects the earning power or assets of either party come to the attention of the
other party.
The Merger Agreement may also be terminated by either party upon notice to
the other in the event the Closing shall not be held by June 30, 1997, unless
such termination date is extended upon mutual agreement of the parties. The
Merger Agreement also provides that if prior to the consummation of the Merger,
Lehigh consummates Alternate Combination which is found by the Lehigh Board of
Directors to be more favorable to Lehigh and its stockholders than the Merger,
Lehigh shall be obligated to pay FMC $1.5 million.
Any term or condition may be waived by the party which is entitled to the
benefit thereof by action taken by the Board of Directors of such party.
Except in the case of Lehigh's consummation of an Alternate Combination,
upon termination of the Merger Agreement each party shall bear its own expenses
in connection the contemplated transactions.
Governmental and Regulatory Approvals
Lehigh and FMC are not aware of any governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
securities laws and the filing of the Certificate of Merger under Delaware law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a discussion of certain federal income tax consequences
under the Internal Revenue Code of 1986, as amended (the "Code"), to Lehigh and
FMC and to stockholders of FMC who receive Lehigh Common Stock and Lehigh
Preferred Stock as a result of the Merger. This discussion does not deal with
all aspects of federal taxation that may be relevant to particular FMC
stockholders, or with the effects of state, local or foreign income taxation,
however, this disclosure does address all material federal tax consequences of
this transaction.
Stockholders are urged to consult with their own tax advisors regarding the
specific tax consequences to them of the Merger, including the applicability of
federal, state, local and foreign tax laws.
No ruling has been requested from the Internal Revenue Service (the
"Service") in connection with the Merger, and in the opinion of Olshan Grundman
Frome & Rosenzweig LLP, counsel for Lehigh, no ruling would be given if one were
requested. The tax description set forth below has been prepared and reviewed by
such counsel and is correct in all material respects. An opinion represents only
the best judgment of tax counsel. The description of the tax consequences set
forth below will not be binding on the Service, and the Service may adopt a
position contrary to that described below.
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Consequences to Lehigh and FMC
The Merger will constitute a reorganization under Section 368(a) of the
Code if carried out in the manner set forth in the Merger Agreement. By reason
of the Merger constituting a "reorganization," no gain or loss will be
recognized by Lehigh or FMC on account of the Merger.
Consequences to FMC Stockholders
By virtue of the qualification of the Merger as a "reorganization" under
the Code, no gain or loss will be recognized by FMC stockholders upon the
receipt in connection with the Merger of Lehigh Common Stock and Lehigh
Preferred Stock in exchange for their shares of FMC Common Stock.
The aggregate tax basis of Lehigh Common Stock received by each FMC
stockholder will be the same as the aggregate tax basis of FMC Common Stock
surrendered in exchange therefor.
The holding period for each share of Lehigh Common Stock and Lehigh
Preferred Stock received by each stockholder of FMC in exchange for FMC Common
Stock will include the period for which such stockholder held the FMC Common
Stock exchanged therefor, provided such stockholder's FMC Common Stock is held
as a capital asset at the Effective Date of the Merger.
Consequences to Lehigh Stockholders
By virtue of the qualification of the Merger as a "reorganization" under
the Code, no gain or loss will be recognized by Lehigh stockholders in
connection with the Merger.
Limitations on Description
The description of the tax consequences set forth above is subject to
certain assumptions and qualifications and is based on the truth and accuracy of
the representations of the parties in the Merger Agreement and in representation
letters to be delivered by the officers and directors of Lehigh and FMC. Of
particular importance is the assumption that the Merger will satisfy the
"continuity of interest" requirement.
In order for the continuity of interest requirement to be met, FMC
stockholders must not, pursuant to a plan or intent existing at or prior to the
Effective Time, dispose of an amount of the Lehigh Common Stock and Lehigh
Preferred Stock to be received in the Merger (including, under certain
circumstances, pre-merger dispositions of FMC Common Stock) such that the FMC
stockholders do not retain a meaningful continuing equity ownership in Lehigh.
Generally, so long as holders of FMC Common Stock do not plan to dispose of in
excess of 50 percent of the Lehigh Common Stock and Lehigh Preferred Stock to be
received as described above (the "50 Percent Test"), such requirement will be
satisfied. Management of Lehigh and FMC have no knowledge of a plan or intention
that would result in the 50 Percent Test not being satisfied.
A successful challenge by the Service to the above-described tax status of
the Merger would not affect Lehigh stockholders, but would result in an FMC
stockholder recognizing gain or loss with respect to each share of FMC Common
Stock surrendered equal to the difference between such stockholder's basis in
such share and the fair market value of the Lehigh Common Stock and Lehigh
Preferred Stock received in exchange therefor. In such event, an FMC
stockholder's aggregate basis in the shares of the Lehigh Common Stock and
Lehigh Preferred Stock received in the exchange would equal the fair market
value
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of such shares and the stockholder's holding period for such shares would not
include the period during which the stockholder held FMC Common Stock.
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PROPOSAL NO. 2 -- THE CERTIFICATE AMENDMENTS
General
The Board of Directors of Lehigh has unanimously adopted a resolution
proposing and declaring it advisable to amend Lehigh's Restated Certificate of
Incorporation and By-laws: (A) eliminating cumulative voting for directors; (B)
eliminating action by stockholders by written consent; (C) fixing the Directors
number of members of the Board of Directors at between seven and eleven, as
determined from time-to-time by the Board of Directors; and (D) requiring any
further amendment to the provisions of the Certificate of Incorporation
addressed by items (A) through (C) to require the vote of the holders of at
least 60% of the outstanding shares of Lehigh Common Stock (collectively, the
"Certificate Amendments"). Stockholders may vote for or against, or abstain from
voting with respect to, all of the parts of this proposal as a group.
In connection with the financial restructuring of Lehigh consummated in
1991 (the "1991 Restructuring"), Lehigh's Restated Certificate of Incorporation
and By-laws were amended to provide for cumulative voting in all elections of
directors, to eliminate the classification of the Board and to fix the number of
directors comprising the entire Board at seven. Such amendments were adopted to
ensure that, following the closing of such restructuring, the
predecessors-in-interest of Base Asset Trust, as liquidating agent of Executive
Life Insurance Company in Rehabilitation/Liquidation ("BAT"), by themselves,
would be able to elect at least one of Lehigh's directors at each annual meeting
of Lehigh's stockholders (so long as they continued to own at least one-sixth of
the outstanding shares of common stock). The adoption of such amendments was
required as a condition to such holders of Lehigh's outstanding subordinated
debentures and senior subordinated notes and such predecessors-in-interest of
BAT. Lehigh believes that such amendments are no longer required in light of the
financial restructuring of Lehigh consummated in May 1993 (the "1993
Restructuring") and as a result of BAT selling all of its stock in Lehigh on
July 2, 1996. For information as to these restructurings, see "Business
Information Regarding Lehigh and Merger Sub."
Part A -- Eliminating Cumulative Voting for Directors
The Lehigh Board has unanimously approved, subject to stockholder approval,
adoption of amendments to Lehigh's Restated Certificate of Incorporation and
By-laws to eliminate the requirement for cumulative voting in all future
elections of directors of Lehigh by its stockholders. Currently, in all
elections of directors, each holder of shares of common stock is entitled to
cast such number of votes as shall equal the number of shares owned by such
holder multiplied by the number of directors to be elected by the holders of
common stock, and such holder may cast all of such holder's votes for a single
candidate or may distribute them among any two or more candidates in such
proportions as such holder may determine. The candidates receiving the highest
number of votes, up to the number of directors to be elected, shall be elected.
If the proposal to eliminate cumulative voting is adopted, cumulative
voting will not be available with respect to the election of directors in
connection with any future elections of directors by stockholders. The holder or
holders of shares representing a majority of the votes entitled to be cast in an
election of directors for Lehigh will be able to elect all directors.
In addition, currently no director may be removed by the stockholders when
the votes cast against his removal would be sufficient to elect him if voted
cumulatively (as described above) at an election of directors at which the same
number of votes were cast and the entire Board were then being elected. If the
proposal to eliminate cumulative voting is adopted, the holders of a majority of
the shares entitled to
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vote at an election of directors will be able to remove any director or the
entire Board with or without cause.
The absence of cumulative voting could have the effect of preventing
representation of minority stockholders on the Board. In addition, the
elimination of cumulative voting may have certain anti-takeover effects. It may,
under certain circumstances, discourage or render more difficult a merger,
tender offer proxy contest or acquisition of large blocks of Lehigh's shares by
persons who would not make such acquisition without assurance of the ability to
place a representative on the Board; deter or delay the assumption of control by
a holder of a large block of Lehigh's shares; or render more difficult the
replacement of incumbent directors and management.
The Board believes, however, that, in general, and especially in publicly
held corporations, each director should represent the interests of all
stockholders rather than the interests of a special constituency, and that the
presence on the Board of one or more directors representing such a constituency
could disrupt and impair the efficient management of Lehigh. Adoption of the
proposal to eliminate cumulative voting requires the affirmative vote of the
holders of a majority of the outstanding shares of common stock or the holders
of a least 80% of the outstanding shares of common stock voting at the Meeting,
whichever is greater.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
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Part B -- Eliminating Action by Stockholders by Written Consent
The Board of Directors recommends that Lehigh's Certificate of
Incorporation be amended to provide that actions required or permitted to be
taken at any annual or special meeting of the stockholders may be taken only
upon the vote of the stockholders at a meeting duly called and may not be taken
by written consent of the stockholders.
Under the General Corporation Law of the State of Delaware (the "DGCL"),
unless otherwise provided in the Certificate of Incorporation, any action
required or permitted to be taken by stockholders of Lehigh may be taken without
a meeting, without prior notice and without a stockholder vote if a written
consent setting forth the action to be taken is signed by the holders of shares
of outstanding stock having the requisite number of votes that would be
necessary to authorize such action at a meeting of stockholders at which all
shares entitled to vote thereon were present and voted. Lehigh's Certificate of
Incorporation currently contains no provision restricting or regulating
stockholder action by written consent.
The adoption of this amendment would eliminate the ability of Lehigh
stockholders to act by written consent in lieu of a meeting. It is intended to
prevent solicitation of consents by stockholders seeking to effect changes
without giving all of Lehigh's stockholders entitled to vote on a proposed
action an adequate opportunity to participate at a meeting where such proposed
action is considered. The proposed amendment would prevent a takeover bidder
holding or controlling a large block of Lehigh's voting stock from using the
written consent procedure to take stockholder action unilaterally.
The Board of Directors does not believe that the elimination of stockholder
action by written consent will create a significant impediment to a tender offer
or other effort to take control of Lehigh. Nevertheless, the effect of this
proposal may be to make more difficult, or delay, certain actions by a person or
a group acquiring a substantial percentage of Lehigh's stock even though such
actions might be desired by, or beneficial to, the holders of a majority of
Lehigh's stock.
This amendment will ensure that all stockholders will have advance notice
of any attempted major corporate action by stockholders, and that all
stockholders will have an equal opportunity to participate at the meeting of
stockholders where such action is being considered. It will enable Lehigh to set
a record date for any stockholder voting, and should reduce the possibility of
disputes or confusion regarding the validity of purported stockholder action.
The amendment could provide some encouragement to a potential acquiror to
negotiate directly with the Board of Directors.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
Part C -- Fixing the Number of Directors at between Seven and Eleven
The Lehigh Board has unanimously approved, subject to stockholder approval,
adoption of amendments of Lehigh's Restated Certificate of Incorporation and
By-laws to provide that the number of directors comprising the entire Board be
not less than seven nor more than eleven, as determined from time to time by the
Board. Such amendments are intended to increase the flexibility of the Board to
vary its size depending on the needs of Lehigh, the availability of qualified
persons willing to serve as directors and other relevant factors.
Lehigh's Restated Certificate of Incorporation currently provides that the
number of directors constituting the entire Board shall be six. Although the
Board currently consists of six directors, five
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directors have been nominated for election at the Meeting. If the Merger is not
approved by stockholders, the Merger will not be effected and the current
directors of Lehigh will continue to serve.
If such proposed amendments are adopted, Lehigh's Restated Certificate of
Incorporation will be amended to provide that the number of directors comprising
the entire Board will be determined as set forth in Lehigh's By-laws and such
By-laws will be amended to provide that the number of directors comprising the
entire Board would be not less than seven nor more than eleven, as determined
from time to time by the Board. Adoption of these amendments requires the
affirmative vote of the holders of a majority of the outstanding shares of
Lehigh Common Stock or the holders of at least 80% of the outstanding shares of
Lehigh Common Stock voting at the Meeting, whichever is greater.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
Part D -- Requiring any Further Amendment to the Provisions of the Certificate
of Incorporation addressed by Parts (A) through (C) to Require the Vote of the
holders of at Least 60% of the Outstanding Shares of Lehigh Common Stock
The Board of Directors recommends that Lehigh's Certificate of
Incorporation be amended to require that in order to amend, repeal or adopt any
provision inconsistent with the amendments to the Certificate of Incorporation
described in Parts (B) through (D) the affirmative vote of at least 60% of the
outstanding shares of Lehigh Common Stock shall be required.
Under the DGCL of the State of Delaware, amendments to the Certificate of
Incorporation require the approval of the holders of a majority of the
outstanding stock entitled to vote thereon, but the law also permits a
corporation to include provisions in its Certificate of Incorporation which
require a greater vote than otherwise required by law for any corporate action.
With respect to such supermajority provisions, the DGCL requires that any
alteration, amendment or repeal thereof be approved by an equally large
stockholder vote.
The requirement of an increased stockholder vote is designed to prevent a
person holding or controlling a majority, but less than 60%, of the shares of
Lehigh from avoiding the requirements of the proposed amendments by simply
repealing them. The practical effect of the proposed amendment is that the
former stockholders of FMC, acting as a group, will be able to meet this
ownership requirement if they choose to act in concert.
The Board recommends a vote FOR this proposal and it is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
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PROPOSAL NO. 3 -- Changing the Name of the Corporation
from "The Lehigh Group Inc." to "First Medical Group, Inc."
The Lehigh Board has unanimously adopted a resolution proposing and
declaring it advisable to amend Lehigh's Restated Certificate of Incorporation
to change the name of Lehigh from "The Lehigh Group Inc." to "First Medical
Group, Inc." The purpose of this amendment is to have the corporation's name
more accurately reflect its primary business following completion of the Merger.
This proposal is conditioned upon completion of the Merger.
The affirmative vote of a majority of the outstanding shares of Lehigh
Common Stock is required for approval of the proposed amendment to change
Lehigh's name.
The Board recommends a vote FOR this proposed amendment and it is intended
that shares represented by the enclosed form of proxy will be voted in favor of
this proposed amendment unless otherwise specified in such proxy.
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PROPOSAL NO. 4 -- ELECTION OF DIRECTORS
General
Lehigh's Restated Certificate of Incorporation and By-laws provide that the
number of directors constituting the entire Board of Directors of Lehigh (the
"Board") shall be six. Lehigh is proposing to amend its Restated Certificate of
Incorporation and By-laws to provide that the number of directors comprising the
entire Board be not less than seven nor more than eleven, as determined from
time to time by the Board. See "Proposal No. 2 -- The Certificate Amendments".
There are five nominees for director. If the stockholders fail to approve the
proposed amendment to Lehigh's Restated Certificate of Incorporation and By-laws
to provide that the number of directors comprising the entire Board shall be not
less than seven nor more than eleven, then the six nominees who receive the most
votes shall serve as Lehigh's directors. If the Merger is not completed, the
current Lehigh directors will continue to serve.
Cumulative voting will be available with respect to the election of
directors at the Meeting. Each holder of shares of Lehigh Common Stock shall be
entitled to cast such number of votes as shall equal the number of shares owned
by such holder multiplied by the number of directors to be elected by the
holders of Common Stock, and such holder may cast all of such holder's votes for
a single candidate or may distribute them among any two or more candidates in
such proportions as such holder may determine. The candidates receiving the
highest number of votes, up to the number of directors to be elected, shall be
elected. Unless instructions to the contrary are given, the shares represented
by a proxy at the Meeting will be voted for any one or more of management's
nominees, to the exclusion of others, and in such order of preference as the
proxy holders determine in their sole discretion.
If for any reason any of Lehigh's nominees should be unable to serve or
refuse to serve as a director, an event which is not anticipated, the enclosed
proxies may be voted for a substituted nominee, in accordance with the judgment
of the proxy holders, and for the other nominees of management.
The table set forth below sets forth information with respect to each
nominee for director of Lehigh following the Merger, if approved. Information as
to age, occupation and other directorships has been furnished to Lehigh by the
individual named. Mr. Zizza is currently a director of Lehigh. Those directors
elected at the Meeting will serve until the next annual meeting of stockholders
of Lehigh (or until their respective successors are duly elected and qualified
or until their earlier death, resignation or removal).
Proposed Directors and Executive Officers
Name Age Current Position
---- --- ----------------
Salvatore J. Zizza 51 Chairman of the Board, President, Chief
Executive Officer, Director of Lehigh and
Nominee for Director
Robert A. Bruno 40 Vice President and Secretary of Lehigh
Dennis A. Sokol 52 Chairman of the Board and Chief
Executive Officer of FMC and Nominee
for Director
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Elias M. Nemnom 46 Vice President and Chief Financial
Officer of FMC
Melvin E. Levinson, 68 Director of FMC and Nominee for
M.D. Director
Elliot H. Cole 64 Director of FMC and Nominee for
Director
Paul Murphy 49 Director of FMC and Nominee for
Director
Mr. Zizza has been a director of Lehigh since 1985 (except that he did not
serve as a director during the period from March 15, 1991 through April 16,
1991) and Chairman of the Board of Lehigh since April 16, 1991, and was Chief
Executive Officer of Lehigh from April 16, 1991 through August 22, 1991 and
President of NICO from 1983 through August 22, 1991. He also served as President
of Lehigh from October 1985 until April 16, 1991. He is also a director of the
Gabelli Equity Trust, Inc.; The Gabelli Asset Fund; The Gabelli Growth Fund; The
Gabelli Convertible Securities Funds, Inc. and The Gabelli Global MultiMedia
Trust Inc. On December 12, 1995, Mr. Zizza became Chairman of the Board of The
Bethlehem Corporation (an American Stock Exchange company). On November 18,
1992, Mr. Zizza also became Chairman of the Board, President and Treasurer of
Initial Acquisition Corp. (a Nasdaq-listed Company).
Mr. Bruno has served as Vice President and General Counsel since May 5,
1993 and as Secretary since August 22, 1994. He was appointed to the Board on
March 31, 1994. He also has served as General Counsel to NICO and its
subsidiaries since June 1983 (except he did not serve as General Counsel to NICO
during the period of January 1, 1992 through May 31, 1993).
Mr. Sokol has served as the Chairman of the Board and Chief Executive
Officer of FMC since its formation in January 1996. Prior to the formation of
FMC, Mr. Sokol served as the Chairman of the Board and Chief Executive Officer
of Hospital Corporation International, Plc., the former international division
of Hospital Corporation of America, Inc., which entity owned and operated
hospitals and primary care facilities in the United Kingdom, Central and Eastern
Europe, the Middle East and Pacific Rim, and American Medical Clinics, Ltd. Mr.
Sokol was the founder, and from 1984 to 1988 served as Chief Executive Officer
of Medserv Corporation, a multifaceted medical service company. Mr. Sokol was
the founder, and from 1989 to 1992 served as the Chief Executive Officer, of the
American-Soviet Medical Consortium whose members included Pfizer, Inc.,
Colgate-Palmolive Company, Hewlett-Packard Company, MedServ, Amoco Corporation
and Federal Express Corp. In all, Mr. Sokol has over 30 years experience in the
medical services industry.
Mr. Nemnom has served as the Chief Financial Officer of FMC since joining
the company in May 1996. Prior to joining FMC, from March 1995 to April 1996,
Mr. Nemnom served as the Chief Financial Officer of MedE America Corporation, an
electronic data interchange company. From December 1985 to January 1995, Mr.
Nemnom served as the Chief Financial Officer of Medserv Corporation, a
multifaceted medical service company. Before joining Medserv, Mr. Nemnom was a
Senior Manager at Deloitte & Touche for over ten years specializing in the
healthcare industry. Mr. Nemnom is a Certified Public Accountant and a member of
the American Institute of Certified Public Accountants, the New York State
Society of Certified Public Accountants and the Healthcare Financial Management
Association.
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Dr. Levinson has served as a Co-Vice Chairman of FMC's Board of Directors
since its formation in January 1, 1996. Dr. Levinson was a co-founder of
MedExec, Inc., a wholly-owned subsidiary of FMC ("MedExec"), for which he served
as Chairman of the Board and a director from March 1991 to January 1996. Dr.
Levinson was also a co-founder and former director of HealthInfusion, Inc., a
publicly traded company engaged in the delivery of intravenous home therapy. Dr.
Levinson is a founder and since January 1996 has served as the Chairman of the
Board of Scion International, Inc., a manufacturer of medical devises. Dr.
Levinson is currently an Associate Professor at the University of Miami School
of Medicine.
Mr. Cole has served as the Co-Vice Chairman of FMC's Board of Directors
since its formation in January 1996. Mr. Cole is a senior partner in the law
firm of Patton Boggs LLP, Washington, D.C., a firm of approximately 250 lawyers.
Mr. Cole has practiced corporation law and been engaged in Federal matters for
more than thirty-five years. Mr. Cole has served as a trustee of Boston
University since 1977 as well as being a member of numerous corporate and
not-for-profit boards.
Mr. Murphy has served as a director of FMC since its formation in January
1996. Since 1994, Mr. Murphy has served as the Deputy Managing Director of BMI
Healthcare, the largest provider of health care in the United Kingdom. From 1989
until its merger in 1994 with its affiliate, General Healthcare Group, in
connection with the formation of BMI Healthcare, Mr. Murphy served as the
Managing Director of GreatNorthern Health Management Ltd., a company which
managed up to ten hospitals within the United Kingdom. Prior to joining
GreatNorthern Health Management Ltd., from 1984 to 1989, Mr. Murphy served as
the Chief Executive Officer of Little Aston Hospital plc, a company which owned
and operated a hospital located in Birmingham, United Kingdom. In all, Mr.
Murphy has over 20 years experience in the United Kingdom health care industry.
Mr. Murphy currently sits on the boards of several hospital corporations and
other health care companies in the United Kingdom.
No family relationship exists between any of the directors and executive
officers of Lehigh.
All directors will serve until the annual meeting of stockholders of Lehigh
to be held in 1997 and until their respective successors are duly elected and
qualified or until their earlier death, resignation or removal. Officers are
elected annually by the Board and serve at the discretion thereof.
Certain Relationships and Related Transactions
On August 22, 1994, Lehigh sold 2,575,000 shares of Lehigh Common Stock
pursuant to a private placement (the "Private Placement") at a purchase price of
$.40 per share, including 250,000 shares sold to Salvatore J. Zizza (Lehigh's
President, Chairman of the Board and Chief Executive Officer), 62,500 shares
sold to Robert A. Bruno (Lehigh's Vice President, General Counsel and Secretary)
and 750,000 shares sold to Kenneth Godt as Trustee of the Orion Trust (which, by
virtue of such sale, became the owner of more than 5% of the outstanding Lehigh
Common Stock). Pursuant to a registration rights agreement dated as of August
22, 1994 among Lehigh and the investors that purchased Lehigh Common Stock
pursuant to the Private Placement (including Mr. Zizza, Mr. Bruno and Kenneth
Godt as Trustee for the Orion Trust), such investors have one demand
registration right (exercisable at any time after the first anniversary and
prior to the fifth anniversary of such date) and certain "piggyback"
registration rights with respect to such common stock. On August 22, 1994,
Lehigh also (i) issued to Goldis Financial Group Inc. warrants to purchase
402,187 shares of common stock at $.50 per share which shall expire on August
29, 1999, as partial consideration for its services as selling agent in
connection with the Private Placement, and (ii) granted to it certain piggyback
registration rights as to such shares.
45
<PAGE>
On August 22, 1994 (immediately prior to the closing under the Private
Placement), (i) Lehigh and Mr. Zizza entered into an employment agreement
providing for the employment of Mr. Zizza through December 31, 1999 as
President, Chairman of the Board and Chief Executive Officer of Lehigh at an
annual salary of $200,000 (subject to increase, in the discretion of the Board,
if Lehigh acquires one or more new businesses, to a level commensurate with the
compensation paid to the top executives of comparable businesses), and (ii)
Lehigh and Dominic Bassani entered into a consulting agreement providing for Mr.
Bassani to serve as a consultant to Lehigh for a five year period and to provide
during such period such financial advisory services and assistance as Lehigh may
request in connection with arranging for financing for Lehigh (including
pursuant to the Private Placement) and in connection with the selection and
evaluation of potential acquisitions. The consulting agreement with Mr. Bassani
was mutually terminated in July 1995. If Lehigh acquires any business with
annual revenues in the year immediately prior to such acquisition of at least
$25 million (an "Acquired Business"), Mr. Zizza will be entitled to a bonus for
each year of his employment following such acquisition (including the portion of
the year immediately following such acquisition), based on specified percentages
of the total pre-tax income of all Acquired Businesses for such year or portion
thereof ("Acquired Business Pre-Tax Income"). For this purpose, Acquired
Business Pre-Tax Income excludes any income earned by Acquired Businesses prior
to their acquisition by Lehigh, any earnings attributable to any minority
interest in Acquired Businesses, and any extraordinary items. The bonus for Mr.
Zizza for each such year (or portion thereof) will be an amount equal to
one-half of (i) 10% of the first $1,000,000 of all Acquired Business Pre-Tax
Income for such year (or portion thereof), (ii) 9% of all Acquired Business
Pre-Tax Income for such year (or portion thereof) above $1,000,000 up to but not
exceeding $2,000,000, plus (iii) 8% of all Acquired Business Pre-Tax Income for
such year (or portion thereof) above $2,000,000 up to but not exceeding
$3,000,000, plus (iv) 7% of all Acquired Business Pre-Tax Income for such year
(or portion thereof) above $3,000,000 up to but not exceeding $4,000,000, plus
(v) 6% of all Acquired Business Pre-Tax Income for such year above $4,000,000 up
to but not exceeding $5,000,000, (vi) 5% of all Acquired Business Pre-Tax Income
for such year above $5,000,000. The merger with FMC will not be considered an
acquisition for purposes of the bonus provisions in Mr. Zizza's employment
agreement. Mr. Zizza and Lehigh have amended Mr. Zizza's employment agreement
which amendment becomes effective as of the Effective Time. The amendment
provides that (i) Mr. Zizza may be entitled to a bonus at the discretion of
Lehigh in lieu of the current bonus formula, (ii) Mr. Zizza's options and
warrants to purchase an aggregate of 6,000,000 shares of Lehigh Common Stock at
an exercise price of $.75 per share and options and warrants to purchase an
aggregate of 6,000,000 shares of Lehigh Common Stock at an exercise price of
$1.00 per share shall be converted into 3% of the total issued and outstanding
stock of Lehigh, on a fully diluted basis (after giving effect to the issuance
and conversion of Lehigh Preferred Stock) at a blended exercise price of $.875
per share and (iii) extending the employment period for one additional year
through December 31, 2000. No compensation expense is expected to be recognized
in connection with the options because the exercise price is significantly in
excess of the current quoted market price of the Lehigh common stock and is
expected to continue to be in excess of the "Effective Time," which represent
the measurement dates with respect to the option.
