SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996...Commission File Number 1-155
THE LEHIGH GROUP INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-1920670
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
810 Seventh Avenue, New York, NY 10019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 333-2620
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1996
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Common Stock, par value 10,339,250 shares
$.001 per share
THE LEHIGH GROUP INC. AND SUBSIDIARIES
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995
and Nine Months Ended September 30, 1996 and 1995 1
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 2-3
Consolidated Statements of Changes in
Shareholders' Deficit - Nine Months
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 9
Item 3. Defaults upon Senior Securities 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
PART I - FINANCIAL INFORMATION
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $ 2,411 $ 3,192 $ 8,398 $ 8,784
Cost of Sales 1,615 2,307 5,816 6,157
-------- -------- -------- --------
Gross Profit 796 885 2,582 2,627
Selling, general and administrative expenses 929 977 2,898 3,130
-------- -------- -------- --------
Operating loss (133) (92) (316) (503)
Other income (expense):
Interest Expense (110) (108) (329) (324)
Interest and other income 109 264 116 288
Deffered finance charges (2) -- (2) --
-------- -------- -------- --------
(3) 156 (215) (36)
Income (Loss) from continuing operations
before income taxes and extraordinary item (136) 64 (531) (539)
Income taxes 0 1 1 3
-------- -------- -------- --------
Income (Loss) from continuing operations
before extraordinary item (136) 63 (532) (542)
Extraordinary item:
Gain from discontinued operations 250 -- 250 --
Net Income (Loss) $ 114 $ 63 $ (282) $ (542)
======== ======== ======== ========
Net Income (loss) per common share (Note 1):
From continuing operations before extraordinary item $ (.01) $ .01 $ (.05) $ (.05)
From extraordinary item $ .02 -- $ .02 --
-------- -------- -------- --------
Net Income (loss) per common share $ .01 $ .01 $ (.03) $ (.05)
======== ======== ======== ========
Weighted average number of common shares
and share equivalents outstanding
Primary and Fully diluted 10,339 10,339 10,339 10,339
======== ======== ======== ========
1
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1996 1995
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(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 193 $ 347
Accounts receivable, net of
allowance for doubtful account $144 & $174 4,186 4,335
Inventories, net 1,547 1,823
Prepaid expenses and other current assets 104 22
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Total current assets 6,030 6,527
Property, plant and equipment, net of
accumulated depreciation and
amortization 50 61
Other assets 35 34
Total assets $6,115 $6,622
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The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
2
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1995 1994
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(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 501 $ 510
Notes payable-bank 360 360
Accounts payable 1,489 1,839
Accrued expenses and other current liabilities 1,735 1,381
Total current liabilities 4,085 4,090
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Long-term debt, net of current maturities 2,110 2,080
Deferred credit applicable to sale of
discontinued operations - 0 - 250
Commitments and contingencies -- --
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Preferred stock, par value $.001; authorized
5,000,000 shares none Issued
Common stock, par value $.001 authorized
shares 100,000,000 in 1995 and in 1994;
shares issued 10,339,000 in 1995 and in
1994 which excludes 3,016,000 shares
held as treasury stock in 1995 and 1994 11 11
Additional paid-in capital 106,594 106,594
Accumulated deficit from January 1, 1986 (105,031) (104,749)
Treasury stock - at cost (1,654) (1,654)
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Total shareholders' equity (deficit) (80) 202
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 6,115 $ 6,622
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
3
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(UNAUDITED)
(IN THOUSANDS)
Additional Accumulated Treasury
Common Paid in Deficit From Stock
Stock Capital Jan. 1, 1986 At Cost Total
-------- -------- ------------ ------- -------
Balance January 1, 1995 $ 11 $106,594 $(104,441) $ (1,654) $ 510
Net Loss (542) (542)
Balance September 30, 1995 $ 11 $106,594 $(104,983) $ (1,654) $ (32)
======== ======== ========== ========= =========
Additional Accumulated Treasury
Common Paid in Deficit From Stock
Stock Capital Jan. 1, 1986 At Cost Total
-------- -------- ------------ ------- -------
Balance January 1, 1996 $ 11 $106,594 $(104,749) $ (1,654) $ 202
Private Placement 0 0
Net Income (282) (282)
Balance September 30, 1996 $ 11 $106,594 $(105,031) $ (1,654) $ (80)
======== ======== ========== ========= ======
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
4
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Increase/(Decrease) in Cash and Cash Equivalents
Nine Months Ended September 30, 1996 1995
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(in thousands)
Cash flows from operating activities:
Net loss $(282) $(542)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 22 45
Changes in assets and liabilities:
Accounts Receivable, net 149 170
Deferred credit applicable to sales of discontinued operations (250) --
Inventories, net 276 (241)
Prepaid and other current assets (82) (4)
Accounts payable (350) 211
Accrued expenses and other current liabilities 353 107
Income taxes payable -- --
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Net cash provided by (used in) operating activities (164) (254)
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Cash flows from investing activities:
Capital expenditures (10) (18)
Other assets, net (1) (1)
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Net cash used in investing activities (11) (19)
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Cash flows from financing activities:
Net payments under bank debt (270) (180)
Repayments of Capital Leases (9) (11)
Debenture 300 --
----- -----
Net cash provided by (used in) financing activities 21 (191)
Net changes in cash and cash equivalents 154 (464)
Cash and cash equivalents at beginning of period 347 925
----- -----
Cash and cash equivalents at end of period $ 193 $ 461
===== =====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information for the three months and nine months ended
September 30, 1996 and 1995 is unaudited. However, the information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for the fair statement of results for the
interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes included in the Company's December 31, 1995 Report on Form 10-K.