Lehigh also granted (i) to Mr. Zizza options to purchase a total of
10,250,000 shares of Lehigh Common Stock: 4,250,000 exercisable at $.50 per
share, 3,000,000 exercisable at $.75 per share, and 3,000,000 exercisable at
$1.00 per share; and (ii) Mr. Bassani warrants to purchase a total of 7,750,000
shares of Common Stock: 1,750,000 exercisable at $.50 per share, 3,000,000 at
$.75 per share, and 3,000,000 at $1.00 per share. In July 1995, Mr. Zizza
purchased all the warrants held by Mr. Bassani. At the time of such purchase,
the Board consented to the transaction and amended the Bassani warrants to make
their expiration date co-terminus with the other warrants which had been issued
to Mr. Zizza; namely, August 22, 1999. The $.50 per share options are currently
exercisable; the $.75 and $1.00 per share options will not be exercisable until
such time as (i) Lehigh has raised at least $10 million of equity, (ii) Lehigh
has consummated an acquisition of a business with annual revenues in the year
immediately
46
<PAGE>
prior to such acquisition of at least $25 million, and (iii) the fair market
value of the Lehigh Common Stock (as measured over a period of 30 consecutive
days) has equalled or exceeded $1.00 per share. The options and warrants held by
Mr. Zizza (including those purchased from Mr. Bassani) will terminate on the
fifth anniversary of the date of grant, subject to earlier termination under
certain circumstances in the event of his death or the termination of his
employment. Lehigh also granted to Mr. Zizza one demand registration right
(exercisable only if Lehigh is eligible to file a registration statement on Form
S-3 or a form substantially equivalent thereto) and certain "piggyback"
registration rights with respect to the shares of Lehigh Common Stock
purchasable upon exercise of the options or warrants granted to him. An option
to purchase 6,000,000 of the shares subject to the foregoing options was granted
to FMC on October 29, 1996. The aggregate exercise price for Mr. Zizza to
purchase 6,000,000 shares of Lehigh common stock would be $3,000,000. FMC
delivered a promissory note in the amount of $100,000 to Mr. Zizza in
consideration for the option. When the option was cancelled on February 7, 1997
, the note was returned.(22) See "Proposal No. 1 -- The Merger -- Background to
the Merger," and "Security Ownership of Certain Beneficial Owners of Lehigh."
On January 1, 1995, Lehigh and Mr. Bruno entered into an employment
agreement providing for his employment through December 31, 1999 as Vice
President and General Counsel for Lehigh at an annual salary of $150,000.
Pursuant to such agreement, Mr. Bruno has deferred one-third of his annual
salary until such time as Lehigh's annual revenues exceed $25 million. In April
1995, Lehigh granted Mr. Bruno an option to purchase 250,000 shares of common
stock at an exercise price of $.50 per share. The option is (i) immediately
exercisable as to 100,000 shares subject to such option, (ii) exercisable as to
additional 75,000 shares subject to option on December 31, 1995, and (iii)
exercisable as to the remaining 75,000 shares subject to such option on December
31, 1996. The option will expire December 31, 1999.
Mr. Bruno and Lehigh have amended the terms of Mr. Bruno's employment
agreement to be effective as of the Effective Time of the Merger. In general,
the amendment provides that (i) Mr. Bruno's salary be reduced from $150,000 to
$120,000 per year, (ii) no part of Mr. Bruno's salary be deferred and (iii) the
term of the employment agreement be extended for an additional year through
December 31, 2000.
In connection with the issuance by Lehigh of common stock pursuant to the
1991 Restructuring to the former holders of the 13-1/2% Notes and 14-7/8%
Debentures and NICO's Senior Secured Notes (which holders included Southwicke,
FBL, Allstate and Teachers or their predecessors in interest), Lehigh granted to
such holders two demand and unlimited piggyback registration rights (which
remain in effect to the extent such Common Stock is not otherwise freely
transferable). For information as to the Lehigh Common Stock held by Southwicke,
FBL, Allstate and Teachers (which is covered by such registration rights), see
"Security Ownership of Certain Beneficial Owners of Lehigh."
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the regulations of the SEC thereunder require Lehigh's
executive officers and directors, and persons who own more than ten percent of a
registered class of Lehigh's equity securities, to file reports of initial
ownership and changes in ownership with the SEC and the National Association of
Securities Dealers, Inc. Such officers, directors and ten-percent stockholders
are also required by SEC rules to furnish Lehigh with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no other reports were required for such persons, Lehigh believes that, during or
with respect to the period from January 1, 1996 to
47
<PAGE>
December 31, 1996, all Section 16(a) filing requirements applicable to its
executive officers, directors and ten-percent stockholders were complied with.
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 Charles Gargano and Anthony Amhurst who missed
only one meeting.
The Lehigh 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 Salvatore Salibello and Richard Bready. The functions of the
Audit Committee include recommending to the Board the appointment of the
independent public accountants for Lehigh; reviewing the scope of the audit
performed by the independent public accountants and their compensation therefor;
reviewing recommendations to management made by the independent public
accountants and management's responses thereto; reviewing internal audit
procedures and controls on various aspects of corporate operations and
consulting with the independent public accountants on matters relating to the
financial affairs of Lehigh.
The Executive Committee of the Board held no meetings in 1996. The current
members of the Executive Committee are Messrs. Zizza, Bready and Bruno. The
Executive Committee is authorized (except when the Board is in session) to
exercise all of the powers of the Board (except as otherwise provided by law).
The Compensation Committee did not meet in 1996. The current members of the
Compensation Committee are Anthony Amhurst and Charles Gargano. The Compensation
Committee is responsible for developing Lehigh's executive compensation policies
and determining the compensation paid to Lehigh's Chief Executive Officer and
its other executive officers.
Salvatore J. Zizza
Robert A. Bruno
Charles Gargano
Anthony Amhurst
Salvatore Salibello
Richard Bready
48
<PAGE>
Executive Compensation
The following table sets forth a summary of compensation awarded to, earned
by or paid to the Chief Executive Officer and the other executive officers of
Lehigh whose total annual salary and bonus exceeded $100,000 for services
rendered in all capacities to Lehigh during each of the years ended December 31,
1996, December 31, 1995 and December 31, 1994:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Annual Compensation ------------
-------------------
Securities
Underlying
Options
Other Annual (number of All Other
Name and Principal Position Year Salary Bonus Compensation(2) shares) Compensation (3)
- --------------------------- ---- ------ ----- --------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore J. Zizza (1)
Chairman of the Board 1996 $ 200,000 0 0 0 $ 1,272
1995 $ 200,000 0 0 0 $ 1,272
1994 $ 200,000 0 0 10,250,000(1) $ 800
Robert A. Bruno (4) 1996 150,000 0 0 0 $ 1,272
Vice President and
General Counsel
1995 150,000 0 0 250,000( 4) $ 1,272
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>
* Less than $100,000.
(1) On August 22, 1994, Lehigh and Mr. Zizza entered into an employment
agreement providing for his employment through December 31, 1999 as
President, Chairman of the Board and Chief Executive Officer of Lehigh at
an annual salary of $200,000 (subject to increase, in the discretion of the
Board, if Lehigh acquires one or more new businesses, to a level
commensurate with the compensation paid to the top executives of comparable
businesses). Pursuant to such agreement, if Lehigh acquires any business
with annual revenues in the year immediately prior to such acquisition of
at least $25 million (an "Acquired Business"), Mr. Zizza will be entitled
to a bonus for each year of his employment following such acquisition
(including the portion of the year immediately following such acquisition),
in an amount equal to one-half of (i) 10% of the first $1,000,000 of all
Acquired Business Pre-Tax Income (as hereinafter defined) for such year (or
portion thereof), plus (ii) 9% of all Acquired Business Pre-Tax Income for
such year (or portion thereof) above $1,000,000 up to but not exceeding
$2,000,000, plus (iii) 8% of all Acquired Business Pre-Tax Income for such
year (or portion thereof) above $2,000,000 up to but not exceeding
$3,000,000, plus (iv) 7% of all Acquired Business Pre-Tax Income for such
year (or portion thereof) above $3,000,000 up to but not exceeding
$4,000,000, plus (v) 6% of all Acquired Business Pre-Tax Income for such
year above $4,000,000 up to but not exceeding $5,000,000, plus (vi) 5% of
all Acquired Business Pre-Tax Income for such year above $5,000,000. For
the purposes hereof, "Acquired Business Pre-Tax Income" for any year (or
portion thereof) means the total pre-tax income of all Acquired Businesses
for such year (or portion thereof), excluding any income earned by Acquired
Businesses prior
49
<PAGE>
to their acquisition by Lehigh, any earnings attributable to any minority
interest in Acquired Businesses, and any extraordinary items.
Mr. Zizza and Lehigh have amended the terms of Mr. Zizza's employment
agreement effective as of the Effective Time of the Merger. In general, the
amendment provides that (i) Mr. Zizza may be entitled to a bonus, at the
discretion of Lehigh, in lieu of the current bonus formula, (ii) Mr.
Zizza's options and warrants exercisable at $.75 per share into an
aggregate of 6,000,000 shares of Lehigh Common Stock and options and
warrants exercisable at $1.00 per share into an aggregate of 6,000,000
shares of Lehigh Common Stock shall be converted into 3% of the total
issued and outstanding shares of Lehigh Common Stock, on a fully diluted
basis (after giving effect to a conversion of all of the shares of Lehigh
Preferred Stock issued in connection with the Merger) at a blended exercise
price of $.875 per share and (iii) the term of Mr. Zizza's employment
agreement be extended for an additional year through December 31, 2000. No
compensation expense is expected to be recognized in connection with these
options because the exercise price is expected to be greater than the
quoted market price at the effective time of the exercise.
(2) As to each individual named, the aggregate amount of personal benefits not
included in the Summary Compensation Table does not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for the named
executive officer.
(3) Represents premiums paid by Lehigh with respect to term life insurance for
the benefit of the named executive officer.
(4) On January 1, 1995, Lehigh and Mr. Bruno entered into an employment
agreement providing for his employment through December 31, 1999 as Vice
President and General Counsel for Lehigh at an annual salary of $150,000.
Pursuant to such agreement, Mr. Bruno has deferred one-third of his annual
salary until such time as Lehigh's annual revenues exceed $25 million. In
April 1995, Lehigh granted Mr. Bruno an option to purchase 250,000 shares
of common stock at an exercise price of $.50 per share. The option is (i)
immediately exercisable as to 100,000 shares subject to such option, (ii)
exercisable December 31, 1995 as to an additional 75,000 shares subject to
such option, and (iii) exercisable December 31, 1996 as to the remaining
75,000 shares subject to such option. The option will expire December 31,
1999.
Mr. Bruno and Lehigh have amended the terms of Mr. Bruno's employment
agreement effective as of the Effective Time of the Merger. In general, the
amendment provides that (i) Mr. Bruno's salary be reduced from $150,000 to
$120,000 per year, (ii) no part of Mr. Bruno's salary be deferred and (iii)
the term of the employment agreement be extended for an additional year
through December 31, 2000.
(5) Mr. Delowery may be deemed to be an executive officer of Lehigh by virtue
of his position with HallMark. HallMark became Lehigh's principal operating
subsidiary following the 1993 Restructuring.
Compensation of Directors
Lehigh directors receive no compensation for serving on the Board other
than the reimbursement of reasonable expenses incurred in attending meetings. In
April 1996, Lehigh granted options to purchase 15,000 shares of common stock at
an exercise price of $.50 per share to Mr. Bready and options to purchase 10,000
shares of common stock at an exercise price of $.50 per share to each of Messrs.
Gargano, Amhurst and Salibello. Both Messrs. Gargano and Amhurst are members of
Lehigh's Compensation Committee and are directors.
The following table provides information on options granted during 1996 to
the executive officers of Lehigh named in the Summary Compensation Table.
Option Grants in 1996
No Lehigh employees were granted stock options in 1996.
The following table sets forth the number of options exercised and the
dollar value realized thereon by the executive officers of Lehigh named in the
Summary Compensation Table, along with the number and dollar value of any
options remaining unexercised on December 31, 1996.
50
<PAGE>
Aggregated Option Exercises in
1996 and Year-End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Year-End Year-End(1)
----------------------------- ----------------------------------
Shares
Acquired Value
Name on Exercise Realized(2) Exercisable Unexercisable Exercisable(2) Unexercisable(2)
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore Zizza $0 $0 6,000,000 12,000,000 $0 $0
Robert Bruno $0 $0 250,000 $0 $0
</TABLE>
(1) On December 31, 1996, the average of the high and low prices per share of
the Common Stock on the New York Stock Exchange was $.25.
(2) Represents the difference between the market value of the Common Stock
underlying the option and the exercise price of such option upon exercise
or year-end, as the case may be.
Compensation Committee Interlocks and Insider Participation
Both Anthony Amhurst and Charles Gargano are members of Lehigh's
Compensation Committee and are directors. There are no compensation committee
interlock relationships to be disclosed pursuant to Item 402 of Regulation S-K.
Board Report on Executive Compensation
The Compensation Committee is responsible for developing Lehigh's executive
compensation policies and determining the compensation paid to Lehigh's Chief
Executive Officer and its other executive officers.
The Compensation Committee considers the current executive compensation
(other than for Mr. Delowery) to be below the standard for executives performing
comparable services (such as debt restructurings, work-outs, negotiations with
bondholders and various creditors, restructuring bank credit lines for more
favorable terms, pursuing opportunities to raise working capital, etc.). The
Compensation Committee did not meet in 1996 and the report is the report of the
entire Board.
Lehigh entered into an employment agreement with Mr. Zizza in August 1994
providing for his employment through December 31, 1999 as President, Chairman of
the Board and Chief Executive Officer of Lehigh at an annual salary of $200,000
(the same salary previously paid to him). His salary is subject to increase, in
the Board's discretion, if Lehigh acquires one or more new businesses, to a
level commensurate with the compensation paid to the top executives of
comparable businesses. If Lehigh acquires any business with annual revenues in
the year immediately prior to such acquisition of at least $25 million, Mr.
Zizza will be entitled to a bonus for each year of his employment following such
acquisition (including the portion of the year immediately following such
acquisition), based on specified percentages of the total pre-tax income of all
such acquired businesses for such year or portion thereof. See "Certain
Relationships and Related Transactions", above. Pursuant to such employment
agreement, Lehigh also granted to Mr. Zizza options to purchase 10,250,000
shares of Common Stock at exercise
51
<PAGE>
prices ranging from $.50 to $1.00 per share. For information as to the terms and
conditions of exercisability of such options, see "Certain Relationships and
Related Transactions" and "Executive Compensation," above. The Board's
compensation committee did not meet in 1996 since all executives are paid
pursuant to previously executed employment agreements.
PROPOSAL NO 5 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors of Lehigh has selected BDO Seidman, LLP to be the
independent auditors of Lehigh for the year ending December 31, 1996. Although
the selection of auditors does not require ratification, the Board of Directors
of Lehigh has directed that the appointment of BDO Seidman, LLP be submitted to
stockholders for ratification due to the significance of their appointment to
Lehigh, arising from the level of familiarity which BDO Seidman, LLP has with
Lehigh's financial statements. If stockholders do not ratify the appointment of
BDO Seidman, LLP, the Board of Directors of Lehigh will consider the appointment
of other certified public accountants. A representative of BDO Seidman, LLP is
expected to be available at the Meeting to make a statement if such
representative desires to do so and to respond to appropriate questions.
Vote Required
Ratification of the appointment of BDO Seidman, LLP requires the
affirmative vote of a majority of the votes cast by all stockholders represented
and entitled to vote thereon. An abstention, withholding of authority to vote or
broker non-vote, therefore, will not have the same legal effect as an "against"
vote and will not be counted in determining whether the proposal has received
the requisite stockholder vote.
Recommendation of the Board of Directors of Lehigh
THE BOARD OF DIRECTORS OF LEHIGH RECOMMENDS A VOTE FOR THE RATIFICATION OF
THE APPOINTMENT OF BDO SEIDMAN, LLP AS LEHIGH'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1996.
52
<PAGE>
BUSINESS INFORMATION REGARDING LEHIGH AND MERGER SUB
Lehigh
General
Lehigh (formerly The LVI Group Inc.) through its wholly owned subsidiary,
HallMark Electrical Supplies Corp. ("HallMark"), is engaged in the distribution
of electrical supplies for the construction industry both domestically
(primarily in the New York Metropolitan area) and for export.
Prior to 1994, Lehigh, through its wholly owned subsidiaries, had been
engaged in the following other businesses: (i) through certain of its operating
subsidiaries ("NICO Construction"), interior construction; (ii) through its
wholly owned subsidiary, LVI Environmental Services Group Inc. ("LVI
Environmental") and subsidiaries thereof, asbestos abatement; (iii) through
Riverside Mfg., Inc. ("Riverside"), the design, production and sale of
electrical products; (iv) through Mobile Pulley and Machine Works, Inc. ("Mobile
Pulley"), the manufacture and sale of dredging equipment and precision machined
castings; and (v) through LVI Energy Recovery Corporation ("LVI Energy"), energy
recovery and power generation and landfill closure services. All of such other
businesses were transferred or sold prior to 1994.
Riverside and Mobile Pulley were transferred to a liquidating trust in
connection with Lehigh's financial restructuring of its outstanding debt and
preferred stock on March 15, 1991 (the "1991 Restructuring"). During the third
quarter of 1991, Lehigh discontinued its interior construction business operated
through its NICO Construction subsidiaries due to the general economic slowdown,
particularly as it related to the real estate market. In the third quarter of
1990, Lehigh discontinued its LVI Energy business which was prompted by
technical problems at the LVI Energy power plant facility. Both the NICO
Construction and LVI Energy subsidiaries were sold on December 31, 1991.
The following is a detailed supplemental description of the 1993
restructuring as it appeared in note number 1 to Lehigh's Form 10-K for the year
ended 1993;
Financial Condition and Restructuring - The Company 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. The Company also incurred a substantial loss
attributable to its LVI Energy business in 1990. For the three year period ended
December 31, 1990, the Company incurred a cumulative net loss of $76.7 million.
As a consequence, the Company had a consolidated shareholders' deficit at
December 31, 1990 of $30.8 million.
At December 31, 1990, the Company 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.
The Company 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).
53
<PAGE>
For the foregoing reasons, the Company consummated the 1991 Restructuring
on March 15, 1991. The consummation of the 1991 Restructuring followed extensive
negotiations and discussion among the Company, 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 the Company'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 ("Class B Notes") and 212,650,560 shares of the Company's
common stock ("Common Stock"),
(b) The holders of $8.76 million principal amount of the Company'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 the Company's $2.0625 Cumulative
Convertible Exchangeable Preferred Stock, no par value (the "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 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'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 ("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
(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 the Company's
shareholders. 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 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 the Company's
debt service obligations. However, adverse market conditions in the interior
construction industry continued to negatively impact
54
<PAGE>
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 the Company's interior construction business during the third
quarter of 1991.
In September, 1991, the Company sold its registered service mark "NICO" for
use in the interior construction management and consulting business in the
United States. In December, 1991, the Company sold all ownership in its NICO
Construction and LVI Energy businesses.
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 consummated a restructuring on May 5, 1993 (the "1993
Restructuring"). Pursuant to the 1993 Restructuring, the Company, through NICO
Inc., a wholly owned subsidiary ("NICO"), sold LVI Environmental to LVI Holding
Corporation ("LVI Holding"), a newly formed company organized by the management
of LVI Environmental, which had a minority interest in LVI Holding. The owners
of LVI Holding were certain holders of the 9.5% Class A Senior Secured
Redeemable Notes due March 15, 1997 and the 8% Class B Senior Secured Redeemable
Notes due March 15, 1999 issued by NICO and guaranteed by the Company (the
"Class A Notes" and "Class B Notes," respectively) and members of the management
of LVI Environmental. As a result of the 1993 Restructuring, 100% of the Class A
Notes and over 97% of the Class B Notes (together, the "Notes"), of NICO were
surrendered to the Company, together with 3,000,000 shares of its Common Stock,
par value $.001 per share ("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. The
Company'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 the Company remains liable). LVI
Holding paid $1.5 million to the Company during 1993 and 1994 in connection with
the 1993 Restructuring to fund operating expenses and working capital
requirements.
(26)
Since 1994, Lehigh has been investigating the feasibility of acquiring or
investing in one or more other businesses that management of Lehigh believes may
have a potential for growth and profit. Lehigh would need to obtain additional
financing to effect any such acquisition or investment (except to the extent
Lehigh Common Stock or other securities of Lehigh were used to effect such
acquisition or investment, which would likely result in dilution to the existing
holders of Lehigh Common Stock). No assurance can be given that Lehigh will be
able to (i) identify any satisfactory business to be acquired or in which to
invest, (ii) obtain the requisite financing for any such acquisition or
investment, (iii) acquire or invest in any such business on terms favorable or
otherwise satisfactory to Lehigh, or (iv) profitably operate any such business.
The Board of Directors believes that the proposed Merger gives it this ability.
Lehigh subleases approximately 300 square feet of space on the 27th floor
of 810 Seventh Avenue, New York, New York 10019 pursuant to a month-to-month
lease at a monthly rental of $2,500 per month. 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
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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).
The Company believes that all of its facilities are adequate for the
business in which it is engaged.
Lehigh was incorporated under the laws of the State of Delaware in 1928.
Lehigh's principal executive offices are located at 810 Seventh Avenue, New
York, NY 10019 and its telephone number at that address is (212) 333-2620.
Electrical Supplies
HallMark was acquired by Lehigh in December 1988. HallMark's sales include
electrical conduit, armored cable, switches, outlets, fittings, panels and wire
which are purchased by HallMark from electrical equipment manufacturers in the
United States. Approximately 60% of HallMark's sales are domestic and 40% are
export. All of Lehigh's revenues are attributed to HallMark.
Domestic sales are made by HallMark employees. Nine customers accounted for
approximately 61%, 72% and 44% (including one customer which accounted for
approximately 25%, 18% and 12%) of HallMark's total domestic sales in 1995, 1994
and 1993, respectively. The loss of any of these customers could have a material
adverse effect on its business. Export sales are made by sales agents retained
by HallMark. Distribution is made in approximately 26 countries. Since November
1, 1992, HallMark's export business has been conducted primarily from Miami,
Florida.
HallMark customers whose sales exceed 10% of Lehigh's consolidated revenue
are: Adco Electric, Arc Electric or and Forest Electric. These customers account
for an aggregate of approximately 38% of Lehigh's consolidated revenues.
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 March 31, 1997, Lehigh had 3 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
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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 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. Lehigh is currently considering an appeal to the
United States Supreme Court. Approximately $350,000 has been accrued by Lehigh
relating to this judgement.
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.
Merger Sub
Merger Sub is a Delaware corporation organized and wholly-owned by Lehigh.
Merger Sub has not conducted any activities other than those related to its
formation, the preparation of this Proxy Statement/Prospectus and the
negotiations of the Merger Agreement and its obligations thereunder.
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LEHIGH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1996 In Comparison With 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 the Company. 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.
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 the Company's operating
loss.
On December 31, 1991, the Company 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, 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: 1996 - $250,000, 1995 - $250,000, 1994 - $5,000,000, 1993 -
$1,760,000, 1992 - $2,376,000.
During 1996, the Company 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.
1995 In Comparison With 1994
Revenues earned for 1995 were $12.1 million, a decrease of $.1 million or
1% compared with 1994. A slight increase in the Company's domestic sales was
more than offset by a decrease in export sales. As to the export business, the
Company has been unable to fully replace those sales lost due to
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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 the Company
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 the Company's operating
loss.
1994 in Comparison with 1993
Revenues earned for 1994 were $12.2 million, a decrease of $.6 million or
5.0% compared with 1993. The decrease in revenues was due largely to a departure
of a member of the sales force in HallMark's export operations and the departure
of certain clients of HallMark that had been obtained by such person. Gross
profit as a percentage of revenues increased from 29.0% in 1993 to 30.0% in 1994
due to increased profit margins in HallMark's domestic operation. Selling,
general and administrative expenses for 1994 represented a decrease of
approximately $34,000, or 8%, compared with 1993.
The factors discussed above resulted in an increase of $104,000 in the
operating loss, from $413,000 in 1993 to an operating loss of $517,000 in 1994.
Interest expense decreased by $26,000 to $398,000 in 1994 from $424,000 in
1993. This decrease was primarily a result of the continued reduction of
long-term debt.
There was no federal income tax expense for 1994, due to Lehigh's operating
loss.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital of approximately $2.6
million (including cash and cash equivalents of $471,000). compared to working
capital of $2.4 million at December 31, 1995. The Company's principal capital
requirements have been to fund working capital needs, capital expenditures and
the payment of long term debt. The Company 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, the Company has expended very little with respect to property and
equipment.
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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 the Company did not
receive any outside funds whereas in 1994 it did. The Company 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, 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 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 the Company and FMC, the Company 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 the Company
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 the
Company's common stock.
The Company 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 the Company in connection with its financial restructuring consummated in
1991. The Company 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). The Company 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, the Company 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.
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FMC has agreed to lend Lehigh up to an additional $150,000 in order for
Lehigh to meet its current working capital requirements. Once the proposed
merger between Lehigh and FMC is consummated it is anticipated that there will
be sufficient cash flow generated from operations to allow Lehigh to continue to
operate without borrowing any money.
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 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. Lehigh is currently considering an appeal to the
United States Supreme Court. Approximately $350,000 has been accrued by Lehigh
relating to this judgment.
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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DESCRIPTION OF LEHIGH'S CAPITAL STOCK
Outstanding Shares and Record Date
On ________ __, 1997 (the "Lehigh Record Date"), there were 11,276,250
shares of Lehigh Common Stock, outstanding and entitled to vote at the Meeting.
Shareholders of record at the close of business on the Lehigh Record Date shall
be entitled to vote at the Meeting.
The following is a summary of certain provisions of the Lehigh Certificate
of Incorporation, as amended, and rights accorded to holders of Lehigh Common
Stock generally and as a matter of law, and does not purport to be complete. It
is qualified in its entirety by reference to Lehigh's Restated Certificate of
Incorporation, Lehigh's By-Laws, and the Delaware General Corporation Law.
Preferred Stock
General. Lehigh's Certificate of Incorporation authorizes the issuance of
5,000,000 shares of preferred stock, $.001 par value, and approval of the Merger
Agreement will also constitute approval of an amendment to the Lehigh
Certificate of Incorporation providing for "blank check" preferred stock, with
such designations, rights and preferences as may be determined from time to time
by the Lehigh's Board. Accordingly, Lehigh's Board will be authorized, without
action by stockholders, to issue preferred stock from time to time with
dividend, liquidation, conversion, voting and any other rights and restrictions.
As of the date hereof, no preferred stock is issued or outstanding.
Lehigh's Board expects to approve the issuance of 1,037,461 shares of
Lehigh Preferred Stock to be issued pursuant to the Merger. The terms of the
Lehigh Preferred Stock will be included in a Certificate of Designation of the
Lehigh Preferred Stock (the "Certificate of Designation"), expected to be
approved by the Lehigh Board of Directors and filed with the Delaware Secretary
of State immediately prior to the effectiveness of the Merger. The Lehigh
Preferred Stock shall possess all those rights and privileges as are afforded to
capital stock by applicable law in the absence of any express grant of rights or
privileges in Lehigh's Certificate of Designation. The Lehigh Preferred Stock
will not have any preemptive rights. The Company will not seek to have the
Lehigh Preferred Stock listed on any national securities exchange. Set forth
below is a description of the rights and preferences of the Lehigh Preferred
Stock.