The results of operations for the nine month period ended September 30,
1996 are not necessarily indicative of the results to be expected for the full
year.
EARNINGS PER SHARE - Earnings per common share is calculated by dividing
net income (loss) applicable to common shares by the weighted average number of
common shares and share equivalents outstanding during each period. Excluded
from fully diluted computations are stock options granted (12,000,000 options
which are contingently exercisable pending the occurrence of certain future
events).
2. SUPPLEMENTARY SCHEDULE
1996 1995
(in thousands)
Statement of cash flows
Nine months ended September 30,
Cash paid during the nine months for:
Interest $ 199 $ 210
Income taxes 1 6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER OF 1996 IN COMPARISON
WITH THIRD QUARTER OF 1995
Sales for the third quarter of 1996 were $2.4 million, a decrease of $0.6
million or 20% compared to the third quarter of 1995. Most of the decrease in
sales occurred in the HallMark export operation due in part to the departure of
certain clients of HallMark that left when there was a change in the sales force
and a change in market conditions that resulted when certain clients of HallMark
decided to purchase supplies directly from the manufacturers instead of through
HallMark. In June, 1996, the person in charge of HallMark's export operation in
Miami and another employee were terminated. HallMark is currently in
negotiations to sell its export operation in Miami. Management does not believe
the closure of the Miami export operation will have a material adverse effect on
the Company. HallMark may continue its export operation from its home office in
New York.
Gross profit as a percentage of sales increased from 27.7% in the third
quarter of 1995, to 33% in the third quarter of 1996. This increase is primarily
due to rebates obtained by HallMark.
Selling, general and administrative expenses decreased by approximately
$48,000 or 4.9% in the third quarter of 1996 as compared to the third quarter of
1995. This decrease was primarily the result of a reduction in legal fees and
over-head associated with the export operation.
The factors discussed above resulted in an operating loss in the third
quarter of 1996 of $133,000 as compared to an operating loss of $92,000 in the
third quarter of 1995.
Included in the results for the third quarter of 1995 and 1996 is other
income of approximately $260,000 and $359,000, respectively which represents a
net adjustment to the value of certain items which predominantly relate to the
Company's 1991 Restructuring.
7
RESULTS OF OPERATIONS NINE MONTHS OF 1996
IN COMPARISON WITH NINE MONTHS OF 1995
Sales for the first nine months of 1996 were $8.4 million, a decrease of
$0.4 million or (0.04%) compared with the first nine months of 1995. Most of the
decrease in sales occurred in the HallMark export operation due in part to the
departure of certain clients of HallMark that resulted when certain clients of
HallMark decided to purchase supplies directly from the manufacturers instead of
through HallMark and also the departure of a member of HallMark's sales force in
the export sector and the departure of certain clients that have been obtained
by such person. In June, 1996, the person in charge of HallMark's export
operation in Miami and another employee were terminated. HallMark is currently
in negotiations to sell its export operation in Miami. Management does not
believe the closure of the Miami export operation will have a material adverse
effect on the Company. HallMark may continue its export operation from its home
office in New York.
Gross profit as a percentage of sales increased from 29.9% in the nine
months ended September 30, 1995 to 30.75% in the nine months ended September 30,
1996.
Selling, general and administrative expenses decreased by approximately
$232,000 or 7.41% in the first nine months of 1996 as compared to the first nine
months of 1995. This decrease was due in part to a decrease in the over-head
associated with the HallMark export operation and a reduction in the Company's
legal fees.
The factors discussed above resulted in an operating loss in the nine
months ended September 30, 1996 of $316,000 as compared to an operating loss of
$503,000 in the nine months of September 1995.
Included in the nine months ended September 30, 1995 and 1996 is other
income of approximately $260,000 and $366,000, respectively which represents a
net adjustment to the value of certain items which predominantly relate to the
Company's 1991 Restructuring.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of approximately
$1.8 million (including cash and cash equivalents of $193,000), compared to
working capital of $2.4 million at December 31, 1995.