Dividend Rights. Each share of Lehigh Preferred Stock will be entitled to
dividends, pari passu with dividends declared and paid with respect to the
Lehigh Common Stock, equal to 250 times the amount declared and paid with
respect to each share of Lehigh Common Stock.
Voting Rights. Each share of Lehigh Preferred Stock will be entitled to 250
votes on any matter submitted to a vote of Lehigh stockholders, to be voted
together with the Lehigh Common Stock. The Lehigh Preferred Stock shall have no
right to vote separately, as a class, except as provided by law.
Conversion Rights. Each share of Lehigh Preferred Stock shall be
convertible at any time into 250 shares of Lehigh Common Stock, subject to
adjustment in certain circumstances. In order to exercise the conversion
privilege, the holder of a share of Lehigh Preferred Stock shall surrender the
certificate representing such share at the office of the transfer agent for the
Lehigh Common Stock and shall give written notice to the Company at said office
that such holder elects to convert the same, specifying the name or names and
denominations in which such holder wishes the certificate or certificates for
the Lehigh Common Stock to be issued.
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The number of shares of Lehigh Common Stock issuable upon the conversion of
shares of Lehigh Preferred Stock is subject to adjustment under certain
circumstances, including (a) the distribution of additional shares of Lehigh
Common Stock to all holders of Lehigh Common Stock; (b) the subdivision of
shares of Lehigh Common Stock; (c) a combination of shares of Lehigh Common
Stock into a smaller number of shares of Lehigh Common Stock; (d) the issuance
of any securities in a reclassification of the Lehigh Common Stock; and (e) the
distribution to all holders of Lehigh Common Stock of any shares of Lehigh's
capital stock (other than Lehigh Common Stock) or evidence of its indebtedness,
assets (other than certain cash dividends or dividends payable in Lehigh Common
Stock) or certain rights, options or warrants (and the subsequent redemption or
exchange thereof).
Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution
or winding up of the Company, no distribution will be permitted to be made to
holders of Lehigh Common Stock unless, prior thereto, the holders of the Lehigh
Preferred Stock shall have received $.01 per share, plus an amount equal to
unpaid dividends thereon if any, including accrued dividends, whether or not
declared, to the date of such payment. With regard to rights to receive
dividends and distributions upon dissolution, the Lehigh Preferred Stock shall
rank prior to the Lehigh Common Stock and junior to any other Preferred Stock
issued by Lehigh, unless the terms of such other Preferred Stock provide
otherwise.
Lehigh Common Stock
General. Under Lehigh's Delaware charter and applicable law, the Board of
Directors has broad authority and discretion to issue convertible preferred
stock, options and warrants, which, if issued in the future, may impact the
rights of the holders of the Lehigh Common Stock. Lehigh has 100,000,000 shares
of common stock authorized and 5,000,000 preferred shares authorized. However,
no "blank check" preferred shares can currently be issued.
Dividends. Holders of Lehigh Common Stock may receive dividends if, as and
when dividends are declared on Lehigh Common Stock by Lehigh's Board of
Directors. If the Board of Directors hereafter authorizes the issuance of
preferred shares, and such preferred shares carry any dividend preferences,
holders of Lehigh Common Stock may have no right to receive dividends unless and
until dividends have been declared and paid. At the present time, there is no
preferred stock outstanding. The ability of Lehigh to lawfully declare and pay
dividends on Lehigh Common Stock is also limited by certain provisions of
applicable state corporation law. It is not expected that dividends will be
declared on the Lehigh Common Stock in the foreseeable future.
Distributions in Liquidation. If Lehigh is liquidated, dissolved and wound
up for any reason, distribution of Lehigh's assets upon liquidation would be
made first to the holders of preferred shares, if any, and then to the holders
of Lehigh Common Stock. If Lehigh's net assets upon liquidation were
insufficient to permit full payment to the holders of shares of preferred stock,
if any, then all of the assets of Lehigh would be distributed pro rata to the
holders of shares of preferred stock and no distribution will be made to the
holders of Lehigh Common Stock. There are no shares of preferred stock issued or
outstanding at this time. A consolidation or merger of Lehigh with or into any
other company, or the sale of all or substantially all of Lehigh's assets, is
not deemed a liquidation, distribution or winding up for this purpose.
Voting Rights
The holders of record of Lehigh Common Stock, Lehigh's only class or series
of voting stock currently outstanding, are entitled to one vote for each share
held, except that, as more fully described under "Proposal No. 3 -- Election of
Directors," Lehigh's Restated Certificate of Incorporation provides
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for cumulative voting in all elections of directors. Lehigh has proposed to
amend its Restated Certificate of Incorporation to eliminate the requirement for
cumulative voting in all future elections of directors by stockholders. See
"Proposal No. 2 -- The Certificate Amendments," Abstentions and broker non-votes
with respect to any proposal will be counted only for purposes of determining
whether a quorum is present for the purpose of voting on that proposal and will
not be voted for or against that proposal. The presence, in person or by proxy,
of the holders of one-third of the outstanding Common Stock entitled to vote at
the Meeting will constitute a quorum.
Delaware Law
Lehigh is subject to Section 203 of the DGCL, which prevents an "interested
stockholder" (defined in Section 203, generally, as a person owning 15% or more
of a corporation's outstanding voting stock) from engaging in a "business
combination" with a publicly-held Delaware corporation for three years following
the date such person became an interested stockholder, unless: (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the affirmative vote of the holders of 66-2/3% of the outstanding
vote stock of the corporation not owned by the interested stockholder. A
"business combination" includes mergers, stock or asset sales and other
transactions resulting in a financial benefit to the interested stockholder. The
Lehigh Board of Directors approved the transaction before FMC became an
interested stockholder, in connection with its approval of the Merger Agreement,
thereby exempting the Merger from the requirements of Section 203. This was done
in order to enable FMC to acquire shares of Lehigh Common Stock in advance of
the Merger vote (whether by means of the option from Mr. Zizza or the purchase
of the Southwicke Shares), so as to further the business objective of ensuring
completion of a transaction (the Merger) which the Lehigh board had already
determined was beneficial to stockholders.
The provisions authorizing the Board of Directors to issue preferred stock
without stockholder approval and the provisions of Section 203 of the DGCL could
have the effect of delaying, deferring or preventing a change in control of
Lehigh.
Transfer Agent, Warrant Agent and Registrar
The transfer agent, warrant agent and registrar for the Lehigh Common Stock
is American Stock Transfer & Trust Company, New York, New York.
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BUSINESS INFORMATION REGARDING FMC
First Medical Corporation ("FMC") is an international provider of
management, consulting and financial services to physicians, hospitals and other
health care delivery organizations and facilities. FMC's diversified operations
are currently conducted through three divisions: (i) a physician practice
management division which provides physician management services including the
operation of clinical facilities and management services to Medical Service
Organizations, (ii) an international division which currently manages western
style medical centers in Eastern Europe and the CIS and (iii) a recently formed
hospital services division which provides a variety of administrative and
clinical services to proprietary acute care hospitals and other health care
providers.
Industry Background
Physician Practice Management Services Division. The role of the primary
care physician is changing dramatically. Historically, the health care services
industry was based on a model in which physician specialists played a
predominant role. This model contributed to over-utilization of specialized
health care services and, in turn, increases in health care costs at rates
significantly higher than inflation. In response, third-party payers have been
implementing measures to contain costs and improve the availability of medical
services. These measures, which include managing the utilization of specialized
health care services and alternative methods of reimbursement, have caused the
health care industry to evolve toward models that contain health care costs more
efficiently. In these models, the primary care physician and physician
management organization are playing increasingly important roles.
FMC believes that two important trends contributing to the evolution of the
health care services industry define its business opportunities. First,
physicians are increasingly abandoning traditional private practices in favor of
affiliations with larger organizations such as 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
HMOs, are increasingly looking to outside providers of physician services to
manage their professional medical requirements and to share the risk of
providing services through capitation arrangements. As these payers seek to
limit their health care costs by reducing the fee-for-service component paid to
their medical service providers, there is additional pressure on smaller
providers to consolidate and realize the efficiencies that can be achieved by
operating in larger practice groups.
Domestic Operations.
Cost containment, industry consolidation and changes in reimbursement
methods are causing difficulties for health care providers, particularly
not-for-profit hospitals. As a result of intense competition from large
for-profit hospitals, not-for-profit hospitals must develop effective plans for
attracting and retaining patient flow. Such plans may include, among other
things, (i) reducing or changing the services provided in order to better
utilize current facilities, equipment and space, (ii) entering into new
contracts with physician groups, HMOs, and other third party payors, and (iii)
various cost-cutting measures. Ultimately, a facility's ability to adapt to
changing environments requires access to capital and management expertise,
services which FMC is willing and able to provide.
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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 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
Through FMC Healthcare Services, Inc. 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.
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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 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, 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 project 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
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. 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 and receive payments from non-HMO members
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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, 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, and the term of this management agreement is 5 years. 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 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. (28(a))
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. FMC provides utilization, billing,
human resources, management information systems, senior executive management,
financial consulting and risk evaluation as a management services organization
in Texas. 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. (28(b))
In connection with the operation of such primary care centers in Florida
and Indiana, FMC employs all 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 bonus in addition to a base
salary 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, contains a
non-competition provision similar to the agreement between FMC (through MedExec)
and Humana, and contains 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. 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 these primary care centers on a
fee-for-service basis and/or capitated basis. Under fee-for-service
arrangements, the company bills and collects the charges for medical services
rendered by contracted or employed health care professionals and also assumes
the financial risks related to patient volume, payor risk, reimbursement and
collection rates. Under capitated arrangements, FMC assumes the risk and
receives revenues at a fixed rate from HMOs at contractually agreed-upon per
member per month rates for all the primary care needs of a patient. A
substantial portion of the patients seeking clinical services from the company's
primary care centers are members of HMOs with which FMC maintains a contractual
relationship. (28(c))
Additionally, FMC has entered into contracts with HMOs to manage the
delivery of comprehensive medical services to enrollees at Company clinics
located in Florida, Texas and Indiana. A substantial portion of the revenues of
FMC's managed care business are derived from prepaid contractual
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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. (28(c))
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, HMOs and other payers. In
consideration for such management services, FMC receives an annual management
fee and participates in profits.
FMC believes that it will have significant opportunities to grow its
managed care business primarily because physician practice management
organizations are better qualified than most third-party 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.
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.
Neither FMC, through 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
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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, (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.
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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.
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 HMOs 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 HMOs.
These efforts focus on customer service,
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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. See "Risk Factors-- Health Care Reform Proposals."
Continuing budgetary constraints at both the federal and state level and
the rapidly escalating costs of health care and reimbursement programs have led,
and may continue to lead, to relatively significant reductions in government and
other third-party reimbursements for certain medical charges. The company's
health care professionals are subject to periodic audits by government
reimbursement programs to determine the adequacy of coding procedures and the
reasonableness of charges.
All Medicare and Medicaid providers and practitioners are subject to claims
review, audits and retroactive adjustments, recoupments, civil monetary
penalties, criminal fines and penalties, and/or suspension or exclusion from
payment programs for improper billing practices. Federal regulations also
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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 HMOs 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. (31)
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 the
Company's business into other states that have this type of prohibition include
(i) the issue of consolidation of revenues and (ii) preventing the Company from
exploiting the physician-patient relationship in pursuit of profits. The Company
does not consolidate the revenues from Texas, but operates as a management
services organization under a management contract. If the Company 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.
(29)
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.
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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 HMOs 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 HMOs provides for stop-loss coverage by the HMOs.
Any determination of material noncompliance with insurance regulations or any
change in the stop-loss coverage by the HMOs 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 to the Commission'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 Commission's staff requested FMC to assume existed. (30)
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 likely to have a material adverse effect
on FMC's financial position.
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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. As of the date hereof, this litigation has been
settled for an amount that would be unlikely to have a material adverse effect
on FMC's financial position. (32)
FMC's principal executive office is located at 1055 Washington Boulevard,
Stamford, Connecticut 06901, and its telephone number is (203) 327-0900.
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FMC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of FMC's financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, including the notes thereto, contained elsewhere in this Prospectus.
The financial data contained herein for periods prior to 1996 refers to the
combined financial statements of MedExec, Inc. and subsidiaries, SPI Managed
Care, Inc., and SPI Managed Care of Hillsborough County, Inc. and are not the
financial statements of FMC.
1996 Compared to 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, the Company
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
the Company 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 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.
76
<PAGE>
Operating Expenses. Operating expenses increased by $3.1 million, or 67%,
to $7.7 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. As a percentage of revenue, however, operating expenses decreased to 15%
from 20% for the same period in 1995.
Other non-operating Expenses. The company incurred $.8 million in
connection with the development and opening of two international clinics.
Net Income. Net income for the year ended December 31, 1996 was $.5
compared to a net loss of $(.4) for the year ended December 31, 1995.
1995 Compared to 1994
Revenue. Revenue increased by $1.4 million, or 7%, to $22.7 million in
1995, from $21.3 million in 1994 due to increased revenue from existing provider
agreements offset by the termination during August 1995 of the provider
agreement to manage the center in Brandon, Florida.
Medical Expenses. Medical expenses increased $1.8 million, or 11%, to $18.4
million in 1995 from $16.6 million in 1994 primarily as a result of an increase
in medical services rendered. The medical loss ratio was 81% for the year ended
December 31, 1995 compared to 78% for the year ended December 31, 1994.
Operating Expenses. Operating expenses increased $1.2 million, or 35%, to
$4.6 million in 1995 from $3.4 million in 1994 due mainly to the additional $1.1
million of expenses incurred by 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 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.
77
<PAGE>
1994 Compared to 1993
Revenue. Revenue increased by $10.2 million, or 92%, to $21.3 million in
1994, from $11.1 million in 1993 primarily due to two new full-risk Humana
affiliated provider agreements to manage primary care centers in Brandon and
Plant City, Florida.
Medical Expenses. Medical expenses increased $8.2 million, or 98%, to $16.6
million in 1994 from $8.4 million in 1993 primarily as a result of medical
services provided under the new Brandon and Plant City provider agreements. The
medical loss ratio was 78% for the year ended December 31, 1994 compared to 76%
for the year ended December 31, 1993.
Operating Expenses. Operating expenses increased $1.7 million, or 100%, to
$3.4 million in 1994 from $1.7 million in 1993 primarily as a result of new
employees to staff the primary care centers in Brandon and Plant City, Florida.
As a percentage of revenue, operating expenses for the year ended December 31,
1994 increased to 16% from 15% for the year ended December 31, 1993.
Other Expenses. Other expenses in 1993 were $.2 million relating primarily
to losses incurred on certain equity investments.
Net Income. Net income increased $.6 million, or 75%, to $1.4 million from
$.8 million in 1993 due to the factors discussed above.
Liquidity and Capital Resources
FMC had cash of $63,014 at December 31, 1996 compared to $198,763 at
December 31, 1995.
To date, the Company's principal uses of cash have been to support its
operating activities and to fund acquisitions. FMC has met its cash requirements
in recent years primarily from its operating activities, advances from Humana
and bank borrowings.
FMC also maintains an unsecured line of credit with a domestic bank for
$ .2 million bearing interest at prime. The $ .2 million drawn under this line
of credit at December 31, 1996 has been used by FMC in connection with the
satisfaction of development costs relating to FMC's Midwest operations. The line
of credit is personally guaranteed by several stockholders of FMC and other
individuals. The principal balance was originally due October 1, 1996, but
extended until June 2, 1997 and interest payable on a monthly basis.
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.
FMC also has a credit facility for $1.5 million bearing interest at 1/2%
above prime. The $.55 million drawn under this facility at December 31, 1996 was
used primarily for FMC organization costs.
78
<PAGE>
$.9 million of the line is secured by FMC's cash, accounts receivable, and
certain other assets. The principal balance is due on May 31, 1997 and interest
is due monthly. In order to borrow the additional $.6 million (unsecured portion
of line), the bank would require the personal guarantee of an officer and
shareholder of the Company. FMC recently obtained a loan commitment in the
amount of $3,300,000 from the same bank which provided the $1,500,000 line of
credit. The commitment is for a 120 day loan bearing interest at the prime plus
.5%. The purpose of the loan is to provide financing for the Merger. The loan is
secured by all of the assets of FMC, 50% of the shares of FMC Common Stock owned
by FMC's Chairman and Chief Executive Officer and any and all shares of Lehigh
Common Stock issuable to FMC upon exercise of the option granted to FMC by Mr.
Zizza and is personally guaranteed up to $600,000 by an officer and shareholder
of the Company. FMC's existing $1,500,000 line of credit is capped so that the
maximum of $900,000 may be outstanding at any time until the $3,300,000 loan is
repaid in full. Accordingly, an aggregate of $4,200,000 is available under this
new facility.
Year Ended December 31, 1996.
Net cash used in operating activities was ($.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.
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.
79
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LEHIGH
The following table sets forth information as of March 12, 1997 (except as
otherwise noted below) with respect to each person (including any "group," as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) known to Lehigh to be the beneficial owner of more than 5% of the
Common Stock.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1)(2) of Class (2)
------------------- --------------------------- -------------
<S> <C> <C>
Fidelity Bankers Life Insurance 799,921 7.1%
Company Trust (a subsidiary of
First Dominion Mutual Life
Insurance Company) ("FBL")
1011 Boulder Springs Drive
Richmond, Virginia 23225 (2)
Teachers Insurance and Annuity 533,280 9.7%
Association ("Teachers")
730 Third Ave
New York, NY 10017 (2)
Kenneth Godt as Trustee for The 750,000 6.7%
Orion Trust (The "Godt Trust")
c/o Siegel & Godt
666 Old Country Road
Garden City, NY 11530 (2)
Salvatore J. Zizza 6,255,502(3) 36.2%(3)
c/o The Lehigh Group Inc.
810 Seventh Ave
New York, NY 10019 (3)
The Equitable Life Assurance 524,901 4.6%
Society of the United States
("Equitable")
787 Seventh Ave
New York, NY 10019 (2)
First Medical Corporation 2 ,858,257 25.4%(4)
("FMC")
1055 Washington Boulevard,
Stamford, Connecticut 06901 (4)
</TABLE>
(1) Except as otherwise indicated each of the persons listed above has sole
voting and investment power with respect to all of the shares shown in the
table as beneficially owned by such person.
(2) Based on information set forth on Schedules 13G and Schedules 13D filed
with the SEC by Equitable on February 9, 1996, The Godt Trust on September
26, 1994 and Teachers on April 23, 1992 (assuming, in each case, no change
in beneficial ownership since such date except in
80
<PAGE>
connection with the 1993 Restructuring). Information as to FBL was obtained
from an investment specialist at T. Rowe Price on March 5, 1997.
(3) Includes (i) 4,250,000 shares issuable upon the exercise of immediately
exercisable options at a price of $.50 per share, (ii) 382 shares owned by
trust accounts for the benefit of Mr. Zizza's minor children, as to which
he disclaims beneficial ownership and (iii) 7,750,000 shares issuable upon
the exercise of immediately exercisable warrants at a price of $.50 per
share as to 1,750,000 such shares, $.75 per share as to 3,000,000 such
shares and $1.00 per share as to 3,000,000 such shares. Excludes 6,000,000
shares issuable at $.75 per share, which are not currently exercisable or
expected to become exercisable within the next 60 days, and will not be
exercisable until such time as (i) Lehigh receives aggregate net cash
proceeds of at least $10 million from the sale (whether public or private)
of its equity securities, (ii) Lehigh consummates an acquisition of a
business with annual revenues during the year immediately preceding such
acquisition of at least $25 million, and (iii) the fair market value
(determined over a 30-day period) of the Common Stock shall have equalled
or exceeded $1.00 per share. All of the options granted to Mr. Zizza will
terminate on the fifth anniversary of the date of grant, subject to earlier
termination under certain circumstances in the event of his death or the
termination of his employment. Lehigh also granted to him one demand
registration right (exercisable only if Lehigh is eligible to file a
registration statement on Form S-3 or a form substantially equivalent
thereto) and certain "piggyback" registration rights with respect to the
shares of the common stock purchasable upon exercise of such options.
(4) On February 7, 1997 FMC purchased 1,920,757 shares of Lehigh Common Stock
from Southwicke and FMC elected to convert its debenture into 937,500
shares of Lehigh Common Stock.
Security Ownership of Management
The following table indicates the number of shares of Lehigh Common Stock
beneficially owned as of March 31, 1997 by (i) each director of Lehigh, (ii)
each of the executive officers named in the Summary Compensation Table set forth
above and (iii) all directors and executive officers of Lehigh as a group.
Name of Beneficial Amount and Nature of
Owner Beneficial Ownership(1) Percent of Class
- ------------------ ------------------------- ----------------
Salvatore J. Zizza 6,255,502(2) 37.7%
Richard L. Bready 15,000(5) *
Robert A. Bruno 312,760(3) *
Charles A. Gargano 10,000(5) *
Salvatore M. Salibello 10,000(5) *
Anthony F. L. Amhurst 10,000(5) *
Joseph Delowery 0 *
All executive officers
and directors as a group
(7 persons) 6,653,262(4) 38.5%(4)
81
<PAGE>
* Less than 1%.
(1) Except as otherwise indicated, each of the persons listed above has sole
voting and investment power with respect to all shares shown in the table
as beneficially owned by such person.
(2) See note 3 of the table under the caption "Security Ownership of Certain
Beneficial Owners of Lehigh," above.
(3) Includes options to purchase 250,000 shares of common stock at $.50 per
share. Subject to the effectiveness of the Merger, on July 8, 1996, Mr.
Bruno agreed to exchange his options to purchase 250,000 shares of Lehigh
Common Stock at an exercise price of $.50 per share, for an option to
purchase 92,000 shares of Lehigh's Common Stock exercisable at $1.00 per
share, over a four year period, with 25% of said options vesting on each
consecutive anniversary of the Effective Date of the Merger. Mr. Bruno and
Lehigh have amended Mr. Bruno's employment contract which amendment shall
become effective on the Effective Time. The amendment provides that (i) Mr.
Bruno's salary shall be reduced from $150,000 to $120,000 per year, (ii) no
part of Mr. Bruno's salary shall be deferred and (iii) the term of the
employment agreement shall be extended for one additional year through
December 31, 2000.
(4) Includes and excludes shares as indicated in notes (2) and (3) above.
(5) Represents options to purchase common stock at $.50 per share. During 1996,
Lehigh expects to issue options to purchase an additional 10,000 shares of
Lehigh Common Stock to Messrs. Bready, Gargano, Amhurst and Salibello at an
exercise price of $.50 per share in lieu of cash compensation for 1996.
LEGAL MATTERS
The validity of the shares of the Lehigh Common Stock and Lehigh Preferred
Stock to be issued in connection with the Merger and certain other legal matters
relating thereto will be passed upon for Lehigh by Olshan Grundman Frome &
Rosenzweig LLP, New York, New York.
EXPERTS
The financial statements and schedule of Lehigh included in this Proxy
Statement/Prospectus and the Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The audited combined financial statements of MedExec Inc. & Subsidiaries;
SPI Managed Care Inc.; & SPI Managed Care of Hillsborough County, Inc., as of
December 31, 1995 and 1994, and for each of the years in the three year period
ended December 31, 1995, which are included in this Proxy Statement/Prospectus,
have been so included in reliance on the reports in the three year period ended
December 31, 1995 of KPMG Peat Marwick LLP, as independent certified public
accountants, appearing elsewhere herein, and upon the authority of such firm as
experts in auditing and accounting.
82
<PAGE>
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
Proxy Statement/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.
83
<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 CRE, 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"):
Independent Auditors' Report............................................................................................F-42
Consolidated Balance Sheet - December 31, 1996..........................................................................F-43
Consolidated Statement of Income for the Year Ended December 31, 1996.................................................. F-44
Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 1996.....................................F-45
Consolidated Statement of Cash Flows for the Year Ended December 31, 1996........................................F-46 - F-47
Notes to Consolidated Financial Statements..............................................................................F-48
THE LEHIGH GROUP INC. ("LEHIGH") AND SUBSIDIARIES:
Report of Independent Certified Public Accountants......................................................................F-62
Consolidated Balance Sheets as of 12/31/96 and 12/31/95..........................................................F-63 - F-64
Consolidated Statements of Operations for the Years Ended 12/31/96, 12/31/95, and 12/31/94..............................F-65
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended
12/31/96, 12/31/95, and 12/31/94......................................................................................F-66
Consolidated Statements of Cash Flows for the Years Ended 12/31/96, 12/31/95, and 12/31/94..............................F-67
Notes to Consolidated Financial Statements..............................................................................F-68
Schedule of Valuation and Qualifying Accounts for the Years Ended 12/31/96, 12/31/95, and
12/31/94................................................................................................................F-77
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction............................................................................................................F-78
Pro Forma Combined Balance Sheet as of December 31, 1996................................................................F-79
Proforma Combined Statement of Operations for First Medical Corporation, and The Lehigh Group Inc.
for the year ended December 31, 1996..................................................................................F-81
</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.
(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 $44,458 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) -
------- ------
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>
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 December 31, 1996, in conformity
with generally accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
March 25, 1997
F-42
<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) 2,864,488
Minority interest 338,077
Other assets (note 1(d)) 300,000
------------
$12,451,862
=============
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 452,352
-----------
Total stockholders' equity 832,137
-----------
Commitments and contingencies (note 12)
$12,451,862
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<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 401,850
Minority interest in net loss of consolidated subsidiaries (338,077)
Preopening and development costs related to international clinics 828,568
-----------
Total operating expenses 8,567,769
Income before interest, taxes, and other 920,375
-----------
Other expense:
Interest expense, net (55,523)
Other expense (55,523)
-------
Income before taxes 864,852
Provision for income taxes (note 8) 412,500
-----------
Net income $ 452,352
===========
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<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 -- -- 452,352 452,352
------ -------- -------- --------
Balance, December 31, 1996 $ 100 $379,685 $452,352 $832,137
====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<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 $452,352
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 401,850
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-46
<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)
See accompanying notes to consolidated financial statements.
F-47
<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. entered into a
transaction whereby MedExec and AMC incorporated FMC and all of the outstanding
shares of MedExec and AMC were converted into shares of FMC. In exchange for and
in conversion of all of the issued and outstanding shares of MedExec and AMC,
the Company issued and delivered common shares of the Company to the
stockholders of MedExec and AMC. The shares of AMC and it subsidiaries were
distributed to the stockholders of FMC. The transaction was accounted for under
the purchase method of accounting. Goodwill was recorded in the amount of
$964,800 related to this transaction.
In connection with the above transaction, AMCMC was incorporated on January 2,
1996. AMCMC purchased customer lists and assumed approximately $1.0 million in
liabilities of the AMC subsidiaries, which are clinics operating in the CIS.
Book value constituted fair value on the transaction date. The transaction was
accounted for under the purchase method of accounting.
(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-48
<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-49
<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) INTERNATIONAL MEDICAL CLINICS DIVISION - AMCMC AND AMCD
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).
On January 20, 1996, the Company entered into an agreement with General de Sante
International, plc ("GDS") to form AMCD, an Irish Company. AMCD was established
to develop and operate medical clinics throughout the world with the exception
of within the CIS. The Company and GDS's shareholdings in AMCD Common stock, as
revised, are 51% and 49%, respectively. The authorized share capital of AMCD is
comprised of 1,000 of Common stock, $1.00 par value. As consideration for the
shares, the Company agreed to contribute certain assets 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 less minority interest. GDS
has an option to purchase up to 51% of AMCD's Common stock in the event certain
changes in management control occur. The additional consideration will be
determined by the Company and GDS.
(D) 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-50
<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-51
<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.
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 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-52
<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-53
<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-54
<PAGE>
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1996 consist of:
Goodwill $2,463,708
Organization costs 480,337
Noncompete agreement 200,000
----------
3,144,045
Less: accumulated amortization 279,557
----------
$2,864,488
==========
As stated in note 1, the following transactions created goodwill at December 31,
1996:
MedExec-FMC transaction $ 964,800
AMCMC 1,020,275
BMC and SPI Broward 327,778
Midwest Managed Care 150,855
----------
$2,463,708
==========
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-55
<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-56
<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-57
<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-58
<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 $294,000
Reduction in valuation allowance (73,000)
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 (58,703)
--------
Net deferred tax asset 250,616
Deferred tax liabilities:
Goodwill asset 363,116
--------
Net deferred tax liability $112,500
========
The Company has provided a valuation allowance for deferred tax assets as of
December 31, 1996 for $58,703. 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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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 December 31, 1996 gives effect to
the reverse acquisition of Lehigh by FMC. The adjustments are presented as if,
at such date, FMC had acquired Lehigh (which is expected to be finalized during
the second 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-78
<PAGE>
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND
SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
COMBINED
FMC Lehigh Adjustments PROFORMA
ASSETS (1) (2) (3)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash $63 $471 -- -- $4,625 5,159
Accounts receivable, net 537 3,581 -- -- -- 4,118
Humana IBNR receivable and claims reserve funds 7,308 -- -- -- 7,308
Due from affiliates and related parties, net 462 -- -- -- 462
Inventories - 1,215 -- -- -- 1,215
Prepaid assets 179 279 -- -- -- 458
-------------------------------------------------------------- ------------
Total current assets 8,549 5,546 -- -- 4,625 18,720
Property and equipment, net 400 50 450
Goodwill related to Lehigh Group -- -- 2,200 -- -- 2,200
Other intangible assets, net 2,865 -- -- -- -- 2,865
Other assets 638 29 -- -- -- 667
-------------------------------------------------------------- ------------
TOTAL $12,452 $5,625 $2,200 $ -- $4,625 24,902
============================================================== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible Debenture -- $300 (300) -- -- --
Accounts payable and accrued expenses $2,037 2,596 -- -- -- $4,633
Accrued medical claims 6,070 -- -- -- -- 6,071
Current portion of long-term obligations -- 90 -- -- -- 90
Corporate Deposits 806 -- -- -- -- 806
Loan payable to Humana 98 -- -- -- -- 98
Loans payable to banks 750 -- -- -- -- 750
Obligations to certain stockholders 422 -- -- -- -- 422
Deferred income taxes 113 -- -- -- -- 113
Other liabilities 300 -- -- -- -- 300
-------------------------------------------------------------- ------------
Total current liabilities 10,596 2,986 (300) -- -- 13,772
Other long-term liabilities 277 2,725 -- -- -- 3,002
Obligations to certain stockholders, 747 (375) 372
net of current portion
Minority Interest -- -- -- -- 1,000 1,000
Stockholders' equity (deficit):
Preferred stock -
Common stock -- 11 (11) -- -- --
Additional paid in capital 380 106,594 (104,033) -- 4,000 6,941
Retained earnings (deficit) 452 (105,037) 106,544 (1,654) -- 305
Treasury stock, at cost -- (1,654) -- 1,654 -- --
-------------------------------------------------------------- ------------
Total stockholders' equity (deficit) 832 (86) 2,500 -- 4,000 7,246
-------------------------------------------------------------- ------------
TOTAL $12,452 $5,625 $2,200 $ -- $4,625 $24,902
============================================================== ============
</TABLE>
F-79
<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 $375
previously provided by GDS, of which $4 million will be contributed as
capital to FMC for shares which upon conversion will represent 22.7% of
the ownership of the combined entity. The balance of $1 million was
contributed as equity to a subsidiary which FMC has a 51% ownership
interest. 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. A 49% common stock interest in FMC Healthcare Services, Inc.
(formerly WHEN, Inc.) ("FMC Healthcare"). This subsidiary of FMC will
engage in the business of providing management, consulting and
financial services to troubled not-for-profit hospitals and other
health care providers.
The purchase price of the common and preferred stock of FMC to be
acquired under steps 1. and 2. above is $4 million. The purchase price
for a 49% ownership interest in FMC Healthcare to be acquired under
step 3. above is $1 million.
4. Until the fifth anniversary of the Merger, GDS will have the option
to increase its ownership interest in Lehigh to 51%, at a price equal
to 110% of the average 30-day trailing market price. This increase in
ownership would occur through the issuance of new stock by Lehigh; as a
result, all other stockholders' ownership interests would be diluted
and GDS would gain control of Lehigh.
5. In addition to the foregoing option to acquire control of Lehigh,
GDS has the option to increase its ownership interest in FMC Healthcare
to 52%, also through the issuance of new stock. This option may be
exercised from the second to the fifth anniversary of the Merger, upon
payment of (i) $3 million cash, or (ii) the shares of Lehigh Common
Stock and Lehigh Preferred Stock issued to GDS in the Merger under step
1. above. Furthermore, upon the exercise of this option GDS has the
option to acquire all of the remaining equity in FMC Healthcare at the
"fair market price" as determined by an independent investment banker.
6. Alternatively, until the third anniversary of the Merger, GDS can
"put" to FMC its 49% ownership interest in FMC Healthcare for (i) $1
million, plus (ii) the "fair market value" of that investment as
determined by an independent investment banker.
7. GDS also has the option to acquire 52% of the common stock of
American Medical Clinics Development Corporation, an Irish corporation
which is a subsidiary of FMC ("AMCDC"). AMCDC is engaged in the
business of managing health care facilities in Eastern Europe.
The $5 million proceeds to be received from GDS at the Effective Time
of the Merger can only be utilized to purchase capital assets to be
used in the business of FMC Healthcare and/or AMCDC.
In the event GDS exercises its option under step 5. above to increase
its ownership interest in FMC Healthcare to 52%, then FMC Healthcare
will be obligated to enter into a two year management agreement with
Lehigh or its designee, for a fee that will be based on the cost of
management plus a reasonable success fee to be determined by Lehigh and
GDS.
In conjunction with the Subscription Agreement, as of the Effective
Time of the Merger FMC and GDS agreed to terminate various pre-existing
loan and option arrangements. In consideration for those terminations,
GDS will acquire approximately 500 shares of FMC Common Stock.
F-80
<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 expenses 43,526 -- -- 43,526
Cost of Sales -- 7,134 -- 7,134
----------------------------------------------------------------------------------
Gross profit 9,488 3,312 -- 12,800
Selling, general and administrative
expense 8,568 3,874 -- 12,442
----------------------------------------------------------------------------------
Operating income(loss) 920 (562) -- 358
Other income (expense):
Interest expense (55) (471) -- (526)
Other income -- 113 -- 113
Preopening and development costs -- -- -- --
----- ---- ----- -----
(55) (358) (413)
Amortization of goodwill - Lehigh (147) (147)
Income (loss) before taxes dicontinued
operations and extraordinary item 865 (920) (147) (202)
Provision for income taxes 413 -- -- 413
----------------------------------------------------------------------------------
Income (loss) before discontinued
operations and extraordinary item 452 (920) (147) (615)
Income from discontinued operations -- 250 -- 250
----------------------------------------------------------------------------------
Income (loss) before extraordinary item 452 (670) (147) (365)
Extraordinary item-gain on early
extinguishment of debt -- 382 -- 382
----------------------------------------------------------------------------------
Net income (loss) $452 $(288) $(147) $17
Net income per share $.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-81
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Restated Certificate of Incorporation and By-laws of Lehigh contain
provisions permitted by the Delaware General Corporation Law (under which Lehigh
is organized), that, in essence, provide that directors and officers shall be
indemnified for all losses that may be incurred by them in connection with any
claim or legal action in which they may become involved by reason of their
service as a director or officer of Lehigh if they meet certain specified
conditions. In addition, the Restated Certificate of Incorporation of Lehigh
contains provisions that limit the monetary liability of directors of Lehigh for
certain breaches of their fiduciary duty of care and provide for the advancement
by Lehigh to directors and officers of expenses incurred by them in defending
suits arising out of their service as such.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
The following Exhibits are filed as part of this registration statement
(references are to Regulation S-K Exhibit Numbers):
*2.1 Agreement and Plan of Merger, dated as of October 29, 1996, between the
Registrant, the Registrant Acquisition Corp. and First Medical
Corporation, as amended (filed as Appendix A to the Joint Proxy
Statement/Prospectus included in this Registration Statement).
3(a) Restated Certificate of Incorporation, By-Laws and Amendments to By-Laws
(incorporated by reference to Exhibits A and B to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1970. Exhibits 3 and
1, respectively, to the Registrant's Current Reports on Form 8-K dated
September 8, 1972 and May 9, 1973, and Exhibit to the Registrant's
Current Report on Form 8-K dated October 10, 1973, and Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1980).
3(b) Certificate of Amendment to Restated Certificate of Incorporation dated
September 30, 1983 (incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29,
1985).
3(c) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
October 31, 1985 (incorporated by reference to Exhibit 4(c) to the
Registrant's Current Report on Form 8-K dated November 7, 1985).
II-1
<PAGE>
3(d) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
January 2, 1986 (incorporated by reference to Exhibit 3(d) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1985).
3(e) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
June 4, 1986 (incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1986).
3(f) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
March 15, 1991 (incorporated by reference to Exhibit 3(g) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990).
3(g) Certificate of Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
December 27, 1991 (incorporated by reference to Exhibit 3(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991).
3(h) Certificate of Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
January 27, 1995 (incorporated by reference to Exhibit 3(i) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994).
3(i) Form of Certificate of Description of the Series A Convertible Preferred
Stock.
3(j) Amended and Restated By-Laws of the Registrant, as amended to date
(incorporated by reference to Exhibit 3(ii) to the Registrant's Current
Report on Form 8-K dated July 17, 1996).
4(a) Form of Indenture, dated as of October 15, 1985, among Registrant, NICO,
Inc. and J. Henry Schroder Bank & Trust the Registrant, as Trustee,
including therein the form of the subordinated debentures to which such
Indenture relates (incorporated by reference to Exhibit 4(a) to the
Registrant's Current Report on Form 8-K dated November 7, 1985).
4(b) Amendment to Indenture dated as of March 14, 1991 referenced to in Item
4(b)(1) (incorporated by reference to Exhibit 4(b)(2) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
4(c) Indenture dated as of March 15, 1991 (the "Class B Note Indenture") among
the Registrant, NICO, the guarantors signatory thereto, and Continental
Stock Transfer and Trust the Registrant, as Trustee, pursuant to which
the 8% Class B Senior Secured Redeemable Notes due March 15, 1999 of NICO
were issued together with the form of such Notes (incorporated by
reference to Exhibit 4(i) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990).
II-2
<PAGE>
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.
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).
II-3
<PAGE>
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
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).
II-4
<PAGE>
*23.1 Consent of BDO Seidman, LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Olshan Grundman Frome & Rosenzweig LLP (included in Exhibit
5.1).
*99.1 Form of Proxy with respect to the solicitation of the holders of the
Registrant's Common Stock.
- ----------
* Filed herewith.
Item 22. Undertakings.
Insofaras indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes: (1) To file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to 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) 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;
and (iii) to 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
II-5
<PAGE>
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering. (45)
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<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
____ day of ________, 1997.
THE LEHIGH GROUP INC.
By: /s/ Salvatore J. Zizza
-------------------------------
Salvatore J. Zizza
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
* Chairman of the Board
Salvatore J. Zizza Director and President Chief
Executive Officer (Chief
Financial Officer)
* Vice President, General
Robert A. Bruno Counsel, Secretary and
Director
* Director
Richard L. Bready
* Director
Charles A. Gargano
* Director
Anthony F.L. Amhurst
* Director
Salvatore M. Salibello
/s/Salvatore J. Zizza
*By: Salvatore J. Zizza
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
*2.1 Agreement and Plan of Merger, dated as of October 28, 1996, between the
Registrant, the Registrant Acquisition Corp. and First Medical
Corporation (filed as Appendix A to the Joint Proxy Statement/Prospectus
included in this Registration Statement).
3(a) Restated Certificate of Incorporation, By-Laws and Amendments to By-Laws
(incorporated by reference to Exhibits A and B to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1970. Exhibits 3 and
1, respectively, to the Registrant's Current Reports on Form 8-K dated
September 8, 1972 and May 9, 1973, and Exhibit to the Registrant's
Current Report on Form 8-K dated October 10, 1973, and Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1980).
3(b) Certificate of Amendment to Restated Certificate of Incorporation dated
September 30, 1983 (incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29,
1985).
3(c) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
October 31, 1985 (incorporated by reference to Exhibit 4(c) to the
Registrant's Current Report on Form 8-K dated November 7, 1985).
3(d) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
January 2, 1986 (incorporated by reference to Exhibit 3(d) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1985).
3(e) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
June 4, 1986 (incorporated by reference to Exhibit 4(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1986).
3(f) Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
March 15, 1991 (incorporated by reference to Exhibit 3(g) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990).
3(g) Certificate of Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
December 27, 1991 (incorporated by reference to Exhibit 3(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991).
3(h) Certificate of Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of Delaware on
January 27, 1995 (incorporated by
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<PAGE>
reference to Exhibit 3(i) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
3(i) Form of Certificate of Designation of the Series A Convertible Preferred
Stock.
3(j) Amended and Restated By-Laws of the Registrant, as amended to date
(incorporated by reference to Exhibit 3(ii) to the Registrant's Current
Report on Form 8-K dated July 17, 1996).
4(a) Form of Indenture, dated as of October 15, 1985, among Registrant, NICO,
Inc. and J. Henry Schroder Bank & Trust the Registrant, as Trustee,
including therein the form of the subordinated debentures to which such
Indenture relates (incorporated by reference to Exhibit 4(a) to the
Registrant's Current Report on Form 8-K dated November 7, 1985).
4(b) Amendment to Indenture dated as of March 14, 1991 referenced to in Item
4(b)(1) (incorporated by reference to Exhibit 4(b)(2) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
4(c) Indenture dated as of March 15, 1991 (the "Class B Note Indenture") among
the Registrant, NICO, the guarantors signatory thereto, and Continental
Stock Transfer and Trust the Registrant, as Trustee, pursuant to which
the 8% Class B Senior Secured Redeemable Notes due March 15, 1999 of NICO
were issued together with the form of such Notes (incorporated by
reference to Exhibit 4(i) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990).
4(d) First Supplemental Indenture dated as of May 5, 1993 between NICO and
Continental Stock Transfer & Trust the Registrant, as trustee under the
Class B Note Indenture (incorporated by reference to Exhibit 4(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993).
4(e) Form of indenture between the Registrant, NICO and Shawmut Bank, N.A., as
Trustee, included therein the form of Senior Subordinated Note due April
15, 1998 (incorporated by reference to Exhibit 4(b) to Amendment No. 2 to
the Registrant's Registration Statement on Form S-2 dated May 13, 1988).
*5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP regarding the legality
of the securities being registered and the tax consequences of the
transaction.
10(a) Guaranty of LVI Environmental dated as of May 5, 1993 (incorporated by
reference to Exhibit 10(f) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993).
10(b) Indemnification Agreement dated as of May 5, 1993 among LVI
Environmental, the Registrant and certain directors and officers of the
Registrant (incorporated by reference to Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993).
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<PAGE>
10(c) Assumption Agreement dated as of May 5, 1993 among the Registrant, NICO
and LVI Holding for the benefit of holders of certain securities of
Hold-Out Notes (as defined therein) (incorporated by reference to Exhibit
10(i) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993).
10(d) Exchange Offer and Registration Rights Agreement dated as of March 15,
1991 made by the Registrant in favor of those persons participating in
the Registrant's exchange offers (incorporated by reference to Exhibit
10(j) to the Registrant's Annual Report on Form 10-K/A Amendment #2 for
the year ended December 31, 1993).
10(e) Employment Agreement between the Registrant and Salvatore J. Zizza dated
August 22, 1994 (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission in September 1994).
10(f) Options of Mr. Zizza to purchase an aggregate of 10,250,000 shares of
Common Stock of the Registrant (incorporated by reference to Exhibit 10.2
to the Registrant's Current Report on Form 8-K filed with the Securities
and Exchange Commission in September 1994).
10(g) Registration Rights Agreement dated as of August 22, 1994 between Mr.
Zizza and the Registrant (incorporated by reference to Exhibit 10.3 to
the Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission in September 1994).
10(h) Consulting Agreement dated as of August 22, 1994 between Dominic Bassani
and the Registrant (incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission in September 1994).
10(i) Warrants of Mr. Bassani to purchase an aggregate of 7,750,000 shares of
Common Stock of the Registrant (incorporated by reference to Exhibit 10.5
to the Registrant's Current Report on Form 8-K filed with the Securities
and Exchange Commission in September 1994).
10(j) Registration Rights Agreement dated as of August 22, 1994 between Mr.
Bassani and the Registrant (incorporated by reference to Exhibit 10.6 to
the Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission in September 1994).
10(k) Form of Registration Rights Agreement dated as of August 22, 1994 among
the Registrant and the investors in the Private Placement (incorporated
by reference to Exhibit 10.7 to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission in September 1994).
10(l) Warrant of Goldis Financial Group, Inc. to purchase an aggregate of
386,250 shares of Common Stock of the Registrant (incorporated by
reference to Exhibit 10.8 to the
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<PAGE>
Registrant's Current Report on Form 8-K filed with the Securities and
Exchange Commission in September 1994).
10(m) Employment Agreement between the Registrant and Robert A. Bruno dated
January 1, 1995 (incorporated by reference to Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).
10(n) Subordinated debenture dated March 28, 1996 between the Registrant and
Macrocom Investors, LLC (incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).
10(o) Option Letter Agreement, dated October 29, 1996, between Salvatore J.
Zizza and First Medical Corporation (incorporated by reference to Exhibit
99.7 to the Registrant's Current Report of Form 8-K filed with the
Securities and Exchange Commission in November 1996).
10(p) $100,000 Promissory Note, dated as of October 28, 1996, from First
Medical Corporation to Salvatore J. Zizza (incorporated by reference to
Exhibit 99.8 to the Registrant's Current Report of Form 8-K filed with
the Securities and Exchange Commission in November 1996).
*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).
*99.1 Form of Proxy with respect to the solicitation of the holders of the
Registrant's Common Stock.
- ----------
* Filed herewith.
E-4
Appendix A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT made and entered into as of the 29th day
of October 1996, by and among The Lehigh Group Inc., a Delaware
corporation ("Lehigh"), Lehigh Management Corp., a Delaware corporation
and a wholly-owned subsidiary of Lehigh ("Newco") and First Medical
Corporation, a Delaware corporation ("FMC"). Unless the context indicates
otherwise, all references herein to Lehigh or FMC refer to Lehigh and FMC
and their respective wholly owned subsidiaries.
W I T N E S S E T H T H A T:
R E C I T A L S:
(A) Lehigh has recently organized Newco for the purpose of merging with and
into FMC on the terms and conditions set forth herein and with the effect that,
as a result thereof, the present stockholders of Lehigh will upon consummation
of the Merger hold four percent of the total equity of Lehigh on a fully diluted
basis.
(B) Simultaneously with the execution and delivery of this Agreement, FMC
is lending to Lehigh the sum of $300,000 and, in evidence thereof, Lehigh is
delivering to FMC a debenture in the form annexed hereto as Exhibit A.
(C) It is intended that the transactions contemplated by this Agreement
shall constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the mutual covenants and agreements and
the benefits to be realized by each of the parties, the parties hereto agree as
follows:
1. THE MERGER
(a) On the Closing Date, Newco shall be merged with and into FMC (the
"Merger") in accordance with the provisions of the General Corporation Law of
the State of Delaware (the "DGCL"). FMC shall be the surviving corporation of
the Merger, shall be a wholly-owned subsidiary of Lehigh and shall continue to
be governed by the laws of Delaware. Immediately prior to the Effective Time (as
hereinafter defined) there shall be filed with the Delaware Secretary of State
an amendment to the Certificate of Incorporation of Lehigh providing for "blank
check" preferred stock and a Certificate of Designation establishing a series of
1,037,461 shares of preferred stock to be designated the Series A Convertible
Preferred Stock, $.001 par value, of Lehigh (the "Lehigh Preferred Stock"), each
share of which shall be convertible at any time by the holder thereof into 250
shares of the common stock, $.001 par value, of Lehigh (the "Lehigh Common
Stock") and each share of which shall be entitled to 250 votes, voting together
with the Lehigh Common Stock, on all matters subject to the vote of
stockholders. Upon the effectiveness of the Merger, and by virtue thereof
without any further action by Lehigh, FMC or any of their stockholders: (i) any
and all shares of the Lehigh Common Stock held by
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FMC immediately prior to the Effective Time shall be cancelled; (ii) each other
share of the Lehigh Common Stock issued and outstanding immediately prior to the
Effective Time shall remain issued and outstanding; and (iii) each share of
common stock, $.01 par value, of FMC (the "FMC Common Stock") shall cease to be
outstanding and shall be converted into (A) 1,127.675 shares of Lehigh Common
Stock and (B) 103.7461 shares of Lehigh Preferred Stock.
(b) Certificates representing shares of FMC Common Stock shall be exchanged
for certificates of Lehigh Common Stock and Lehigh Preferred Stock as follows:
(i) After the Effective Time, certificates evidencing outstanding
shares of FMC Common Stock shall evidence the right of the holder thereof
to receive certificates representing 1,127.675 shares of Lehigh Common
Stock and 103.7461 shares of Lehigh Preferred Stock for each share of FMC
Common Stock. Each holder of FMC Common Stock, upon surrender of the
certificates which prior thereto represented shares of FMC Common stock, to
a trust company to be designated by Lehigh which shall act as the exchange
agent (the "Exchange Agent") for such stockholders to effect the exchange
of certificates on their behalf, shall be entitled upon such surrender to
receive in exchange therefor a certificate or certificates representing the
number of whole shares of Lehigh Common Stock and Lehigh Preferred Stock
into which the shares of FMC Common Stock theretofore represented by the
certificate or certificates so surrendered shall have been converted. Until
so surrendered, each such outstanding certificate for shares of FMC Common
Stock shall be deemed, for all corporate purposes including voting rights,
subject to the further provisions of this Section 1(b), to evidence the
ownership of the whole shares of Lehigh Common Stock and Lehigh Preferred
Stock into which such shares have been converted.
(ii) No certificate representing a fraction of Lehigh Common Stock or
Lehigh Preferred Stock will be issued and no right to vote or receive any
distribution or any other right of a stockholder shall attach to any
fractional interest of Lehigh Common Stock or Lehigh Preferred Stock to
which any holder of shares of FMC Common Stock would otherwise be entitled
hereunder.
(iii) If any certificate for whole shares of Lehigh Common Stock or
Lehigh Preferred Stock is to be issued in a name other than that in which
the certificate surrendered in exchange therefor is registered, it shall be
a condition of the issuance thereof that the certificate so surrendered
shall be properly endorsed and otherwise be in proper form for transfer and
that the person requesting such exchange pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates
for shares of Lehigh Common Stock or Lehigh Preferred Stock in any name
other than that of the registered holder of the certificate surrendered.
(iv) At the Effective Time, all shares of FMC Common Stock which shall
then be held in its treasury, if any, shall cease to exist, and all
certificates representing such shares shall be cancelled.
(c) Lehigh and FMC shall each submit this Agreement to its stockholders for
approval in accordance with the DGCL, at an annual or special meeting of the
stockholders (the "Meeting") called and held on a date to be fixed by their
respective Boards of Directors and shall use their best efforts to hold such
meeting on or before May 15, 1997 or as soon thereafter as practical.
(d) Lehigh and FMC shall each use its best efforts to obtain the
affirmative vote of stockholders required to approve this Agreement and the
transactions contemplated hereby, and will recommend to their respective
stockholders the approval of the Merger, subject however, in the case of
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each company's Board of Directors, to its fiduciary obligation to stockholders.
Lehigh shall mail to all of its stockholders entitled to vote at and receive
notice of such meeting the material required in accordance with the Registration
Statement and Prospectus provisions specified in paragraph 9 hereof.
(e) On or before the date of the Meeting, the Board of Directors of Newco
shall duly approve this Agreement and Lehigh, as sole stockholder of Newco,
shall duly approve this Agreement and the transactions contemplated hereby.
(f) Following the approval of the Merger by the stockholders of Lehigh,
Newco and FMC, a Certificate of Merger containing the information required by
applicable law shall be executed by the appropriate officers of FMC and Newco.
(g) Notwithstanding any other provision of this Agreement to the contrary,
if Lehigh receives a proposal for a business combination with any other party
which is more favorable to Lehigh or its stockholders than the terms set forth
in this Agreement (an "Alternate Proposal") at any time prior to consummation of
the Merger, Lehigh shall be entitled to pursue and/or consummate such
transaction free of any obligation to FMC under or pursuant to this Agreement
except for those obligations set forth in Section 17 hereof.
2. CLOSING; EFFECTIVE TIME
(a) The closing of all the transactions contemplated hereby (herein called
the "Closing" or the "Closing Date") shall occur at a date and place mutually
agreed between the parties and on a date within fifteen (15) business days after
all of the of the conditions described in paragraphs 14 and 15 hereof have been
satisfied or, to the extent permitted by paragraph 16(c) hereof, their
satisfaction has been waived. Lehigh, Newco and FMC will use their best efforts
to obtain the approvals specified in paragraph 8 hereof and any other of the
consents, waivers, or approvals necessary or desirable to accomplish the
transactions contemplated by this Agreement. All documents required to be
delivered by each of the parties hereto shall be duly delivered to the
respective recipient thereof at or prior to the Closing. Without the consent of
FMC and Lehigh to extend such date, the Closing Date shall be no later than June
30, 1997, and if it is delayed beyond said date, or extended date, then either
party shall have the right to terminate this Agreement upon notice to that
effect.
(b) At the Closing, Lehigh, Newco and FMC shall jointly direct that the
Certificate of Merger be duly filed, and in accordance with such direction it
shall be filed, in the Offices of the Secretary of State of Delaware so that the
Merger shall be effective on the Closing Date. The time at which the Merger
becomes effective is referred to herein as the "Effective Time."
3. LISTING
At a time mutually agreed to by Lehigh and FMC, but in no event later than
the date following the approval of stockholders of both Lehigh and FMC, Lehigh
agrees, at its expense, to apply for and use its best efforts to obtain
additional listings on the New York Stock Exchange, subject to notice of
issuance, of the shares of Lehigh Common Stock to be delivered to FMC
stockholders in the Merger. FMC agrees to render assistance to Lehigh in
obtaining such listing, including the furnishing of such financial statements as
Lehigh may reasonably request.