8
On June 11, 1996, the Company and DHB Capital Group Inc. ("DHB") executed
a letter of intent providing for the merger of DHB with a subsidiary of the
Company (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 the Company in the amount of $300,000 pursuant to the terms of a
Debenture. The Debenture includes interest at the rate of two percent (2%) 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 the
Company 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 First Medical Corporation, 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 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 First Medical Corporation were used to
satisfy the loan the Company previously obtained from DHB on June 11, 1996.
The Company continues to be in default in the payment of interest
(approximately $761,000 in interest was past due as of September 30, 1996) on
$500,000 principal amount of 13-1/2% Senior Subordinated Notes ("13-1/2% Notes")
and 14-7/8% Subordinated Debentures ("14-7/8 Debentures").
On November 6, 1996, HallMark paid off its installment loan with Banca
Nazionale Del Lavoro, SPA and entered into a 3 year new revolving loan with The
CIT Group/Credit Finance, Inc. in the amount of $5 million.
On April 10, 1995 a judgement was entered against the Company for $260,969
plus interest and legal fees (see "Item 1 Legal proceedings").
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 10, 1995 a judgment was entered in Kennebec County, Maine against
the Company and Dori Shoe Company (a former indirect subsidiary) in the amount
of $260,969, plus interest and legal fees.
The State of Maine and Bureau of Labor Standards commenced an action in
Maine Superior Court on or about November 29, 1990 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 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 the Company when the Dori Shoe
plant was closed it was amended so as to arguably apply to the Company
retroactively. In a prior case brought against the Company (then known as Lehigh
Valley Industries) and its former subsidiary under the Maine severance pay
statute prior to its amendment, the Company was successful against the State of
Maine (see CURTIS V. LOREE FOOTWEAR AND LEHIGH VALLEY INDUSTRIES, 516 A. 2d (Me.
1986)).
The Company's counsel in Maine believe that the application of Maine's
amended severance pay statute is unconstitutional under both the Maine and
United States constitutions. The Company has appealed the judgment to the
Supreme Judicial Court of Maine. While the Company believes it has a strong
defense, the outcome of this appeal cannot presently be determined.
On or about October 1, 1996, Southwicke Corporation ("Southwicke")
commenced an action against the Company and all of the Company's directors in
the Supreme Court of the State of New York in the County of New York.
Southwicke, a shareholder of the Company, alleges three causes of action.
The first cause of action alleges, among other things, that the directors of the
Company have breached their fiduciary duty to the Company's stockholders by
entering into a merger agreement with DHB Capital Group Inc. The second cause of
action is for declaratory judgment declaring that the options and/or warrants
granted to DHB and the DHB options in connection with the proposed merger are
invalid and with respect to the third cause of action declaring the bylaws
passed are invalid. Southwicke is also seeking damages for no less than
$500,000.
The Company's management and its outside counsel believe Southwicke's
action is meritless. While the Company believes it has strong defenses, no
assurance can be given regarding the outcome of this action.
10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company continues to be in default in the payment of interest
(approximately $761,000 interest is past due as of September 30, 1996) on
$500,000 principal amount of 13-1/2% Notes and 14-7/8% Debentures.
ITEM 5. OTHER INFORMATION
On October 11, 1996, DHB Capital Group, Inc. notified the Company that it
was terminating the Agreement and Plan of Reorganization that was entered into
between the parties on July 8, 1996.
On October 29, 1996 the Company and first Medical Corporation executed a
merger agreement as more fully disclosed in the Company's Form 8-K dated
November 7, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See Exhibit Index.
B. Reports on Form 8-K
During the third quarter of 1996, the Company filed the following
reports on Form 8-K:
(i) Current Report on Form 8-K dated July 16, 1996 (filed July 17,
1996) reporting under Item 5, a press release announcing that the Company
and DHB Capital Group Inc., executed a definitive merger agreement.
(ii) Current Report on Form 8-K dated August 2, 1996 (filed August 2,
1996) reporting under Item 5, that the Company amended and restated its
bylaws.
11
EXHIBIT INDEX
Exhibit No. Description
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3(ii) Amended and Restated Bylaws (incorporated
herein by reference to Exhibit 3(ii) to the
Company's Form 8-K dated August 2, 1996).
27.1 Financial Data Schedule
99 Press release dated July 9, 1996
(incorporated herein by reference to Exhibit
99 to the Company's Form 8-K dated July 16,
1996).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE LEHIGH GROUP INC.
By: /s/ Salvatore J. Zizza
----------------------
Salvatore J. Zizza
Chairman of the Board,
President and
Chief Executive Oficer
Dated: November 14, 1996
13