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4. INVESTIGATION BY THE PARTIES
Lehigh and FMC acknowledge that they have made or caused to be made such
investigation of the properties of the other and its subsidiaries and of its
financial and legal condition as the party making such investigation deems
necessary or advisable to familiarize itself with such properties and other
matters. Lehigh and FMC each agree that if matters come to the attention of
either party requiring additional due diligence, each agrees to permit the other
and its authorized agents or representatives to have, after the date of
execution hereof, full access to its premises and to all of its books and
records at reasonable hours, and its subsidiaries and officers will furnish the
party making such investigation with such financial and operating data and other
information with respect to the business and properties of it and its
subsidiaries as the party making such investigation shall from time to time
reasonably request. No investigation by Lehigh or FMC shall affect the
representations and warranties of the other and each such representation and
warranty shall survive any such investigation. Each party further agrees that in
the event the transactions contemplated by this Agreement shall not be
consummated, it and its officers, employees, accountants, attorneys, engineers,
authorized agents and other representatives will not disclose or make available
to any other person or use for any purpose unrelated to the consummation of this
Agreement any information, whether written or oral, with respect to the other
party and its subsidiaries or their business which it obtained pursuant to this
Agreement. Such information shall remain the property of the party providing it
and shall not be reproduced or copied without the consent of such party. In the
event that the transactions contemplated by this Agreement shall not be
consummated, all such written information shall be returned to the party
providing it.
5. "AFFILIATES" OF FMC
Each stockholder of FMC who is, in the opinion of counsel to Lehigh, deemed
to be an "affiliate" of FMC as such term is defined in the rules and regulations
of the Securities and Exchange Commission under the Securities Act of 1933, as
amended (hereinafter called the "1933 Act"), is listed on a Schedule to be
delivered to Lehigh within 20 days hereof, and will be informed by FMC that: (i)
absent an applicable exemption under the 1933 Act, the shares of Lehigh Common
Stock to be received by such "affiliate" and owned beneficially on consummation
of the transactions contemplated hereunder may be offered and sold by him only
pursuant to an effective registration statement under the 1933 Act or pursuant
to the provisions of paragraph (d) of Rule 145 promulgated under the 1933 Act;
(ii) Rule 145 restricts the amount and method of subsequent dispositions by such
"affiliate" of such shares and (iii) a continuity of interests by the
"affiliate" must be maintained. Prior to the Closing Date, FMC agrees to obtain
from each "affiliate" an agreement to the effect that such affiliate will not
publicly sell any of such shares unless a registration statement under the 1933
Act with respect thereto is then in effect, or such disposition complies with
paragraph (d) of Rule 145 promulgated under the 1933 Act, or counsel
satisfactory to Lehigh has delivered a written opinion to Lehigh and to such
"affiliate" that registration under the 1933 Act is not required in connection
with such disposition.
6. STATE SECURITIES LAWS
Lehigh will take such steps as may be necessary to comply with any state
securities or so-called Blue Sky laws applicable to the actions to be taken in
connection with the Merger and the delivery by Lehigh to FMC stockholders of the
shares of Lehigh Common Stock and Lehigh Preferred Stock to be delivered
pursuant to this Agreement. Costs and expenses of any such Blue-Sky
qualifications shall be borne by Lehigh.
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7. CONDUCT OF BUSINESS PENDING THE CLOSING
From the date hereof, to and including the Closing Date, except as may be
first approved by the other Party or as is otherwise permitted or contemplated
by this Agreement:
(i) Lehigh and FMC shall each conduct their business only in the usual
and ordinary course;
(ii) neither Lehigh or FMC shall make any change in its authorized or
outstanding capitalization;
(iii) Except as set forth on their respective Disclosure Schedules
annexed to this Agreement neither Lehigh or FMC shall authorize for
issuance or issue or enter any agreement or commitment for the issuance of
shares of capital stock;
(iv) neither Lehigh or FMC shall create or grant any rights or
elections to purchase stock under any employee stock bonus, thrift or
purchase plan or otherwise;
(v) neither Lehigh or FMC shall amend their Certificates of
Incorporation or Bylaws unless deemed to be reasonably necessary to
consummate the transaction contemplated herein and upon prior notice
thereof to each other;
(vi) Neither Lehigh or FMC shall make any modification in their
employee benefit programs or in their present policies in regard to the
payment of salaries or compensation to their personnel and no increase
shall be made in the compensation of their personnel, except in the
ordinary course of business;
(vii) Neither Lehigh or FMC shall make any contract, commitment, sale
or purchase of assets or incur debt, except in the ordinary course of
business;
(viii) Lehigh and FMC will use all reasonable and proper efforts to
preserve their respective business organizations intact, to keep available
the services of their present employees and to maintain satisfactory
relationships with suppliers, customers, regulatory agencies, and others
having business relations with it;
(ix) Neither Lehigh or FMC shall create or implement a profit sharing
plan; and,
(x) The Board of Directors of Lehigh and FMC will not declare any
dividends on, or otherwise make any distribution in respect of, their
outstanding shares of capital stock.
8. EFFORTS TO OBTAIN APPROVALS AND CONSENTS
FMC and Lehigh will use all reasonable and proper efforts to obtain, where
required, the approval and consent (i) of any governmental authorities having
jurisdiction over the transactions contemplated in this Agreement, and (ii) of
such other persons whose consent to the transactions contemplated by this
Agreement is required.
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9. PROXY STATEMENT AND REGISTRATION STATEMENT
(a) FMC and Lehigh agree that they shall cooperate in the preparation of
and the filing with the Securities and Exchange Commission by Lehigh of a proxy
statement/prospectus (the "Proxy Statement") in accordance with the Securities
Exchange Act of 1934 (the "1934 Act") and the applicable rules and regulations
thereunder, to be included in the registration statement of Lehigh referred to
below and (ii) the filing with the Securities and Exchange Commission, by
Lehigh, of a registration statement on Form S-4 or such other Form as may be
appropriate (the "Registration Statement"), including the Lehigh Proxy
Statement, in accordance with the Securities Act of 1933 (the "1933 Act") and
the applicable rules and regulations thereunder covering the shares of Lehigh
Common Stock and Lehigh Preferred Stock to be issued pursuant to this Agreement
and the shares of Lehigh Common Stock issuable upon conversion of the Lehigh
Preferred Stock. Lehigh and FMC thereafter shall use all reasonable efforts to
cause the Registration Statement to become effective under the 1933 Act at the
earliest practicable date, and shall take such actions as may reasonably be
required under applicable state securities laws to permit the transactions
contemplated by this Agreement. Lehigh shall advise FMC promptly when the
Registration Statement has become effective, and Lehigh shall thereupon send a
Proxy Statement to its stockholders for purposes of the Meeting contemplated by
this Agreement. The Proxy Statement shall be mailed not less than 20 days prior
to such meeting to all stockholders of record at their address of record on the
transfer records of Lehigh. Each party shall bear their respective out of pocket
expenses, and expenses related to preparing documents, financial statements,
schedules, exhibits, and like materials for inclusion in the Registration
Statement. Lehigh shall be responsible for the expenses of filing the
Registration Statement.
(b) Subject to the conditions set forth below, the parties agree to
indemnify and hold harmless each other, their respective officers, directors,
partners, employees, agents and counsel against any and all loss, liability,
claim, damage, and expense whatsoever (which shall include, for all purposes of
this Section 9, but not be limited to, attorneys' fees and any and all expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when incurred
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact made by the party against whom
indemnification is sought and contained (1) in any Prospectus/Proxy Statement,
the Registration Statement, or Proxy Statement (as from time to time amended and
supplemented) or any amendment or supplement thereto; or (2) in any application
or other document or communication (in this Section 9 collectively called an
"application") executed by or on behalf of either party or based upon written
information filed in any jurisdiction in order to qualify the shares of Lehigh
Common Stock and Lehigh Preferred Stock to be issued in connection with the
Merger and the shares of Lehigh Common Stock issuable upon conversion of the
Lehigh Preferred Stock under the "Blue Sky" or securities laws thereof or filed
with the Securities and Exchange Commission or any securities exchange; or any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the indemnifying party from the party seeking
indemnification expressly for inclusion in any Prospectus/Proxy Statement, the
Registration Statement, or Proxy Statement, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of
representation, warranty, covenant, or agreement contained in this Agreement.
The foregoing agreement to indemnify shall be in addition to any liability each
party may otherwise have, including liabilities arising under this Agreement. If
any action is brought against either party or any of its officers, directors,
partners, employees, agents, or counsel ( an "indemnified party") in respect of
which indemnity may be sought pursuant to the foregoing paragraph,
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such indemnified party or parties shall promptly notify the other party (the
"indemnifying party") in writing of the institution of such action (but the
failure to so notify shall not relieve the indemnifying party from any liability
it may have other than pursuant to this Paragraph 9(b)) and the indemnifying
party shall promptly assume the defense of such action, including the employment
of counsel and payment of expenses (satisfactory to such indemnified party or
parties). Such indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless the
employment of such counsel shall have been authorized in writing by the
indemnifying party in connection with the defense of such action or the
indemnifying party shall not have promptly employed counsel satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there may
be one or more legal defenses available to it or them or to other indemnified
parties which are different from or additional to those available to the other
party in any of which events such fees and expenses shall be borne by the
indemnifying party and the indemnifying party shall not have the right to direct
the defense of such action on behalf of the indemnified party or parties.
Anything in this paragraph to the contrary notwithstanding, the indemnifying
party shall not be liable for any settlement of any such claim or action
effected without its written consent.
10. COOPERATION BETWEEN PARTIES
FMC and Lehigh shall fully cooperate with each other and with their
respective counsel and accountants in connection with any steps required to be
taken as part of their obligations under this Agreement, including the
preparation of financial statements and the supplying of information in
connection with the preparation of the Registration Statement and the Proxy
Statement.
11. REPRESENTATIONS OF LEHIGH
Lehigh represents, warrants and agrees that:
(a) Lehigh is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and it subsidiaries are duly
organized, validly existing and in good standing under the laws of the
jurisdiction pursuant to which they were incorporated. Lehigh and its
subsidiaries have the corporate power and any necessary governmental authority
to own or lease their properties now owned or leased and to carry on their
business as now being conducted. Lehigh and its subsidiaries are duly qualified
to do business and in good standing in every jurisdiction in which the nature of
their business or the character of their properties makes such qualification
necessary.
(b) As of the date hereof, the authorized capital stock of Lehigh consists
of 100,000,000 shares of Lehigh Common Stock, of which 11,276,250 shares are
issued and outstanding, and 5,000,000 shares of preferred stock, $.001 par
value, none of which is issued and outstanding. As of the date hereof, there are
options and warrants outstanding to purchase 18,697,187 shares of Lehigh Common
Stock. The outstanding capital stock of Lehigh and its subsidiaries has been
duly authorized and issued and is fully paid and nonassessable. Except for the
foregoing, Lehigh and its subsidiaries have no commitment to issue, nor will
they issue, any shares of their capital stock or any securities or obligations
convertible into or exchangeable for, or give any person any right to acquire
from Lehigh or its subsidiaries, any shares of Lehigh's or it subsidiaries'
capital stock. Lehigh owns all of the issued and outstanding capital stock of
Newco.
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(c) The shares of Lehigh Common Stock and Lehigh Preferred Stock which are
to be issued and delivered to the FMC stockholders pursuant to the terms of this
Agreement, when so issued and delivered, will be validly authorized and issued
and will be fully paid and nonassessable. Lehigh shall have applied for and
shall use its best efforts to obtain approval for listing such shares of Lehigh
Common Stock subject to notice of issuance on the New York Stock Exchange prior
to the Effective Time, and no stockholder of Lehigh or other person will have
any preemptive rights in respect thereto.
(d) Lehigh has furnished FMC with copies of its Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended December
31, 1995 which contains consolidated balance sheets of Lehigh and subsidiaries
as of December 31, 1995 and 1994 and the related consolidated statements of
operations, stockholders equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1995 audited by BDO Seidman, LLP. Lehigh
has also furnished FMC with unaudited financial statements as of June 30, 1996
as set forth in its Form 10-Q as filed with the Securities and Exchange
Commission. All of the above financial statements present fairly the
consolidated financial position of Lehigh and its subsidiaries at the periods
indicated, and the consolidated results of operations and cash flows for the
periods then ended. The interim financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis, and in the opinion of Lehigh include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of such interim
period. Since June 30, 1996 there has been no material adverse change in the
assets or liabilities or in the business or condition, financial or otherwise,
of Lehigh or its consolidated subsidiaries, and no change except in the ordinary
course of business or as contemplated by this Agreement.
(e) Except as disclosed in the public filings of Lehigh and except for the
lawsuit filed by Southwicke Corporation a copy of the complaint in which is
annexed hereto, neither Lehigh nor any of its subsidiaries is (i) engaged in or
a party to, or to the knowledge of Lehigh, threatened with any material legal
action or other proceeding before any court or administrative agency or (ii) to
the knowledge of Lehigh, has been charged with, or is under investigation with
respect to, any charge concerning any presently pending material violation of
any provision of Federal, state, or other applicable law or administrative
regulations in respect to its business.
(f) Lehigh and Newco have the corporate power to enter into this Agreement
and, subject to requisite stockholder approval, the execution and delivery and
performance of this Agreement have been duly authorized by all requisite
corporate action and this Agreement constitutes the valid and binding
obligations of Lehigh and Newco.
(g) The execution and carrying out of this Agreement and compliance with
the terms and provisions hereof by Lehigh and Newco will not conflict with or
result in any breach of any of the terms, conditions, or provisions of, or
constitute a default under, or result in the creation of, any lien, charge, or
encumbrance upon any of the properties or assets of Lehigh, Newco or any of its
other subsidiaries pursuant to any corporate charter, indenture, mortgage,
agreement (other than that which is created by virtue of this Agreement) or
other instrument to which Lehigh or any of its subsidiaries is a party or by
which it or any of its subsidiaries if bound or affected.
(h) This Agreement and the documents and financial statements furnished
hereunder on behalf of Lehigh do not contain and will not contain any untrue
statement of a material fact nor omit to state a material fact necessary to be
stated in order to make the statements contained herein and therein not
misleading; and there is no fact known to Lehigh which materially adversely
affects or in the future
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will materially adversely affect the business operations, affairs or condition
of Lehigh or any of its subsidiaries or any of its or their properties or assets
which has not been set forth in this Agreement or any documents or materials
furnished hereunder.
(i) There are no agreements or contracts between Lehigh and its
subsidiaries with any other third party that require approvals or consents that
could delay or prevent the Merger of Lehigh and Newco and the other transactions
contemplated thereby.
(j) Neither Lehigh nor any of its subsidiaries uses or handles potentially
hazardous materials and have not received notification of, and are not aware of,
any past or present event, condition or activity of or relating to the business,
properties or assets of Lehigh which violates any Environmental or Occupational
Safety Law.
12. REPRESENTATIONS OF FMC
FMC represents, warrants and agrees that:
(a) FMC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and its subsidiaries are duly
organized, validly existing and in good standing under the laws of the
jurisdiction pursuant to which they were incorporated. FMC and its subsidiaries
have the corporate power and any necessary governmental authority to own or
lease their properties now owned or leased and to carry on their business as now
being conducted. FMC and its subsidiaries are duly qualified to do business and
in good standing in every jurisdiction in which the nature of their business or
the character of their properties makes such qualification necessary.
(b) The authorized capital stock of FMC consists of 15,000 shares of FMC
Common Stock, of which 10,000 shares are issued and outstanding. The outstanding
capital stock, of FMC and its subsidiaries has been duly authorized and issued
and is fully paid and nonassessable. FMC and its subsidiaries have no commitment
to issue, nor will they issue, any shares of their capital stock or any
securities or obligations convertible into or exchangeable for, or give any
person any right to acquire from FMC or its subsidiaries any shares of FMC or it
subsidiaries capital stock, except for those rights identified in the Disclosure
Schedule of FMC annexed hereto (the "FMC Disclosure Schedule").
(c) FMC has furnished Lehigh with copies of the unaudited consolidated
balance sheet of FMC and subsidiaries as of June 30, 1996 and the related
consolidated statements of operations, shareholder equity (deficit) and cash
flows for the six months ended June 30, 1996, and the consolidated balance
sheets of MedExec, Inc., a principal operating subsidiary of FMC, and its
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholder equity (deficit) and cash flows for each
of the two years in the period ended December 31, 1995 audited by KPMG Peat
Marwick. All of the above financial statements present fairly the consolidated
financial position of FMC and its subsidiaries at the periods indicated, and the
consolidated results of operations and cash flows for the periods then ended.
The interim financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis, and in the opinion
of FMC include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of such interim period. Since June 30, 1996
there has been no material adverse change in the assets or liabilities or in the
business or condition, financial or otherwise, of FMC or its consolidated
subsidiaries, and no change except in the ordinary course of business or as
contemplated by this Agreement.
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(d) Neither FMC nor any of its subsidiaries is engaged in or a party to, or
to the knowledge of FMC, threatened with any material legal action or other
proceeding before any court or administrative agency except as set forth in the
FMC Disclosure Schedule to be furnished to Lehigh. Neither FMC nor any of its
subsidiaries, to the knowledge of FMC, has been charged with, or is under
investigation with respect to, any charge concerning any presently pending
material violation of any provision of Federal, state, or other applicable law
or administrative regulations in respect to its business except as set forth on
said FMC Disclosure Schedule.
(e) The information to be furnished by FMC for use in the material mailed
to stockholders of FMC in connection with the Meetings will in all material
respects comply with the applicable requirement of the 1933 Act and the 1934
Act, and the rules and regulations promulgated thereunder.
(f) FMC has the corporate power to enter into this Agreement, the execution
and delivery and performance of this Agreement have been duly authorized by all
requisite corporate action, and this Agreement constitutes the valid and binding
obligations of FMC.
(g) The execution and carrying out of this Agreement and compliance with
the terms and provisions hereof by FMC will not conflict with or result in any
breach of any of the terms, conditions, or provisions of, or constitute a
default under, or result in the creation of, any lien, charge, or encumbrance
upon any of the properties or assets of FMC or any of its other subsidiaries
pursuant to any corporate charter, indenture, mortgage, agreement (other than
that which is created by virtue of this Agreement) or other instrument to which
FMC or any of its subsidiaries is a party or by which it or any of its
subsidiaries if bound or affected.
(h) This Agreement, the FMC Disclosure Schedule and all documents and
financial statements furnished hereunder on behalf of FMC do not contain and
will not contain any untrue statement of a material fact nor omit to state a
material fact necessary to be stated in order to make the statements contained
herein and therein not misleading; and there is no fact known to FMC which
materially adversely affects or in the future will materially adversely affect
the business operations, affairs or condition of FMC or any of its subsidiaries
or any of its or their properties or assets which has not been set forth in this
Agreement the FMC Disclosure Schedule or other documents and material furnished
hereunder.
(i) There are no agreements or contracts between FMC and its subsidiaries
with any other third party that require approvals or consents that could delay
or prevent the Merger of FMC and Newco and the other transactions contemplated
thereby.
(j) Neither FMC nor any of its subsidiaries uses or handles potentially
hazardous materials other than those customarily handled by medical clinics of
the type managed by FMC, and have not received notification of, and are not
aware of, any past or present event, condition or activity of or relating to the
business, properties or assets of FMC which violates any Environmental or
Occupational Safety Law.
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13. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties made herein by FMC and Lehigh shall not
survive, and shall expire with and be terminated upon, the Closing of the
Merger.
14. CONDITIONS TO THE OBLIGATIONS OF LEHIGH
The obligations of Lehigh hereunder are subject to the satisfaction on or
before the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have been
approved by the requisite vote of stockholders of Lehigh and FMC.
(b) Each "affiliate" of FMC will have properly executed and delivered the
Affiliate's Agreement described in paragraph 5 hereof.
(c) FMC shall have furnished Lehigh with (i) certified copies of
resolutions duly adopted by the holders of a majority or more of the issued and
outstanding shares of FMC common stock entitled to vote, evidencing approval of
this Agreement and the transactions contemplated hereby; (ii) certified copies
of resolutions duly adopted by the Board of Directors of FMC approving the
execution and delivery of this Agreement and authorizing all necessary or proper
corporate action, to enable FMC to comply with the terms hereof and thereof;
(iii) an opinion dated the closing date of counsel for FMC in form and substance
satisfactory to Lehigh and its counsel to the effect that:
(1) FMC and each of its subsidiaries are corporations duly organized
and validly existing and in good standing under the laws of its respective
jurisdiction of incorporation, and to the best of the knowledge of such
counsel based on inquiries of responsible officers of FMC, is duly
qualified to do business and is in good standing in every jurisdiction in
which the nature of their business or the character of their properties
makes such qualification necessary, except where the failure to be so
qualified will not have a material adverse effect on FMC's business or
consolidated financial condition, and has all corporate and other power and
authority, including all governmental licenses and authorizations,
necessary to own its properties and to carry on its business as described
in the Proxy Statement;
(2) this Agreement has been duly authorized and executed by proper
corporate action of FMC and constitutes the valid and legally binding
obligation of FMC in accordance with its terms.
(3) no provision of the Certificate of Incorporation or the By-laws of
FMC or of any contract (except those pursuant to which waivers or consents
have been obtained) known to such counsel to which FMC is a party, or any
law, rule or regulation prevents it from carrying out the transactions
contemplated hereby.
(4) there is no material action or proceeding known to such counsel,
pending or threatened against FMC before a court or other governmental body
or instituted or threatened by any public authority or by the holders of
any securities of FMC, other than as specifically set forth in the FMC
Disclosure Schedule.
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(5) FMC has adequate title, subject only to liens and other matters
set forth on the financial statements furnished to Lehigh pursuant to
paragraph 12(c) hereof, to all its real estate properties, except for any
lien of taxes not yet delinquent or being contested in good faith by
appropriate proceedings and easements and restrictions of record which do
not materially adversely affect the use of the property by FMC, and except
for minor defects in titles, none of which, based upon information
furnished by officers of FMC, does or will materially adversely affect
FMC's use of such properties or its operations, and to which the rights of
FMC therein have not been questioned. In giving such opinion, counsel may
rely upon title policies previously issued to FMC or updated certificates
furnished by title insurance companies.
(6) to the best knowledge of such counsel and based upon inquiries of
responsible officers of FMC and upon searches of Uniform Commercial Code
filings in the offices of the appropriate Secretary of State, there are no
liens against properties of FMC (excluding real estate) except as disclosed
by FMC to Lehigh in the FMC Disclosure Schedule.
In rendering its opinion, FMC counsel may rely as to factual matters on
statements of officers of FMC. In rendering this opinion with respect to the
laws of any jurisdiction other than Delaware, FMC counsel may rely on the
opinion of other counsel retained by FMC provided that said opinion shall state
that Lehigh is justified in relying on the opinion or opinions of such other
counsel.
(d) The representations and warranties of FMC contained in this Agreement
shall be true in all material respects on and as of the Closing Date with the
same effect as though such representations and warranties had been made on and
as of such date, except for changes permitted by this Agreement or those
incurred in the ordinary course of business and FMC shall have received from FMC
at the Closing a certificate dated the Closing Date of the Chairman, President
or a Vice President of FMC to that effect.
(e) Each and all of the respective agreements of FMC to be performed on or
before the Closing Date pursuant to the terms hereof shall in all material
respects have been duly performed and FMC shall have delivered to FMC a
certificate dated the Closing Date, of the Chairman, President or a Vice
President of FMC to that effect.
(f) The completion of Lehigh's Proxy Statement and the effectiveness of
Lehigh's Registration Statement on Form S-4, as each may be amended.
(g) The approval of this Agreement by the FMC Board of Directors.
(h) The absence of any material contingent liabilities of FMC not
previously disclosed to Lehigh.
(i) The nonexistence of any agreement or contract that could delay or
prevent the completion of the transactions contemplated by this Agreement.
15. CONDITIONS TO THE OBLIGATIONS OF FMC
The obligations of FMC hereunder are subject to the satisfaction on or
before the Closing Date of the following conditions:
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(a) This Agreement and the transactions contemplated hereby shall have been
approved by the requisite vote of stockholders of Lehigh and FMC.
(b) Lehigh shall have furnished FMC with (i) certified copies of
resolutions duly adopted by a majority of the holders of the issued and
outstanding shares of Lehigh Common Stock validly present at a meeting,
evidencing approval of this Agreement and the transactions contemplated hereby;
(ii) certified copies of resolutions duly adopted by the Board of Directors of
Lehigh approving the execution and delivery of this Agreement and authorizing
all necessary or proper corporate action, to enable Lehigh to comply with the
terms hereof and thereof; (iii) an opinion dated the closing date of counsel for
Lehigh in form and substance satisfactory to FMC and its counsel to the effect
that:
(1) Lehigh and each of its subsidiaries are corporations duly
organized and validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, and to the best of the knowledge
of such counsel based on inquiries of responsible officers of Lehigh, is
duly qualified to do business and is in good standing in every jurisdiction
in which the nature of their business or the character of their properties
makes such qualification necessary, except where the failure to be so
qualified will not have a material adverse effect on Lehigh's business or
consolidated financial condition, and has all corporate and other power and
authority, including all governmental licenses and authorizations,
necessary to own its properties and to carry on the business as described
in the Proxy Statement of Lehigh made a part of the Proxy Statement.
(2) this Agreement has been duly authorized and executed by proper
corporate action of Lehigh and constitutes the valid and legally binding
obligation of Lehigh in accordance with its terms.
(3) no provision of the Certificate of Incorporation or the By-laws of
Lehigh or of any contract (except those pursuant to which waivers or
consents have been obtained) known to such counsel to which Lehigh is a
party, or any law, rule or regulation prevents it from carrying out the
transactions contemplated hereby.
(4) there is no material action or proceeding known to such counsel,
pending or threatened against Lehigh before a court or other governmental
body or instituted or threatened by any public authority or by the holders
of any securities of Lehigh, other than as specifically set forth in the
Disclosure Schedule.
(5) Lehigh has adequate title, subject only to liens and other matters
set forth on the financial statements furnished to FMC pursuant to
paragraph 11(d) hereof, to all its real estate properties, except for any
lien of taxes not yet delinquent or being contested in good faith by
appropriate proceedings and easements and restrictions of record which do
not materially adversely affect the use of the property by Lehigh, and
except for minor defects in titles, none of which, based upon information
furnished by officers of Lehigh, does or will materially adversely affect
Lehigh's use of such properties or its operations, and to which the rights
of Lehigh therein have not been questioned. In giving such opinion, counsel
may rely upon title policies previously issued to Lehigh or updated
certificates furnished by title insurance companies.
(6) to the best knowledge of such counsel and based upon inquiries of
responsible officers of Lehigh and upon searches of Uniform Commercial Code
filings in the offices of the
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appropriate Secretary of State, there are no liens against properties of
Lehigh (excluding real estate) except as to be disclosed in the Disclosure
Schedule.
In rendering its opinion, Lehigh counsel may rely as to factual matters on
statements of officers of Lehigh. In rendering this opinion with resect to the
laws of any jurisdiction other than Delaware, Lehigh counsel may rely on the
opinion of other counsel retained by Lehigh provided that said opinion shall
state that Lehigh is justified in relying on the opinion or opinions of such
other counsel.
(c) The representations and warranties of Lehigh contained in this
Agreement shall be true in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of such date, except for changes permitted by this Agreement or those
incurred in the ordinary course of business and FMC shall have received from
Lehigh at the Closing a certificate dated the Closing Date of the President or a
Vice President of Lehigh to that effect.
(d) Each and all of the respective agreements of Lehigh to be performed on
or before the Closing Date pursuant to the terms hereof shall in all material
respects have been duly performed and Lehigh shall have delivered to FMC a
certificate dated the Closing Date, of the Chairman, President or a Vice
President of Lehigh to that effect.
(e) The completion of Lehigh's Proxy Statement and the effectiveness of
Lehigh's Registration Statement on Form S-4, as each may be amended.
(f) The approval of this Agreement by the Lehigh Board of Directors.
(g) The absence of any material contingent liabilities of Lehigh not
previously disclosed to FMC.
(h) The nonexistence of any agreement or contract that could delay or
prevent the completion of the transactions contemplated by this Agreement.
16. TERMINATION AND MODIFICATION OF RIGHTS
(a) This Agreement (except for the last three sentences of paragraph 4 of
this Agreement and paragraph 17 of this Agreement) may be terminated at any time
prior to the Closing Date by (i) mutual consent of the parties hereto authorized
by their respective Boards of Directors or (ii) upon written notice to the other
party, by either party upon authorization of its Board of Directors:
(1) if in its reasonably exercised judgment since the date of this
Agreement there shall have occurred a material adverse change in the
financial condition or business of the other party or the other party shall
have suffered a material loss or damage to any of its property or assets,
which change, loss or damage materially affects or impairs the ability of
the other party to conduct its business, or if any previously undisclosed
condition which materially adversely affects the earning power or assets of
either party come to the attention of the other party; or
(2) if any action or proceeding shall have been instituted or
threatened before a court or other governmental body or by any public
authority to restrain or prohibit the transactions
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contemplated by this Agreement or if the consummation of such transactions
would subject either of such parties to liability for breach of any law or
regulation.
(b) As provided in paragraph 2(a), this Agreement may be terminated by
either party upon notice to the other in the event the Closing shall not be held
by June 30, 1997.
(c) Any term or condition of this Agreement may be waived at any time by
the party hereto which is entitled to the benefit thereof, by action taken by
the Board of Directors of such party; and any such term or condition may be
amended at any time, by an agreement in writing executed by the Chairman of the
Board, the President or any Vice President of each of the parties pursuant to
authorization by their respective Boards of Directors provided however that no
amendment of any principal term of the Merger shall be affected after approval
of this Agreement by the stockholders of Lehigh, FMC and Newco unless such
amendment is approved by such stockholders in accordance with applicable law.
17. BREAK-UP FEE
In the event that Lehigh receives and consummates an Alternate Proposal (as
that term is defined in paragraph 1(g) hereof), then Lehigh shall pay FMC
$1,500,000 by wire transfer of immediately available funds at the date of
consummation of such Alternate Proposal.
18. BROKERS
Each of the parties represents that no broker, finder or similar person has
been retained or paid and that no brokerage fee or other commission has been
agreed to be paid for or on account of this Agreement other than Gruntal &
Company and First Union.
19. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the State
of Delaware.
20. NOTICES
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand or when mailed by registered or certified mail,
postage prepaid, or when given by telex or facsimile transmission (promptly
confirmed in writing), as follows:
(a) If to Lehigh or Newco:
Salvatore J. Zizza, President
810 Seventh Avenue - #27 F
New York, NY 10019
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With a copy to:
Robert A. Bruno, Esq.
General Counsel & Vice President
810 Seventh Avenue - #27 F
New York, NY 10019
and
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, NY 10022
Attn: Ilan K. Reich, Esq.
(b) If to FMC:
Dennis Sokol
Chairman
First Medical Corporation
1055 Washington Boulevard
Stamford, CT 06901
and
Greenberg Traurig
1221 Brickell Avenue
Miami, Florida 33131
Attn: Gary Epstein, Esq.
21. NON-ASSIGNMENT
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
22. COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
and by the different parties hereto on separate counterparts each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
23. HEADINGS AND REFERENCES
The headings of the paragraphs of this Agreement are inserted for
convenience of reference only.
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24. ENTIRE AGREEMENT; SEVERABILITY
This Agreement, including the Disclosure Schedules, documents referred to
herein which form a part hereof, contains the entire understanding of the
parties hereto in respect of the subject matter contained herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter. A determination that any portion of this
Agreement is unenforceable or invalid shall not affect the enforceability or
validity of any of the remaining portions of this Agreement or this Agreement as
a whole.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto by their respective officers thereunto duly authorized by a majority of
their directors as of the date first above written.
ATTEST: THE LEHIGH GROUP INC.
By /s/ Salvatore J. Zizza
-------------------------
AUTHORIZED OFFICER Salvatore J. Zizza,
Chairman of the Board and
Chief Executive Officer
ATTEST: FIRST MEDICAL CORPORATION
By /s/ Dennis A. Sokol
-------------------------
AUTHORIZED OFFICER Dennis A. Sokol, Chairman
ATTEST: LEHIGH MANAGEMENT CORP.
By /s/ Salvatore J. Zizza
-------------------------
AUTHORIZED OFFICER Salvatore J. Zizza, President and
Chief Executive Officer
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Appendix B
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE
PREFERRED STOCK
OF
THE LEHIGH GROUP INC.
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
The Lehigh Group Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolution was adopted by the Board of Directors of
the Corporation:
RESOLVED, that, pursuant to the authority expressly granted to and vested
in the Board of Directors of the Corporation (the "Board of Directors") by the
provisions of the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), there hereby is created, out of the 5,000,000
shares of Preferred Stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred
stock consisting of 1,037,461 shares, which series shall have the following
powers, designations, preferences and relative, participating, optional or other
rights, and the following qualifications, limitations and restrictions (in
addition to the powers, designations, preferences, participations and
restrictions set forth in the Certificate of Incorporation which are applicable
to the Preferred Stock):
Section 1. Designation and Amount.
The shares of such series shall be designated as "Series A Convertible
Preferred Stock" (the "Series A Preferred Stock") and the authorized number of
shares constituting such series shall be 1,037,461. The par value of the Series
A Preferred Stock shall be $.001 per share.
Section 2. Dividends.
The holders of shares of the Series A Preferred Stock shall be entitled to
receive, when, as and if dividends are declared by the Board of Directors on the
Corporation's Common Stock, $.001 par value (the "Common Stock"), out of funds
of the Corporation legally available therefor, cash dividends in an amount per
share of Series A Preferred Stock equal to two hundred and fifty times the
amount declared with respect to each share of the Common Stock. Each such
dividend shall be paid to the holders of record of the shares of the Series A
Preferred Stock as they appear on the stock records of the Corporation on the
record date for payment of the corresponding dividend on the Common Stock.
Section 3. Voting Rights.
The holders of Series A Preferred Stock shall be entitled to vote, together
with the holders of Common Stock, on all matters as to which holders of the
Common Stock shall be entitled to vote, with the holders of Series A Preferred
Stock being entitled to cast two hundred and fifty votes for each share
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of Series A Preferred Stock held by them. The holders of Series A Preferred
Stock shall not be entitled to vote separately, as a class, on any matter except
(a) as provided in Section 7 and (b) as required by law.
Section 4. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
holders of shares of the Series A Preferred Stock shall be entitled to receive,
in cash, out of the remaining net assets of the Corporation, the amount of $.01
for each share of the Series A Preferred Stock held by them, plus an amount
equal to all dividends accrued and unpaid on each such share up to the date
fixed for distribution, before any distribution shall be made to the holders of
shares of Common Stock. If upon any liquidation, dissolution or winding up of
the Corporation, the assets distributable among the holders of shares of the
Series A Preferred Stock are insufficient to permit the payment in full to the
holders of all such shares of all preferential amounts payable to all such
holders, then the entire assets of the Corporation thus distributable shall be
distributed ratably among the holders of the shares of the Series A Preferred
Stock in proportion to the respective amounts that would be payable per share if
such assets were sufficient to permit payment in full.
(b) For purposes of this Section 4, a distribution of assets in any
dissolution, winding up or liquidation shall not include (i) any consolidation
or merger of the Corporation with or into any other corporation, (ii) any
dissolution, liquidation, winding up or reorganization of the Corporation
immediately followed by reincorporation of another corporation or (iii) a sale
or other disposition of all or substantially all of the Corporation's assets to
another corporation; provided, however, that, in each case, effective provision
is made in the certificate of incorporation of the resulting and surviving
corporation or otherwise for the protection of the rights of the holders of
shares of the Series A Preferred Stock.
(c) After the payment of the full preferential amounts provided for herein
to the holders of shares of the Series A Preferred Stock or funds necessary for
such payment have been set aside in trust for the holders thereof, such holders
shall be entitled to no other or further participation in the distribution of
the assets of the Corporation.
Section 5. Conversion.
(a) Holders of shares of the Series A Preferred Stock shall have the right,
exercisable (subject to the provisions of Section 5(d)) at any time and from
time to time, to convert each share of Series A Preferred Stock into two hundred
and fifty shares of the Common Stock, subject to adjustment as described below.
Upon conversion, no adjustment or payment will be made for dividends, but if any
holder surrenders a share of the Series A Preferred Stock for conversion after
the close of business on the record date for the payment of a dividend and prior
to the opening of business on the payment date for such dividend, then,
notwithstanding such conversion, the dividend payable on such dividend payment
date will be paid to the registered holder of such share of the Series A
Preferred Stock on such record date.
(b) Any holder of a share or shares of the Series A Preferred Stock
electing to convert such share or shares shall deliver the certificate or
certificates therefor to the principal office of any transfer agent for the
Common Stock, with such form of notice of election to convert as the Corporation
shall prescribe fully completed and duly executed and (if such required by the
Corporation
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<PAGE>
or any conversion agent) accompanied by instruments of transfer in form
satisfactory to the Corporation and to any conversion agent, duly executed by
the registered holder or his duly authorized attorney, and transfer taxes,
stamps or funds therefor or evidence of payment thereof if required pursuant to
Section 5(c) hereof. The conversion right with respect to any such shares shall
be deemed to have been exercised at the date upon which the certificates
therefor accompanied by such duly executed notice of election and instruments of
transfer and such taxes, stamps, funds, or evidence of payment shall have been
so delivered, and the person or persons entitled to receive the shares of the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of the Common Stock upon said date.
(c) If a holder converts a share or shares of the Series A Preferred Stock,
the Corporation shall pay any documentary, stamp or similar issue or transfer
tax due on the issue of Common Stock upon the conversion. The holder, however,
shall pay to the Corporation the amount of any tax which is due (or shall
establish to the satisfaction of the Corporation payment thereof) if the shares
are to be issued in a name other than the name of such holder and shall pay to
the Corporation any amount required by the last sentence of Section 5(a) hereof.
(d) The Series A Preferred Stock shall not become convertible into shares
of Common Stock until such time as the number of shares of the Corporation's
authorized and unissued Common Stock equals or exceeds the aggregate number of
shares of the Common Stock into which all of the authorized shares of Series A
Preferred Stock would be convertible under Section 5(a) (without regard to this
sentence) if all of such shares of Series A Preferred Stock were outstanding.
Thereafter, the Corporation shall reserve and shall at all times have reserved
out of its authorized but unissued shares of the Common Stock sufficient shares
of the Common Stock to permit the conversion of the then outstanding shares of
the Series A Preferred Stock. All shares of Common Stock which may be issued
upon conversion of shares of the Series A Preferred Stock shall be validly
issued, fully paid and nonassessable. In order that the Corporation may issue
shares of the Common Stock upon conversion of shares of the Series A Preferred
Stock, the Corporation will endeavor to comply with all applicable Federal and
State securities laws and will endeavor to list such shares of the Common Stock
to be issued upon conversion on each securities exchange on which the Common
Stock is listed.
(e) The conversion rate in effect at any time shall be subject to
adjustment from time to time as follows:
(i) In case the Corporation shall (1) pay a dividend in shares of the
Common Stock to holders of the Common Stock, (2) make a distribution in
shares of the Common Stock to holders of the Common Stock, (3) subdivide
the outstanding shares of the Common Stock into a greater number of shares
of the Common Stock or (4) combine the outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, the conversion
rate immediately prior to such action shall be adjusted so that the holder
of any shares of the Series A Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number of shares of the Common
Stock which he would have owned immediately following such action had such
shares of the Series A Preferred Stock been converted immediately prior
thereto. An adjustment made pursuant to this Section 5(e)(i) shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision or combination.
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(ii) In case the Corporation shall issue rights or warrants to
substantially all holders of the Common Stock entitling them (for a period
commencing no earlier than the record date for the determination of holders
of Common Stock entitled to receive such rights or warrants and expiring
not more than 45 days after such record date) to subscribe for or purchase
shares of the Common Stock (or securities convertible into shares of the
Common Stock) at a price per share less than the current market price (as
determined pursuant to Section 5(e)(iv)) of the Common Stock on such record
date, the number of shares of the Common Stock into which each share of the
Series A Preferred Stock shall be convertible shall be adjusted so that the
same shall be equal to the number determined by multiplying the number of
shares of the Common Stock into which such shares of the Series A Preferred
Stock was convertible immediately prior to such record date by a fraction
of which the numerator shall be the number of shares of the Common Stock
outstanding on such record date plus the number of additional shares of the
Common Stock offered (or into which the convertible securities so offered
are convertible), and of which the denominator shall be the number of
shares of the Common Stock outstanding on such record date, plus the number
of shares of the Common Stock which the aggregate offering price of the
offered shares of the Common Stock (or the aggregate conversion price of
the convertible securities so offered) would purchase at such current
market price. Such adjustments shall become effective immediately after
such record date.
(iii) In case the Corporation shall distribute to all holders of the
Common Stock shares of any class of capital stock other than the Common
Stock, evidence of indebtedness or other assets (other than cash dividends
out of current or retained earnings), or shall distribute to substantially
all holders of the Common Stock rights or warrants to subscribe for
securities (other than those referred to in Section 5(e)(ii)), then in each
such case the number of shares of the Common Stock into which each share of
the Series A Preferred Stock shall be convertible shall be adjusted so that
the same shall equal the number determined by multiplying the number of
shares of the Common Stock into which such shares of the Series A Preferred
Stock was convertible immediately prior to the date of such distribution by
a fraction of which the numerator shall be the current market price
(determined as provided in Section 5(e)(iv)) of the Common stock on the
record date mentioned below, and of which the denominator shall be such
current market price of the Common Stock, less the then fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive evidence of such fair market value) of the portion of the assets
so distributed or of such subscription rights or warrants applicable to one
share of the Common Stock. Such adjustment shall become effective
immediately after the record date for the determination of the holders of
the Common Stock entitled to receive such distribution. Notwithstanding the
foregoing, in the event that the Corporation shall distribute rights or
warrants (other than those referred to in Section 5(e)(ii) ("Rights") pro
rata to holders of the Common Stock, the Corporation may, in lieu of making
any adjustment pursuant to this Section 5(e)(iii), make proper provision so
that each holder of a share of Series A Preferred Stock who converts such
share after the record date for such distribution and prior to the
expiration or redemption of the Rights shall be entitled to receive upon
such conversion, in addition to the shares of the Common Stock issuable
upon such conversion (the "Conversion Shares"), a number of Rights to be
determined as follows: (i) if such conversion occurs on or prior to the
date for the distribution to the holder of Rights of separate certificate
evidencing
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such Rights (the "Distribution Date"), the same number of Rights to which a
holder of a number of shares of the Common Stock equal to the number of
Conversion Shares is entitled at the time of such conversion in accordance
with the terms and provisions of and applicable to the Rights; and (ii) if
such conversion occurs after the Distribution Date, the same number of
Rights to which a holder of the number of the Common Stock into which a
share of the Series A Preferred Stock so converted was convertible
immediately prior to the Distribution Date would have been entitled on the
Distribution Date in accordance with the terms and provisions of and
applicable to the Rights.
(iv) The current market price per share of the Common Stock on any
date shall be deemed to be the average of the daily closing prices for
thirty consecutive trading days commencing forty-five trading days before
the day in question. The closing price for each day shall be the last
reported sale price regular way or, in case no such reported sale takes
place on such date, the average of the reported closing bid and asked
prices regular way, in either case on the New York Stock Exchange, or if
the Common Stock is not listed or admitted to trading on such Exchange, on
the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading on
any national securities exchange, the closing sale price of the Common
stock, or in case no reported sale takes place, the average of the closing
bid and asked prices, on NASDAQ or any comparable system, or if the Common
Stock is not quoted on NASDAQ or any comparable system, the closing sale
price or, in case no reported sale takes place, the average of the closing
bid and asked prices, as furnished by any two members of the National
Association of Securities Dealers, Inc. selected from time to time by the
Corporation for that purpose.
(v) In any case in which this Section 5 shall require that an
adjustment be made immediately following a record date, the Corporation may
elect to defer (but only until five business days following the mailing of
the notice described in Section 5(e)) issuing to the holder of any share of
the Series A Preferred Stock converted after such record date the shares of
the Common Stock and other capital stock of the Corporation issuable upon
such conversion over and above the shares of the Common stock and other
capital stock of the Corporation issuable upon such conversion only on the
basis of the conversion rate prior to adjustment; and, in lieu of the
shares the issuance of which is so deferred, the Corporation shall issue or
cause its transfer agents to issue due bills or other appropriate evidence
of the right to receive such shares.
(f) No adjustment in the conversion rate shall be required until cumulative
adjustments result in a concomitant change of 1% or more of the conversion price
as in effect prior to the last adjustment of the conversion rate; provided,
however, that any adjustments which by reason of this Section 5(f) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 5 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case may be.
No adjustment to the conversion rate shall be made for cash dividends.
(g) In the event that, as a result of an adjustment made pursuant to
Section 5(e), the holder of any share of the Series A Preferred Stock thereafter
surrendered for conversion shall become entitled to receive any shares of
capital stock of the Corporation other than shares of the Common Stock,
thereafter the number of such other shares so receivable upon conversion of any
shares of the Series A
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Preferred Stock shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in this Section 5.
(h) The Corporation may make such increases in the conversion rate, in
addition to those required by Sections 5(e)(i), (ii) and (iii), as it considers
to be advisable in order than any event treated for Federal income tax purposes
as a dividend of stock or stock rights shall not be taxable to the recipients
thereof.
(i) Whenever the conversion rate is adjusted, the Corporation shall
promptly mail to all holders of record of shares of the Series A Preferred Stock
a notice of the adjustment and shall cause to be prepared a certificate signed
by a principal financial officer of the Corporation setting forth the adjusted
conversion rate and a brief statement of the facts requiring such adjustment and
the computation thereof; such certificate shall forthwith be filed with each
transfer agent for the shares of the Series A Preferred Stock.
(j) In the event that:
(1) the Corporation takes any action which would require an
adjustment in the conversion rate,
(2) the Corporation consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation and
stockholders of the Corporation must approve the transaction, or
(3) there is a dissolution or liquidation of the Corporation,
a holder of shares of the Series A Preferred Stock may wish to convert some or
all of such shares into shares of the Common Stock prior to the record date for,
or the effective date of, the transaction so that he may receive the rights,
warrants, securities or assets which a holder of shares of the Common Stock on
that date may receive. Therefore, the Corporation shall mail to holders of
shares of the Series A Preferred Stock a notice stating the proposed record or
effective date of the transaction, as the case may be. This Corporation shall
mail the notice at least 10 days before such date; however, failure to mail such
notice or any defect therein shall not affect the validity of any transaction
referred to in clauses (1), (2) or (3) of this Section 5(j).
(k) If any of the following shall occur, namely: (i) any reclassification
or change of outstanding shares of the Common Stock issuable upon conversion of
shares of the Series A Preferred Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger to
which the Corporation is a party other than a merger in which the Corporation is
the continuing corporation and which does not result in any reclassification of,
or change (other than a change in name, or par value, or from par value to no
par value, or from no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of the Common Stock or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Corporation as an entirety, then the Corporation, or such successor or
purchasing corporation, as the case may be, shall, as a condition precedent to
such reclassification, change, consolidation, merger, sale or conveyance,
provide in its certificate of incorporation or other charter document that each
share of the Series A Preferred Stock shall be
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convertible into the kind and amount of shares of capital stock and other
securities and property (including cash) receivable upon such reclassification,
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of the Common Stock deliverable upon conversion of such share of the
Series A Preferred Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such certificate of incorporation or
other charter document shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
5. The foregoing, however, shall not in any way affect the right a holder of a
share of the Series A Preferred Stock may otherwise have, pursuant to clause
(ii) of the last sentence of Section 5(e)(iii), to receive Rights upon
conversion of a share of the Series A Preferred Stock. If, in the case of any
such consolidation, merger, sale or conveyance, the stock or other securities
and property (including cash) receivable thereupon by a holder of the Common
Stock includes shares of capital stock or other securities and property of a
corporation other than the successor or purchasing corporation, as the case may
be, in such consolidation, merger, sale or conveyance, then the certificate of
incorporation or other charter document of such other corporation shall contain
such additional provisions to protect the interests of the holders of shares of
the Series A Preferred Stock as the Board of Directors shall reasonably consider
necessary by reason of the foregoing. The provision of this Section 5(k) shall
similarly apply to successive consolidations, mergers, sales or conveyances.
Section 6. Ranking. With regard to rights to receive dividends and
distributions upon dissolution of the Corporation, the Series A Preferred Stock
shall rank prior to the Common Stock and junior to any other Preferred Stock
issued by the Corporation, unless the terms of such other Preferred Stock
provide otherwise.
Section 7. Limitations. In addition to any other rights provided by
applicable law, so long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote, or the
written consent as provided by law, of the holders of at least a majority of the
outstanding shares of the Series A Preferred Stock, voting as a class, amend,
alter or repeal, whether by merger, consolidation or otherwise, any of the
provisions of the Certificate of Incorporation (including this Certificate of
Designation) that would change the preferences, rights or powers with respect to
the Series A Preferred Stock so as to affect the Series A Preferred Stock
adversely; provided, however, that (except as otherwise required by applicable
law) nothing herein contained shall require such a vote or consent in connection
with any increase in the total number of authorized shares of the Common Stock.
Section 8. No Preemptive Rights. No holder of shares of the Series A
Preferred Stock will possess any preemptive rights to subscribe for or acquire
any unissued shares of capital stock of the Corporation (whether now or
hereafter authorized) or securities of the Corporation convertible into or
carrying a right to subscribe for or acquire shares of capital stock of the
Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by Salvatore J. Zizza, its President, and attested by
Robert A. Bruno, its Secretary, this ____ day of __________, 1997.
THE LEHIGH GROUP INC.
By: /s/ Salvatore J. Zizza
--------------------------
Name: Salvatore J. Zizza
Title: President
Attested:
By: ____________________
Name: Robert A. Bruno
Title: Secretary
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Appendix C
Name of Subscriber: GENERALE DE SANTE INTERNATIONAL, PLC
SUBSCRIPTION AGREEMENT
First Medical Corporation
5200 Blue Lagoon Drive
Suite 250
Miami, Florida 33126
Gentlemen:
The undersigned ("Subscriber") hereby tenders this Subscription Agreement
("Agreement') subject to the terms and conditions set forth herein. If you are
in agreement, please indicate your acceptance by executing this Agreement in the
space provided and returning one executed counterpart to Subscriber. All
references to Subscriber shall include the Subscriber's nominee.
The closing of this transaction will not occur until such time as First
Medical Corporation, a Delaware corporation (the "Issuer"), consummates a
transaction in which it becomes a public company. Accordingly, the parties agree
that all documents to be executed in connection with the transaction described
herein shall be subject to the closing of a transaction in which the Issuer
shall become a public company. Simultaneously with the closing, the Issuer
agrees to register the Common Stock (as defined below) currently owned by
Subscriber and the Common Stock purchased by Subscriber hereby as described
herein.
1. Subscription
1.1 Subscriber hereby subscribes for and agrees to purchase a number
of shares of the Common Stock, $.01 par value (the "Common Stock"), of
First Medical Corporation, a Delaware corporation (the "Issuer"), equal to
10% of the issued and outstanding Common Stock of the issuer existing on
the date of the Closing of the transactions contemplated by this Agreement,
including the shares issued to Subscriber.
1.2 Subscriber hereby subscribes for and agrees to purchase such
amount of the 9% Series A Preferred Stock ("Preferred Stock") of the issuer
as shall be convertible into 10% shares of Common Stock issued and
outstanding as at the date of issue. The Preferred Stock issued to the
Subscriber shall form a class of shares of its own. The Preferred Stock
shall be issued to Subscriber and shall contain the terms and conditions
set forth in Exhibit "A" annexed hereto and made a part hereof by reference
and such other terms and conditions, if any, as issuer and Subscriber may
mutually agree upon in writing prior to the Closing of the transaction
contemplated by this Agreement. As set forth in Exhibit "A," the Preferred
Stock will pay a 9% cumulative annual dividend, payment of which will be
deferred until the earlier of (1) the third anniversary of the Closing and
(ii) the date of conversion into Common Stock, and will be convertible into
shares of Common Stock equal to 10% of the currently issued and outstanding
Common Stock on a fully diluted basis. There will be no new issue of Common
Stock during 1996.
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1.3 Subscriber hereby subscribes for and agrees to purchase 49% of the
issued and outstanding shares of the Common Stock, $.01 par value (the
"WHEN Common Stock"), of WHEN Inc., a Delaware corporation and a
wholly-owned subsidiary of the Issuer ("WHEN"). The WHEN Common Stock
subscribed for hereby equals 49% of the issued and outstanding WHEN Common
Stock.
1.4 The purchase price for the Common Stock and Preferred Stock
purchased hereby is an aggregate of US$4,000,000. The purchase price for
the WHEN Common Stock purchased hereby is US$1,000,000.
1.5 The Issuer agrees that the proceeds from Subscriber's purchase of
the Common Stock, Preferred Stock and WHEN Common (collectively, the
"Securities") shall only be used by the Issuer for the purchase of capital
assets for WHEN and/or American Medical Clinics Development Corporation.
Limited, an Irish corporation ("AMCDC").
2. Restrictions on Transfer.
2.1 Subscriber acknowledges that is acquiring the Securities for its
own account and for the purpose of Investment and not with a view to any
distribution or resale thereof within the meaning of the Securities Act of
1933, as amended (the "Act"), and any applicable state or other securities
laws ("Other Securities Laws"). Subscriber further agrees that it will not
sell, assign or transfer any of the Securities so acquired in violation of
the Act or Other Securities Laws and acknowledges that, in taking
unregistered securities, it must continue to bear the economic risk of its
investment for an indefinite period of time because such Securities have
not been registered under the Act or Other Securities Laws. Subscriber
further acknowledges that such Securities cannot be transferred unless they
are registered under the Act and Other Securities Laws or an exemption from
such registration is applicable to such transfer.
2.2 Subscriber acknowledges that appropriate legends reflecting the
status of the Securities under the Act and Other Securities Laws will be
placed on the face of the certificates for such Securities at the time of
their transfer and delivery, including, without limitation, the following
restrictive legend:
"The Shares represented by this certificate have been
acquired directly or indirectly from the Issuer without
being registered under the Securities Act of 1933, as
amended, or any other applicable securities laws, and
are restricted securities as that term is defined under
Rule 144 promulgated under the Act. These shares may
not be sold, pledged, transferred, distributed or
otherwise disposed of in any manner ("Transfer") unless
they are registered under the Act and any applicable
securities laws, or unless the request for Transfer is
accompanied by a favorable opinion of counsel,
reasonably satisfactory to the Issuer, stating that the
Transfer will not result in a violation of the Act or
any applicable state securities laws."
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2.3 Immediately following (i) a transaction in which the Issuer
becomes a public company and (ii) any conversion by Subscriber, the Issuer
agrees to register all shares of the Common Stock owned by the Subscriber
under the Securities Act of 1933, as amended (the "Act"), on a Form S-3 or
other appropriate form of registration. In addition, in the event that the
Issuer proposes to register any securities (the "Registration Shares")
under the Act, other than pursuant to a registration statement on Form S-4
or S-8, or any successor to such forms, for the purpose of the sale or
other transfer of the Registration Shares by Issuer, Subscriber shall have
the right to request the Issuer to include its shares of Common Stock
and/or Preferred Stock, as the case may be, in such registration under the
Act or any other securities laws; provided, however, that if such
registration is pursuant to an underwritten initial public offering and in
the written opinion of the Issuer's managing underwriter for such offering,
if any, the inclusion of all or a portion of the Subscriber's securities,
when added to the securities being registered by the Issuer and any selling
shareholder(s) of the Issuer other than the Subscriber, if any (the "Other
Stockholders"), will exceed the maximum number of the Issuer's securities
that can be marketed at the price that could otherwise be obtained or would
otherwise materially adversely affect the offering, then the Issuer may
first include i such registration all of the securities the Issuer proposes
to sell, and the number of the Subscriber's securities and the Other
Stockholders' securities that may be so included shall be allocated among
the Subscriber and the Other Stockholders pro-rata on the basis of the
number of shares that are requested to be registered by Subscriber and the
Other Stockholder(s). The parties hereto agree that the cost of
registration of Subscriber's securities shall be borne by the Issuer.
3. Covenants and Additional Agreements.
3.1 As set forth above, the shares of Preferred Stock being subscribed
for hereby shall be convertible into a number of shares of Common Stock
equal to ten percent of the issued and outstanding Common Stock of Issuer
as of the date of issuance.
3.2 Subscriber shall have the right to designate half of the members
of the board of directors of WHEN.
3.3 The Executive Committees of the Issuer and WHEN shall include its
Chairman of the Board, its Chief Executive Officer and a designee of
Subscriber (in the event Subscriber shall select such a designee) All
capital business investments (but not normal capital expenditures) shall be
approved only by a unanimous vote of their respective Executive Committees.
Meetings of the Executive Committees may be held by telephone, with
confirmation of votes by fax.
3.4 At any time within three (3) years following the Closing, the
Subscriber shall have the option to put the write of its shareholders in
WHEN to the Issuer for the consideration of an aggregate of US$1,000,000
and a sum equivalent to the fair market value of such shares. The fair
market value of such shareholdings shall be determined by a reputable
investment banking firm to be selected by the Issuer and the Subscriber. In
the event the parties cannot agree on an investment banker, the parties
shall each select a reputable investment banking firm and such investment
banking firms shall select a third reputable investment banking firm to
determine the fair market value of the WHEN Common Stock. The determination
of the third investment banking firm shall be binding upon the Issuer and
Subscriber.
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3.5 In connection with the transactions contemplated hereby,
Subscriber shall sell to the Issuer, for consideration of US$1.00, an
amount equal to one percent of the shares of AMCDC. Alain Leilouche shall
become Chairman of the Board of AMCDC.
3.6 It is understood by the Issuer and the Subscriber that all
hospital management contractual agreements will be effected through WHEN.
3.7 At any time between the second and the fifth anniversary of the
Closing, Subscriber may acquire from WHEN that number of shares of WHEN
Common Stock as may be sufficient, together with the shares acquired
pursuant to this Agreement, to provide Subscriber with 52% of the issued
and outstanding common stock of WHEN, WHEN shall enter into a management
agreement with the issuer or its wholly-owned subsidiary or other designee,
pursuant to which WHEN pays such entity, for two years after such
acquisition, an annual management fee equal to the sum of WHEN's cost of
management and a reasonable success fee to be determined by the issuer and
the Subscriber. In the event that Subscriber acquires the additional 3% of
WHEN Common Stock, Issuer will receive from Subscriber, at the Issuer's
option, either (i) 10% of the Common Stock of FMC that was issued at the
Closing or (ii) US$3,000,000. Further, if Subscriber acquires the
additional 3% of the WHEN Common Stock, Subscriber will also have the
option to purchase at that time the remaining shares of WHEN Common Stock
at a price equal to its fair market value, as determined by one reputable
investment banking firm, to be selected by the Issuer and Subscriber. In
the event the parties cannot agree on an investment banker, the parties
shall each select a reputable investment banking firm who shall select a
third reputable investment banking firm to determine the fair market value
of the WHEN Common Stock. The determination of the third investment banking
form shall be binding upon the Issuer and Subscriber. If Subscriber
acquires all of the WHEN Common Stock, the management agreement described
in this Section 3.7 shall terminate.
3.8 Upon the Closing, the provision of that certain agreement dated
January 20, 1996, among the Issuer, the Subscriber and AMCDC relating to
the loan by Subscriber of US$1,200,000 shall terminate and be of no further
force and effect.
3.9 Subscriber may acquire from Issuer for US$1.00 consideration, that
number of shares of the Common Stock of AMCDC, par value of the AMCDC
Common Stock (the "AMCDC Common Stock") as may be sufficient, together with
the shares of AMCDC Common Stock already owned by Subscriber, to provide
Subscriber with 52% of the issued and outstanding AMCDC Common Stock.
3.10 At any time prior to the fifth anniversary of the Closing,
Subscriber shall have the option to acquire from the Issuer, for the price
of 110% of the average 30-day telling market price thereof, that number of
shares of Common Stock of the Issuer that, together with the shares of
Common Stock already held by Subscriber, shall equal 51% of the issued and
outstanding Common Stock of the issuer.
3.11 The Issuer and Subscriber agree that in exchange for the
Subscriber's termination of that certain option granted to Subscriber by
American Medical Clinics, Inc. ("AMC") and its successor entity American
Medical Centers Management Company, Inc., a wholly owned subsidiary of the
Issuer, which option entitles the Subscriber to purchase, at any time prior
to December 31, 1997, 10% of the issued and outstanding common stock of
AMC, the Issuer shall issue Subscriber a number of shares of Common Stock
equal to 5% of the issued and outstanding Common Stock of the issuer
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existing immediately following the date of the Closing of the transactions
contemplated by this Agreement. Issuer agrees that the shares of Common
Stock issuable to the Subscriber pursuant to this Section 3.11 shall not be
diluted during the remainder of the year ended December 31, 1996, absent
agreement between the issuer and the Subscriber.
3.12 It is an essential term of this Agreement that Charles Pendola
will become Chief Executive Officer of Issuer and WHEN.
3.13 Subscriber shall have the right to designate three (3) members of
the Issuer's Board of Directors. Subscriber shall also have the right to
appoint a Deputy Chief Financial Officer to be employed by the Issuer, as
well as a Deputy Managing Director of WHEN, to be employed by WHEN.
4. Miscellaneous.
4.1 This Agreement shall be construed in accordance with and governed
by the laws of the State of Delaware.
4.2 The Closing shall take place at the offices of Patton & Boggs,
L.L.P., 2550 M Street, N.W. Washington, D.C. at 10:00 a.m. on the date
immediately following the consummation of a transaction in which the Issuer
becomes a public company or on such other date and place as Issuer and
Subscriber shall mutually agree. At the Closing of this Transaction, the
issuer shall deliver to the Subscriber duly executed stock certificates for
the Securities being subscribed for and the Subscriber shall deliver to the
Issuer, a certified or official bank check for the total subscription price
set forth above or shall wire such funds to an account designated by
Issuer.
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IN WITNESS WHEREOF, the parties have caused this Subscription Agreement to
be executed by the officers thereunto duly authorized on the date first set
forth below.
SUBSCRIBER:
GENERALE DE SANTE INTERNATIONAL, PLC
By: /s/ Daniel Caille
----------------------------
Daniel Caille
Mailing Address: 4 Cornwall Terrace
London NW1 4QP ENGLAND
Date: June 11, 1996
Telephone: 011-44-071-486-1286
Fax: 011-44-071-486-9275
Accepted by:
ISSUER:
FIRST MEDICAL CORPORATION
By: /s/ Dennis A. Sokol
------------------------
Name: Dennis A. Sokol
Title: Chairman
Date: June 11, 1996
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Appendix D
Generale de Sante International plc
3 April 1997
The Lehigh Group Inc.
810 Seventh Avenue
27th Floor
New York, New York 10019
Attn: Salvatore J. Zizza
First Medical Corporation
5200 Blue Lagoon Drive
Suite 250
Miami, FL 33126
Attn: Dennis A. Sokol
Dear Sirs:
Reference is made to the Subscription Agreement (the "Subscription Agreement")
dated June 11, 1996 between Generale de Sante International plc ("GDS") and
First Medical Corporation ("FMC") pursuant to which GDS will acquire shares of
common stock, $.01 par value per share, of FMC and shares of 9% Series A
Preferred Stock of FMC upon the closing (the "Closing") of the transactions
contemplated by the Subscription Agreement.
We understand that FMC and The Lehigh Company ("Lehigh") have entered into an
Agreement and Plan of Merger dated as of October 29, 1996, pursuant to which a
subsidiary of Lehigh will merge with and into FMC (the "Merger"). We further
understand that upon the consummation of the Merger, the Closing will occur and
GDS will acquire shares of common stock, $.001 par value per share ("Lehigh
Common Stock"), of Lehigh and shares of Series A Convertible Preferred Stock,
$.001 par value per share ("Lehigh Preferred Stock"), of Lehigh.
GDS hereby notifies FMC and Lehigh that the shares of Lehigh Common Stock,
Lehigh Preferred Stock and 9% Series A Preferred Stock of FMC to be acquired by
GDS at the Closing will be acquired, and will be held, as a passive investment
and that GDS will not currently exercise its right under the Subscription
Agreement to designate three directors to the Board of Directors of FMC or,
following the Merger and the Closing, the Board of Directors of Lehigh, as well
as its right to designate a member of the Executive Committee of each of FMC and
FMC Healthcare Services, Inc., a Deputy Chief Financial Officer of FMC and a
Deputy Managing Director of FMC Healthcare Services, Inc. GDS further notifies
FMC and Lehigh that GSD does not have any intentions, plans or proposals that
may relate to or would result in:
(a) Conversion of any shares of FMC 9% Series A Preferred Stock or Lehigh
Preferred Stock acquired upon consummation of the Merger and the Closing
into shares of Lehigh Common Stock;
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(b) Exercise of its opinion under the Subscription Agreement to increase its
ownership interest in FMC [or Lehigh] to 51% of the issued and outstanding
shares of such company;
(c) Exercise of its right to designate three directors to the Board of
Directors of FMC [or Lehigh].
We would expect that Lehigh will disclose our intentions, as set forth above, in
any proxy or registration statement to be issued in connection with the Merger.
Very truly yours,
GENERALE DE SANTE INTERNATIONAL PLC
By: /s/ Guy Odi
------------------------------
Name: Guy Odi
Title: Company Secretary
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Rider X
GDS has notified Lehigh that GDS intends that its ownership and voting interest
in Lehigh will be a passive investment and that GDS does not currently intend to
exercise its right to designate three directors to the Lehigh Board.
Rider Y
GDS has notified Lehigh, pursuant to a letter dated 3 April, 1997, that the
shares of Lehigh Common Stock, Lehigh Preferred and FMC 9% Series A Preferred
Stock to be acquired by GDS as the Effective Time will be acquired, and will be
held, as a passive investment and that GDS will not currently exercise its right
to designate three directors to the Lehigh Board, a member of the Executive
Committee of each of FMC and FMC Healthcare Services, Inc., a Deputy Financial
Officer of FMC and a Deputy Managing Director of FMC Healthcare Services, Inc.
Other than the transactions contemplated by the Merger Agreement (which was
negotiated and concluded without the participation of GDS), GDS does not have
any intentions, plans or proposals that may relate to or would result in:
(a) Conversion of the shares of FMC 9% Series A Preferred Stock or Lehigh
Preferred Stock to be acquired by GDS at the Effective Time into shares of
Lehigh Common Stock;
(b) Exercise GDS's option under step 4, to increase its ownership interest in
Lehigh to 51% of the issued and outstanding shares of Lehigh Common Stock;
(c) Exercise of GDS's right to designate three directors to the Lehigh Board.
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Appendix E
FORM OF
PROVIDER AGREEMENT
1. Parties
This Provider Agreement ("Agreement") is entered into by and between:
a. The party designated on the Cover Sheet as "Provider" and, if said party
is a corporation or partnership, the Principals of said party, all of whom
are listed in the attached Ownership Disclosure Statement (Attachment A).
All of said persons and entities are collectively referred to herein as
"Provider"; and
b. Humana Medical Plan, Inc. and Humana Plan of Florida, Inc. (Florida
health maintenance organizations) and Humana Health Insurance Company of
Florida, Inc. (a Florida insurance company) and Humana Insurance Company
(an insurance company) and their affiliates. All of said companies are
severally referred to in this Agreement as "Humana".
2. Scope of the Agreement
This Agreement sets forth the rights, responsibilities, terms and
conditions governing Provider's status as a Participating Provider in certain
health care networks established by Humana and Provider's service to designated
covered individuals ("Members") by contracts issued or administered by Humana.
This Agreement applies only to those health care benefits contracts and to those
Members designated by Humana.
The joinder of the two companies under the designation "Humana" shall not
be construed as imposing joint responsibility or cross-guarantees. All rights
and responsibilities arising in respect to individual Members shall be
applicable to only the company which issued the contract covering the respective
Member ad may not be imposed on or enforced on the other company.
3. Medical Services to be Provided
Provider agrees to provide or arrange for covered health care services for
Members in accordance with Attachment B.
4. Use of Participating Providers
Provider shall admit or refer Members for covered services only to
providers designated or specially approved by Humana.
5. Provider Fees
Humana shall pay Provider in accordance with payment arrangement outlined
in Attachment C. Provider shall collect any copayment amount applicable to the
services provided. The payment from Humana plus the payments owed by Members
pursuant to their contract ("Copayments") shall be accepted by Provider as
payment in full for all Covered Services. If a health care benefits
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contract permits any assignment of benefits to be made by Members to providers,
then Provider agrees to accept assignment of benefits made by Members, as
payment in full.
6. Coordination of Benefits; Recovery Rights
Covered services provided to each Member are subject to coordination or
subrogation with other benefits payable or paid to or on behalf of the Member,
and to Humana's rights of recovery in other party liability situations.
Physician shall accept payment from Humana, plus any Copayments, as payment in
full for all Covered Services provided to Members, and Physician hereby assigns
to Humana all Physician's rights to recover any other benefits that may be
payable in respect to a Member.
Physician agrees to use Physician's best efforts to determine the
availability of other benefits, including other party liability, and to obtain
any information or documentation required by Humana to facilitate Human's
collection of such other benefits.
7. Policies and Procedures
Provider agrees to abide by all quality assurance, utilization review,
credentialing and other policies and procedures established and revised by
Humana from time to time. Such policies and procedures are set out in the
Affiliated Provider Manual ("Manual"). Provider shall be notified of any
revisions to the policies and procedures and they shall become binding upon
Provider thirty (30) days after Humana has notified Provider. Any revisions
affecting Provider shall not be discriminatory and shall apply to all providers
similarly situated.
8. No Liability to Members for Charges
Provider hereby agrees that in no event, including, but not limited to
non-payment by Humana, Humana's insolvency or breach of this Agreement, shall
Provider bill, charge, collect a deposit from, seek compensation, remuneration
or reimbursement from, or have any recourse against Members of Humana or persons
other than Humana acting on their behalf for Covered Services provided pursuant
to this Agreement. This provision shall not prohibit collection of any
Copayments in accordance with the terms of this Agreement.
Provider further agrees that (1) this provision shall survive the
termination of this Agreement regardless of the cause giving rise to termination
and shall be construed to be for the benefit of the Member, (2) this provision
supersedes any oral or written contrary Agreement now existing or hereafter
entered into between Provider and Member or persons acting on their behalf, and
(3) this provision shall apply to all employees and subcontractors of Provider,
and Provider shall obtain from such persons written agreement to this provision.
An modification, addition, or deletion to Article 8 shall become effective
on a date no later than fifteen (15) days after the Commissioner of Insurance
has received written notice of such proposed changes.
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9. Credentialing
Participation under this Agreement by Provider, and any Provider employee
or subcontractor, is subject to the satisfaction and maintenance, in Humana's
sole judgment, of all credentialing standards adopted under the policies and
procedures set out in the Manual.
10. Insurance
Provider agrees to maintain, at no expense to Humana, such policies of
comprehensive and general liability, professional liability and worker's
compensation coverage, with such carriers and in such amounts as Humana may
reasonably approve, insuring Provider, its members, employees, agents and
subcontractors (as applicable), against any claim or claims for damages arising
as a result of injury to property or person, including death, occasioned
directly or indirectly in connection with the performance of medial services
contemplated by this Agreement and/or the maintenance of Provider's facilities
and equipment. Upon request, Provider shall provide Humana with evidence of said
coverage, and Provider shall require the carrier(s) to provide Humana with
notice of any cancellations or modifications. This clause shall survive for a
period of time following the termination of this Agreement not less than the
Statute of Limitations applicable to personal injury in this State.
11. Malpractice Claims
Providers shall within forty-eight (48) hours, or such lessor period of
time as required by the applicable statute of this State notify Humana in
writing of notice of any Member claim alleging malpractice or the occurrence of
any incident which is required to be reported under such statute.
12. Standards of Professional Practice
Provider agrees to provide Members with medical services which
are within the normal scope of Provider's medical practice. These services shall
be made available to Members without discrimination and in the same manner as
provided to Provider's other patients. Provider agrees to provide medical
services to Members in accordance with the prevailing practices and standards of
the profession and community.
13. Medical Records
Unless otherwise provided in this Agreement Provider shall maintain and
retain records relating to Members in such form as required by law and accepted
medical practice. Humana or any federal or State regulatory agency, as permitted
by law, may obtain copies and have access to any medical, administrative or
financial record of Provider related to covered services provided by Provider to
any Member upon request. This clause shall survive any termination of this
Agreement.
14. Use of Provider's Name
Humana shall have the right to include the following information in any and
all marketing and administrative materials it distributes: Provider name,
telephone number, address, hours of operation, type of practice or specialty,
and the names of all physicians providing care at Provider's facility.
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15. Duration of Agreement
This Agreement shall be effective only if and when Humana has separately
notified Provider of its acceptance of Provider's application. Duration of
Agreement shall be defined as outlined in Attachment D.
16. Grievance Procedure
Provider agrees to cooperate and participate with Humana in its grievance
procedure, and Provider will comply with all final determinations made through
the grievance procedure.
17. Assignment and Delegation
This Agreement is entered into to secure the personal services of Provider.
Accordingly Provider may not assign or delegate all or any part of this
Agreement without the prior written consent of Humana. Humana may assign this
Agreement to any purchaser of all or a substantial portion of the book of
business in respect of which this Agreement is executed or to any affiliate of
Humana provided that the assignee agrees to assume Humana's obligations under
this Agreement.
18. Entire Agreement
This Agreement, including the Application, Cover Sheet, Manual, the
Attachments hereto and the documents incorporated herein, constitutes the entire
Agreement between Humana and Provider with respect to the subject matter hereof,
and it supersedes any other medical services Agreement oral or written, between
Humana and Provider.
19. Relationship
Nothing contained in this Agreement shall be deemed to create any
relationship between Provider and Humana other than that of independent
contractors. This Agreement is not intended for the benefit of any third
parties. Notice to, or consent from, any third party, including a Member or
other provider, shall not be required in order to make any termination or
modification of this Agreement effective.
20. Waiver
Waiver, whether expressed or implied, of any breach of any provision of
this Agreement shall not be deemed to be a waiver of any other provision or a
waiver of any subsequent breach of the same provision.
21. Litigation
In the event of any litigation arising out of or related to this Agreement,
the prevailing party shall be entitled to recover from the other party its
reasonable attorney fees and costs of litigation including, without limitation,
any expert witness fees.
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22. Severability
If any part of this Agreement should be determined to be invalid,
unenforceable, or contrary to law or professional ethics, that part shall be
reformed, if possible, to conform to law and ethics, and if reformation is not
possible, that part shall be deleted, and the other parts of this Agreement
shall remain fully effective.
23. Right to Injunction
In the event of an actual or threatened breach of this Agreement, Humana
shall be entitled to an injunction enforcing this Agreement in addition to all
other remedies available at law.
24. Liquidated Damages
Provider acknowledges that Humana has invested and will invest substantial
resources including funds, time, effort and goodwill in building a roll of
Members to be treated by Provider. Therefore, Provider or any of Provider's
employees, principals or financially related entities, shall not solicit,
persuade, induce, coerce or otherwise cause the disenrollment of any Member at
any time. If any Member disenrolls from Plan to be treated by Provider or any of
Provider's employees, principals, or a financially related entity under some
other prepaid financial arrangement other than Plan within six (6) months of
disenrollment, the Provider shall pay to Humana the amount of $1,200.00 (ONE
THOUSAND TWO HUNDRED DOLLARS) for each such Member who is treated by Provider or
any of Provider's employees, principals, or any financially related entity.
Provider hereby agrees that this amount constitutes liquidated damages and is
not a penalty, inasmuch as the actual damages are not ascertainable at the time
of the execution of this Agreement. Provider understands that the liquidated
damages clause does not apply to or require payment from the Members in any
circumstance. Humana agrees with Provider that this provision shall not apply to
any Member who disenrolls and is treated by Provider or anyone else on a
non-prepaid and non-capacitated fee-for-service basis as a private patient. In
addition, Members who were patients prior to Provider's participation as a
Humana affiliated Provider, will be excluded from this provision, if Provider
can furnish documentation thereof acceptable to Humana. Provider has the
obligation to immediately notify Humana of the name of any Member or former
Member treated by Provider or any other person covered by this provision within
ten (10) days of the first (1st) day of treatment. This clause shall survive
termination or expiration of this Agreement for a period of six (6) months
regardless of cause giving rise to termination.
25. Off-Set
Provider authorizes Humana to deduct monies that may otherwise be due and
payable to Provider from any outstanding monies that Member may, for any reason,
owe to Humana.
26. No Third Party Beneficiaries Rights
The parties have not created and do not intend to create by this Agreement
any rights and any third parties under this Agreement, including, but not
limited to, Members. The parties acknowledge and agree that there are no third
party beneficiaries to this Agreement.
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27. Notices
Any notice, except notices of changes in policies and procedures pursuant
to Article 7, required or desired to be given under this Agreement shall be in
writing and shall be delivered in person or mailed by Certified or Registered
Mail, postage pre-paid return receipt requested, to the other party at the
address set forth below their respective signatures to this Agreement. Except as
provided in Article 7, any such notice shall be effective upon receipt. Unless a
notice specifically limits its scope, notice to any one party included in the
term "Provider" or "Humana" shall constitute notice to all parties included in
the respective term.
28. Incorporation of Attachments
Attachments A, B, C, D, E, F, G and H are made a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of this
____ day of _______, 199_. It is provided, however, that Humana's execution of
this Agreement shall not constitute the acceptance required to make this
Agreement effective pursuant to Article 9.
HUMANA
Humana Medical Plan, Inc.
By: /s/ illegible
--------------------------------
Title: V.P. & Gen. Mgr.
Humana Health Plan of Florida, Inc.
By: /s/ illegible
------------------------------
Title: _____________________________
Humana Health Insurance Company of Florida, Inc.
By: /s/ illegible
--------------------------------
Title: _____________________________
Humana Insurance Company
By: ____________________________
Title: ____________________________
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Address for Notice:
Humana Health Care Plan
5401 W. Kennedy Blvd., Suite 800
Tampa, FL 33609
PROVIDER
By: _________________________________
Title: _________________________________
PRINCIPALS OF PROVIDER
______________________
______________________
______________________
______________________
______________________
______________________
______________________
Address for Notice:
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ATTACHMENT B
SERVICES TO BE PROVIDED TO MEMBERS
ASSIGNED TO PRIMARY CARE PROVIDERS
Provider agrees to provide or arrange for Covered Services to Members who
have been assigned to Provider by Humana. Provider further agrees not to close
their practice to new Members without prior written approval of Humana and will
accept Members who are assigned to the Provider without discrimination or
screening of such Members based upon their health status.
Covered Services are those services provided under health benefit plans or
health care contracts offered, underwritten, or administered by Humana, as
specified in the Manual. Covered Services include the services of Primary Care
physician(s) who will provide physician services in the medical office(s) listed
in Attachment F ("Center").
Physician services shall include but not necessarily be limited to: medical
and surgical services, including anesthesia; diagnostic tests and procedures
that are a part of treatment; other services ordinarily furnished in the
physician office, such as x-ray ordered as part of treatment; services of the
physician's office nurse; drugs and biologicals that cannot be
self-administered; transfusions of blood and blood components; and medical
supplies.
Provider is responsible twenty-four (24) hours a day, seven (7) days a week
for providing or arranging all Covered Services including prescribing, directing
and authorizing all other care to Members who have been assigned to Provider.
Provider shall provide to Humana upon request a written description of
Provider's coverage arrangements for emergency and urgent care and service
coverage in the event of Provider unavailability due to vacation, illness, or
after hours. Provider will ensure that all physicians providing coverage are
contracted and credentialed physicians with Humana. Provider will also ensure
that the physician providing coverage renders services under the same terms and
conditions and in compliance with all provisions of this Agreement.
In the event that emergency and urgent care services are needed by a Member
outside the service are, the Provider shall monitor and authorize the
out-of-area care and shall provide direct care as soon as the Member is able to
return to the service area for treatment without medically harmful or injurious
consequences.
C. Provider shall be capitated for the provision of these services as
specified in Attachment
In the even that Provider terminates from participation in the Plan,
Provider shall continue Members medication therapy until the Member has been
evaluated by the new Primary Care physician, and physician has had reasonable
opportunity to review or modify Member's medication therapy.
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SERVICES TO BE PROVIDED TO MEMBERS NOT
ASSIGNED TO A PRIMARY CARE PROVIDER
For Members under health benefit or health care contracts offered,
underwritten, or administered by Humana where Members are not assigned to a
primary care provider, Provider agrees to provide all physician services offered
by Provider to such Members. Provider shall be compensated for the provisions of
these services as specified in Attachment C.
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ATTACHMENT C
PAYMENT ARRANGEMENTS FOR MEMBERS
ASSIGNED TO PROVIDER'S CENTER
COMMERCIAL MEMBERS
Humana agrees to pay Provider for Covered Services provided to Commercial
Members who have been assigned to Provider's Center, according to the payment
arrangement set forth below.
1. Part A Fund
A Part A Fund shall be established which will consist of the "Part A
Revenue," "Part A Expenses," and "Claims Reserve Fund." The fund shall be
calculated as follows:
Part A Revenue
An amount equal to the product of the capitation for each age/sex category
listed on Exhibit C-1, Commercial Capitations (column titled "HOSP"), multiplied
by the number of Members in each category, will be credited to the Part A Fund
as "Part A Revenue."
Part A Expenses
An amount equal to the claim paid by Humana, plus a calculated amount for
claims incurred but not reported or paid (IBNR) for Part A Expenses, will be
charged to the Part A Fund as "Part A Expenses."
Part A Expenses include, but are not limited to, costs identified for
inpatient hospital medial and surgical services, inpatient hospital psychiatric
services, selected outpatient surgery procedures at Humana contracted
facilities, skilled nursing home services, and home health care services. Part A
Expenses also include the Supplemental Benefits capitation, the cost of the Stop
Loss Pool (as specified in Section 5 below) and other Covered Services or costs
which may be determined to be Part A Expenses by Humana in the normal course of
business.
Claims Reserve Fund
The balance of the Claims Reserve Fund is determined by multiplying the Per
Capita Reserve Amount by the number of Commercial and individual Members
currently assigned to the Provider, and is adjusted on a monthly basis. The Per
Capita Reserve Amount is calculated by dividing the total claims paid, pending,
or incurred during the prior three months of operation, by the Provider's total
Commercial and individual enrollment for the same period.
Surpluses from the Provider's Part A Fund are paid into the Claims Reserve
Fund each month until the Claims Reserve Fund balance is reached. The Claims
Reserve Fund shall be used to pay for any Part A Expenses which are not covered
by the Part A Fund. Any funds remaining upon termination of this Agreement shall
be shared equally between Provider and Humana.
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Part A Revenue, less Part A Expenses shall be calculated on a monthly
basis, beginning with the fourth month of this Agreement. If the calculation
reflects a positive balance, then the balance is a surplus. The surplus shall be
credited towards the Claims Reserve Fund balance, and any net surplus exceeding
the Claims Reserve Fund balance shall be shared equally between Provider and
Humana. The Provider's share of the net surplus shall be paid to the Provider on
or about the last day of the month following the calculation above.
If the calculation reflects a negative balance, then the balance is a
deficit. Fifty-percent of the deficit shall be absorbed by Humana and
fifty-percent of the deficit shall be payable by Provider to Humana.
2. Part B Fund
A Part B Fund shall be established to pay for Part B Expenses. The fund
shall be calculated as follows:
Part B Revenue
An amount equal to the product of the capitation for each age/sex category
listed on Exhibit C-1, Commercial Capitation (column titled "REF"), multiplied
by the number of Members in each category; plus,
An amount for Supplemental Benefits as listed on Exhibit C-1 (column titled
"Drug" and "Vision"), multiplied by the number of Members who have selected such
supplemental benefits, will be allocated to the Part B Fund as "Part B Revenue."
Part B Expenses
An amount equal to the claims paid by Humana, plus a calculated amount for
claims incurred but not reported or paid (IBNR) for Part B costs which Humana is
expected to pay; plus
An amount allocated to the Stop Loss Pool, plus
An amount allocated to the Maternity Pool, will be charged to the Part B
Fund as "Part B Expenses."
Part B Expenses are all costs for Covered Services not defined as Part A
Expenses. Part B Expenses include, but may not be limited to, hospital based
physician fees, specialists fees, hospital outpatient services and supplemental
benefits costs.
Part B Revenue, less Part B Expenses, shall be calculated on a monthly
basis, beginning with the fourth month of this Agreement. If the calculation
reflects a positive balance then the balance is a surplus. One Hundred Percent
(100%) of the surplus shall be credited to the Provider on a monthly basis. If
the monthly calculation reflects a negative balance, then the balance is a
deficit. One Hundred Percent (100%) of the deficit amount will be owed by
Provider to Humana.
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3. Payment of Surpluses or Deficits
At the close of each month, any Part A and/or Part B surpluses shall be
offset by any Part A and/or Part B deficits. Any resulting net surplus shall be
paid to the Provider on or about the end of the following month. Any resulting
net deficit shall be paid to Humana upon notification by Humana of such
deficits.
4. Primary Care Capitation
The Primary Care Capitation paid to Provider for Physician Services, will
be mailed on or about the 15th day of each month, and will consist of the
following:
An amount equal to the product of the capitation for each age/sex category
on Exhibit C-1, Commercial Capitation (column titled "PCP"), multiplied by the
number of Members in each category.
5. Stop Loss Pool
A Stop Loss Pool shall be maintained to pay for Part A and Part B Expenses
incurred by a Member after having reached the threshold amount in any one
calendar year. Threshold amounts are defined in the Manual.
Claims paid from the Maternity Pool shall not be considered expenses for
purposes of the Stop Loss Pool, and shall not be included in the calculation.
The per member per month costs of the Stop Loss Pool shall be charged to
the Part A Fund and Part B Fund on a pro-rata basis. The initial per member per
month rate for a new Provider will be the rate in effect on the effective date
of this Agreement. The rate will adjust for all Providers at the same time.
Humana retains the right to purchase Reinsurance coverage with the funds
from the Stop Loss Pool for the purposes described above.
6. Maternity Pool
A Maternity Pool shall be maintained to cover the cost of all Part A Fund
and Part B Fund maternity expenses (as defined in the Manual). The per member
per month cost of the Maternity Pool shall be charged to the Provider's Part A
Fund and Part B Fund on a pro-rata basis. The initial per member per month rate
for a new Provider will be the rate in effect on the effective date of this
Agreement. The rate will adjust for all Providers at the same time.
Humana retains the right to purchase Reinsurance coverage with the funds
from the Maternity Fund Pool for the purposes described above.
7. Other Pools
Provider agrees to participate in any other Stop Loss or Risk Sharing-type
Pool that Humana may create from time to time that, in Humana's sole judgment,
helps ensure the financial
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viability of the Health Care Network. Provider will be notified at least 20 days
in advance of any changes in the Stop Loss Pool or other Risk Sharing-type Pool.
8. Capitation Adjustments
The per member per month rates used to calculate Part A Revenue, Part B
Revenue, Supplemental Benefits Capitation or Primary Care Capitation, may be
adjusted from time to time to reflect the changes made in the rates paid to
Humana for Commercial and individual Members, changes in benefits offered to
Members by Humana or any other business reasons.
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MEDICARE MEMBERS
Humana agrees to pay Provider for Covered Services provided to Members who
have been assigned to Provider, according to the payment arrangement set forth
below:
1. Part A Fund
A Part A Fund shall be established which will consist of the "Part A
Revenue," "Part A Expenses," and "Claims Reserve Fund." The fund shall be
calculated as follows:
Part A Revenue
An amount equal to the product of the capitation for each age/sex category
listed on Exhibit C-2, Medicare Capitation (section A titled "Medicare Part A
Capitation"), multiplied by the number of Members in each category, will be
credited to the Part A Fund as "Part A Revenue."
Part A Expenses
An amount equal to the claim paid by Humana, plus a calculated amount for
claims incurred but not reported or paid (IBNR) for Part A Expenses, will be
charged to the Part A Fund as "Part A Expenses."
Part A Expenses include, but are not limited to, costs identified for
inpatient hospital medical and surgical services, inpatient hospital psychiatric
services, selected outpatient surgery procedures at Humana contracted
facilities, skilled nursing home services, and home health care services. Part A
Expenses also include the Supplemental Benefits capitation, the cost of the Stop
Loss Pool (as specified in Section 5 below), and other Covered Services or costs
which may be determined to be Part A Expenses by Humana in the normal course of
business.
Claims Reserve Fund
The balance of the Claims Reserve Fund is determined by multiplying the Per
Capita Reserve Amount by the number of Medicare Members currently assigned to
the Provider, and is adjusted on a monthly basis. The Per Capita Reserve Amount
is calculated by dividing the total claims paid, pending, or incurred during the
prior three months of operation, by the Provider's total Medicare enrollment for
the same period.
Surpluses from the Provider's Part A Fund are paid into the Claims Reserve
Fund each month until the Claims Reserve Fund balance is reached. The Claims
Reserve Fund shall be used to pay for any Part A Expenses which are not covered
by the Part A Fund. Any funds remaining upon termination of this Agreement shall
be shared equally between Provider and Humana.
Part A Revenue, less Part A Expenses shall be calculated on a monthly
basis, beginning with the fourth month of this Agreement. If the calculation
reflects a positive balance, then the balance is a surplus. The surplus shall be
credited towards the Claims Reserve Fund balance, and any net surplus exceeding
the Claims Reserve Fund balance shall be shared equally between Provider and
Humana. The Provider's share of the net surplus shall be paid to the Provider on
or about the last day of the month following the calculation above.
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If the calculation reflects a negative balance, then the balance is a
deficit. Fifty-percent of the deficit shall be absorbed by Humana and
fifty-percent of the deficit shall be payable by Provider to Humana.
2. Part B Fund
A Part B Fund shall be established to pay for Part B Expenses. The fund
shall be calculated as follows:
Part B Revenue
An amount equal to the product of the capitation for each age/sex category
listed on Exhibit C-2, Medicare Capitation (section B titled "Medicare Part B
Referral Capitation"), multiplied by the number of Members in each category;
plus,
An amount for Supplemental Benefits as listed on Exhibit C-2 (section D
titled "Medicare Supplemental Benefits Capitation"), multiplied by the number of
Members who are eligible for Medicare, Part A.
Part B Expenses
An amount equal to the claims paid by Humana, plus a calculated amount for
claims incurred but not reported or paid (IBNR) for Part B costs which Humana is
expected to pay; plus
An amount allocated to the Stop Loss Pool.
Part B Expenses are all costs for Covered Services not defined as Part A
Expenses. Part B Expenses include, but may not be limited to, hospital based
physician fees, specialists fees, hospital outpatient services and supplemental
benefits costs.
Part B Revenue, less Part B Expenses, shall be calculated on a monthly
basis, beginning with the fourth month of the Agreement. If the calculation
reflects a positive balance then the balance is a surplus. One Hundred Percent
(100%) of the surplus shall be credited to the Provider on a monthly basis. If
the monthly calculation reflects a negative balance, then the balance is a
deficit. One Hundred Percent (100%) of the deficit amount will be owed by
Provider to Humana.
3. Payment of Surpluses or Deficits
At the close of each month, any Part A and/or Part B surpluses shall be
offset by any Part A and/or Part B deficits. Any resulting net surplus shall be
paid to the Provider on or about the end of the following month. Any resulting
net deficit shall be paid to Humana upon notification by Humana of such
deficits.
4. Primary Care Capitation
The Primary Care Capitation paid to Provider for Physician Services, will
be mailed on or about the 15th day of each month, and will consist of the
following:
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An amount equal to the product of the capitation for each age/sex category
on Exhibit C-2, Medicare Capitation (section C titled "Medicare Primary Care
Provider Capitation"), multiplied by the number of Members in each category.
5. Stop Loss Pool
A Stop Loss Pool shall be maintained to pay for expenses incurred by a
Member after having reached the threshold amount. The threshold amount is
defined in the Manual. The per Member per month rate for a new Provider will be
the rate in effect on the effective date of the contract and will be revised for
all Providers at the same time. Humana retains the right to purchase reinsurance
coverage for these purposes.
6. Other Pools
Provider agrees to participate in any other Stop Loss or Risk Sharing-type
Pool that Humana may create from time to time that, in Humana's sole judgment,
helps ensure the financial viability of the Health Care Network. Provider will
be notified at least 30 days in advance of any changes in the Stop Loss Pool or
other Risk Sharing-type Pool.
8. Capitation Adjustments
The per member per month rates used to calculate Part A Revenue, Part B
Revenue, Supplemental Benefits Capitation or Primary Care Capitation, may be
adjusted from time to time to reflect the changes made in the rates paid to
Humana for Commercial and individual Members, changes in benefits offered to
Members by Humana or any other business reasons.
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PAYMENT ARRANGEMENT FOR MEMBERS NOT ASSIGNED TO PROVIDER
1. Humana P.P.O. and other non-assigned Members (except Medicare Supplement
Members)
As of the Effective Date, for those Members who are under health benefit or
health care contracts offered, underwritten, or administered by Humana where
Members are not assigned to Provider, Provider agrees to provide all physician
services offered by Provider. Provider agrees to accept as payment in full from
Humana seventy percent (70%) of the Medicare Allowable or Provider's Fee
Profile, whichever is less, less any co-payments and deductibles due from such
Members for physician services provided to such Members (the "Fee for Service
Payment Method").
2. Humana Medicare Supplement Members
As of Effective Date, Provider also agrees to bill the Medicare
intermediary, for Humana supplemental benefit plans where Humana's coverage
supplements the basic coverage of another carrier or third party payor. Provider
agrees to accept the basic coverage as payment in full.
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ATTACHMENT D
DURATION OF AGREEMENT
This Agreement shall continue for a term of five (5) years from the
effective date, unless terminated as provided in this Agreement.
Provider may terminate this Agreement for cause if Humana fails to make
payments required under this Agreement, but only after written notice and
providing at least sixty (60) days in which Humana may avoid termination by
curing the default in payment. Any dispute concerning the amount of payment owed
shall be resolved according to the procedures specified in the Manual.
Humana may terminate this Agreement for cause if Provider fails to carry
out any term or condition of this Agreement or has otherwise defaulted under
this Agreement, after thirty (30) days written notice, or Humana may elect to
impose optional procedures in lieu of termination of this Agreement, as
specified in this Attachment D.
Humana may terminate this Agreement immediately upon written notice,
stating the cause for such termination, in the event Humana reasonably
determines that (i) Provider's continued participation under this Agreement may
adversely affect the health, safety or welfare of any Member or bring Humana or
its health care networks into disrepute, (ii) or Provider engages in or
acquiesces to any act of bankruptcy, receivership or reorganization, (iii) or
Humana loses its authority to do business. Humana may also terminate this
Agreement immediately if it loses authority to conduct any limited segment of
its business, but only as to that segment.
Humana may elect to terminate this Agreement upon sixty (60) day written
notice, if Provider's cumulative Part A/Part B deficits, for three consecutive
months, exceeds those months' cumulative Primary Care Capitation by 100%.
"Cumulative" Deficit is defined as the amount of the deficit after offset
payments (offset provisions are defined in Clause 25). "Cumulative" Primary Care
Capitation is defined as the Provider's capitation amount for Primary Care
Services net any offset payments or withholds. Termination may be delayed or
waived. Waiver for termination for any given period would not waiver termination
rights for succeeding periods.
Provider agrees that he will not alter his referral patterns for
non-Members as a result of entering into this contract or as a result of Humana
entering into any contract with any other practitioner (herein the "Referee").
If the percentage of Provider's non-Members referred to a Referee declines by
greater than 10% during any six (6) month period compared with the percentage
referred prior to the Referee's Effective Date, and if the Referee also
contracts to furnish services to Members, then Humana may, at its option,
terminate this Agreement upon sixty (60) days notice unless Provider shall
submit evidence satisfactory to Humana that the change in referrals to the
Referee was for a cause other than Referee's entering into a contract with
Humana.
Either party may elect to terminate this Agreement without cause after the
first two (2) years upon giving six (6) months written notice. In addition, this
Agreement may be terminated by mutual written consent of both parties at any
time.
Any termination of this Agreement (except immediate terminations) by either
party, shall become effective at the end of a month. Upon termination, Provider
agrees to provide medical services
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to any Member hospitalized on the date of termination until the date of
discharge, or until Humana has made arrangements for substitute care. Humana
agrees to pay for such covered services in accordance with Attachment C.
Provider understands that termination of this Agreement shall not relieve
Provider from Provider's obligation to provide, or arrange and pay for Covered
Services to Members through the last day of this Agreement. Humana retains the
right to recover from Provider any costs paid on Provider's behalf which are
obligations of Provider and become necessary to be paid by Humana to maintain
the health care delivery network.
Compliance with Florida Statutes - As required under Florida Statute
Section 641.234, as amended, effective October 1, 1988, if the Department of
Insurance has information and belief that this Agreement requires Humana Medical
Plan, Inc. and/or Humana Health Plan of Florida, Inc. ("Humana") to pay a fee
which is unreasonably high in relation to the services provided, after review of
this Agreement, the department may order Humana to cancel this Agreement if it
determines that the fees to be paid by Humana or as compared with similar
contracts entered into by other health maintenance organizations in similar
circumstances, such that this Agreement is detrimental to the subscribers,
stockholders, investors, or creditors of Humana. The issuance of such an order
by the Florida Department of Insurance will not affect the termination of the
entire Agreement which shall remain in full force and effect with respect to
Humana Health Insurance Company of Florida, Inc. and Humana Insurance Company
and product lines contemplated in the Agreement to which this Amendment is made
a part.
As required under Florida Statute Section 641.315, Provider shall provide
sixty (60) days advance written notice to Humana at the address listed in the
"Notices" section of this Agreement, and to the Department of Insurance, Bureau
of Specialty Insurers, 200 East Gaines Street, Tallahassee, Florida 32399-0300,
before canceling this Agreement with Humana for any reason. Nonpayment for goods
or services rendered by Provider to Humana or any of its Members shall not be a
valid reason for avoiding such 60-day advance notice of cancellation. Upon
receipt by Humana of a 60-day cancellation notice, Humana may, if requested by
the Provider terminate the contract in less than sixty (60) days if Humana is
not financially impaired or insolvent.
Humana and Provider hereby acknowledge and agree that the provisions stated
in the previous paragraph do not relieve the Provider of any of its other
obligations under this Agreement that are not inconsistent with the foregoing,
including without limitation any obligation Provider has to provide more than
sixty (60) days notice of cancellation of this Agreement, to Humana.
Any change (including any addition and/or deletion) to any provision or
provisions of this Agreement that is required by duly enacted federal or Florida
legislation, or by a regulation or rule finally issued by a regulatory agency
pursuant to such legislation, rule or regulation, will be deemed to be part of
this Agreement without further action required to be taken by either party to
amend this Agreement to effect such change or changes, for as long as such
legislation, regulation or rule is in effect.
Optional Procedures in Lieu of Termination
If, upon Humana's determination that Provider has breached this Agreement
or is not abiding by any policy or procedure specified in this Agreement, the
Manual, or other publication by which Provider has been notified of such policy
or procedure, Humana may elect to implement a remedial
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plan under which the Provider will have a reasonable period of time to comply
with the provisions of this Agreement. This "Corrective Action Plan" is
specified in the Manual.
Humana may also immediately implement a procedure to restrict new Members
at Provider's Medical Center. This procedure will continue until such time as
Humana determines that Provider has corrected the default and may then take
additional Members.
If, as a result of Provider's untimely payment to any Participating
Provider which Provider is obligated to pay directly, the services of Members
are disrupted, Humana may, at its sole discretion, immediately implement a
procedure in lieu of termination whereby Humana will pay such providers and
deduct the payment from any monies due and owing by Humana to Providers. This
procedure will continue until such time as Humana determines that the Provider
is able to resume payment to these providers without disruption of services.
This shall not relieve the Provider's obligation to pay Participating Providers.
Provider understands that Humana has no obligation to implement the
Optional Procedures specified above in lieu of termination, and that such option
does not waive any rights under this Agreement.
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<PAGE>
ATTACHMENT E
Section 1 - Health Care Delivery Network/Participating Providers
Section 2 - Provider's Facility
Section 3 - Advertising and Marketing
Section 4 - Conflicts of Interest
Section 5 - Medical Records
Section 6 - Access to Information
SECTION 1
HEALTH CARE DELIVERY NETWORK - PARTICIPATING PROVIDERS
Except as otherwise provided in this Agreement, Provider shall admit or
refer Members to those hospitals, specialists and other health care
professionals, hereinafter "Humana Participating Providers," with whom Humana
has contracted as part of its Health Care Delivery Network. These Humana
Participating Providers are listed in the Manual and may change from time to
time. Humana shall pay the Humana Participating Providers directly at a
pre-negotiated capitation payment or fee-for-service payment on behalf of the
Provider for appropriately referred services, and these payments shall be
charged to the appropriate account of the Provider, as described in Attachment
C.
Provider may substitute their own Participating Provider with another of
their own choosing after having first obtained written approval of Humana, such
approval shall not be unreasonably withheld. Provider shall obtain written
agreement from these Participating Providers after Humana has approved such
agreements and Participating Providers have been credentialed by Humana. Humana
will pay these participating providers directly as described above.
Provider understands and agrees that no physician or other health
professional or facility shall be permitted to provide services to Humana
Members which have not been credentialed by Humana. Provider agrees to replace
any physician or other health professional who has been decredentialed by Humana
within a reasonable period of time after Provider has been notified in writing
of such decredentialing, with a provider who has been credentialed by Humana.
Provider understands that, from time to time, other providers' agreement
will expire or be terminated, and that Members will be transferred to Provider's
Center. Provider agrees to honor existing Health Care Delivery Network contracts
covering Members which have been transferred into Provider's Center, until such
time as those contracts can be terminated.
SECTION 2
PROVIDER'S FACILITY
Provider is, or will be providing health care services at the facility
location listed on the attached Attachment F. This facility is known as the
Provider's "Center." Provider agrees not to change
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<PAGE>
the location where services are provided to Members, or to add any new
locations, without the prior written approval of Humana. Similarly, Provider
must obtain Humana's prior written approval before closing any location.
Provider will establish regular business hours for the provision of services to
Humana Members. In establishing business hours, Provider should take into
consideration the number and type of Members assigned to the facility. The
proposed business hours listed on Attachment F are subject to approval by
Humana. This does not relieve Provider of its obligation to provide 24-hour per
day medical coverage for Members.
SECTION 3
ADVERTISING AND MARKETING
Provider may participate in the generation of Membership through marketing
and advertising only after obtaining prior written approval of Humana. Provider
will not advertise or utilize any marketing materials, logos, tradenames,
servicemarks, or other materials created or owned by Humana, or make reference
to Humana without Humana's written consent. Provider shall not acquire any right
or title in or to the marketing materials, logos, tradenames, service marks, or
other materials of Humana, the same shall remain at all times the exclusive
property of Humana.
Provider agrees to install appropriate signage promoting Humana both
outside and inside its facility, subject to limitations in Provider's lease or
local ordinance. Such signage must be approved by Humana and will be installed
at Provider's expense. Provider further agrees to display marketing materials
provided by Humana inside the facility. Upon request by Humana and within ten
(10) working days, Provider agrees to remove any such signage and materials from
exterior or interior of its facility, as the case may be, and either deliver or
destroy same in accordance with the instructions of Humana.
Provider agrees not to send written communication to Provider's Members,
other than that provided for in the manual, without the prior review and
approval by Humana.
SECTION 4
CONFLICT OF INTEREST
Provider hereby represents and warrants that, except as disclosed on
Attachment G, Provider, including all Principals of Provider, shall not be
interested, directly or indirectly, in any manner, as a contractor, partner,
officer, director, shareholder, advisor, employee, or in any other capacity, in
any other health maintenance organization, prepaid health plan, or similar
entity providing prepaid health services, hereafter referred to as a
"Competitive Plan."
Provider agrees that Provider has a continuing obligation to notify Humana
of any changes in Attachment G.
Provider is not permitted to contract or affiliate with any Competitive
Plan which offers a Medicare HMO product which will be provided to members of
the Competitive Plan at the same facility where services are provided to Members
of Humana. Provider may contract or affiliate with a Competitive Plan which
offers a Medicare HMO product which will be provided to members of the
Competitive Plan at a facility which is not affiliated with Humana and which is
a reasonable distance from the Provider's facility under this Agreement.
Provider may contract or affiliate with a Competitive Plan which does not offer
a Medicare HMO product at any facility.
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<PAGE>
Humana reserves the right to determine which Competitive Plans offer
Medicare HMO products and to prohibit Provider from contracting or affiliating
with such plans at the facility under this Agreement, or at facilities within a
reasonable distance from this facility.
Provider represents and warrants that neither Provider, nor any employee or
agent of Provider, shall solicit or otherwise attempt to induce, directly or
indirectly, any Members to disenroll from Humana or to enroll in any Competitive
Plan. It shall be deemed conclusively that Provider has breached this
representation and warranty if a Member disenrolls from Humana, and within six
(6) months thereafter, or six (6) months following any termination of this
Agreement, whichever shall occur first, said Member enrolls in a Competitive
Plan in which Provider is interested, directed or indirectly.
Provider agrees to identify any and all facilities and agencies (e.g. Lab,
X-ray, Nursing Home or Home Services agency, etc.) where Provider refers
patients and where Provider has an ownership or financial interest. Provider
will make such disclosure at time of contract execution and thereafter whenever
ownership or financial interest in a facility or agency is obtained.
Except in the case of death or legal incompetence, Provider represents and
warrants that there shall be no change in ownership without Humana's approval,
and such approval shall not be unreasonably withheld. Any such change in
ownership is subject to the limitations of Assignment and Delegation specified
in Article 17 of this Agreement. In the event a change of ownership occurs as a
result of the death or legal incompetence of one of the Principals, Provider (or
its personal representative) shall notify Humana of any such change or impending
change within fifteen (15) days of the date of death or petition for a judgment
of incompetence.
SECTION 5
MEDICAL RECORDS
Provider shall maintain and retain records on behalf of Humana relating to
Members in such form as required by law and accepted medical practice. Humana
shall be the owner of such records and may obtain, copy, have access to, or
cause to be transferred any and all medical, administrative or financial records
related to the covered services provided by Provider to any Member upon request.
Provider agrees to transfer the original medical record of any Member who has
transferred to another Provider for any reason, including termination of this
Agreement, upon request by Humana or the Member. The transfer of medical records
shall be at no cost to either Humana or the Member. Provider agrees to pay court
costs or legal fees necessary for Humana to enforce the terms of this Section 5.
This Section 5 shall survive the termination of this Agreement for any reason.
SECTION 6
ACCESS TO INFORMATION
Provider agrees Humana or its designee shall have access and an opportunity
to thoroughly examine Provider's facilities, books, records and operations at
any time. Further, Humana or its designee shall have access and an opportunity
to thoroughly examine at any time facilities, books, records and operations of
any related organization or entity. Related organization or entity shall be
defined as (1) having influence or ownership or control and (2) either a
financial relationship or a relationship for rendering of services. Purpose of
such requirement is to permit Humana the right to assure compliance with all
financial, operational, quality assurance, as well as, any and all other
obligations required of Provider under this Agreement or the Manual.
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<PAGE>
Failure by any person or entity involved, including Provider, to comply
with any requests for access, above mentioned, within ten (10) business days of
receipt of notification will be considered a breach of contract.
E-24
Exhibit 11
THE LEHIGH GROUP INC.
Computation of Primary and Fully Diluted Earning Per Share
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loss from continuing operations
before extraordinary item (920)
Income (loss) before
extraordinary item (670) (308) 4,590
Net income (loss) (288) (308) 4,590
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 10,339,925
shares outstanding 10,339,250 0 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.
Exhibit 23.1
To the Board of Directors of The Lehigh Group Inc.
We hereby consent to the inclusion of our report dated March 4, 1996, except as
to Note 3, which is as of March 28, 1996 with respect to the consolidated
balance sheets of The Lehigh Group Inc. and subsidiaries as of December 31, 1995
and 1994 and the related consolidated statements of operations, shareholders
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1995.
BDO SEIDMAN LLP
New York, New York
May 14, 1997
E-2
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of:
Broward Managed Care, Inc.
We consent to the inclusion of our report dated May 17, 1996, with respect to
the financial statements 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, which report appears in the Form S-4 (No. 333-11955)
of The Lehigh Group, Inc. dated May 14, 1997 and reference to our firm under the
heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
May 14, 1997
E-3
<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 the Form S-4 (No. 333- 11955) of The
Lehigh Group, Inc. dated May 14, 1997 and reference to our firm under the
heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
May 14, 1997
E-4
<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 the Form S-4 (No. 333-11955) of The Lehigh Group, Inc.
dated May 14, 1997 and reference to our firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
May 14, 1997
E-5
<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 the Form S-4 (No.
333-11955) of The Lehigh Group, Inc. dated May 14, 1997 and reference to our
firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
May 14, 1997
E-6
