SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 1-155
THE LEHIGH GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1920670
- --------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
810 Seventh Avenue, New York, N.Y. 10019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (212) 333-2620
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES / / NO / X /
Approximate aggregate market value of the voting stock held by "nonaffiliates"
of the Registrant on March 12, 1997: $1,637,578.*
Number of shares of Common Stock outstanding of the Registrant as of March 12,
1997: 11,276,750
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* Registrant's sole class of voting stock is its Common Stock $.001 par value,
which is listed on the New York Stock Exchange. The determination of market
value of such Common Stock has been based solely on the closing price per share
of such stock on the New York Stock Exchange on the date indicated. In making
this computation, all shares known to be owned by directors and executive
officers of the Registrant and all shares known to be owned by persons holding
in excess of 5% of the Registrant's Common Stock have been deemed held by
"affiliates" of the Registrant. Nothing herein shall affect the right of the
Registrant to deny that any such directors, executive officers or more than 5%
stockholder is an "affiliate."
PART I
ITEM 1. BUSINESS
GENERAL
The Lehigh Group Inc., a Delaware corporation (formerly The LVI 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.
Prior to 1994, the Company, 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 the Company's financial restructuring of its outstanding debt
and preferred stock on March 15, 1991 (the "1991 Restructuring"). During the
third quarter of 1991, the Company 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, the Company 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 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.
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
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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, Chief Executive Officer of FMC, 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. However, there can be no assurance at this time
that the Company will be able to consummate this transaction.
The Company was incorporated under the laws of the State of Delaware in
1928. The Company'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 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.
Domestic sales are made by HallMark employees. Nine customers accounted
for approximately 74%, 61% and 72% (including one customer which accounted for
approximately 21%, 25% and 18%) of HallMark's total domestic sales in 1996, 1995
and 1994, respectively. The loss of any of these customers could have a material
adverse effect on its business. Export sales are made by sales agents retained
by HallMark. Distribution is made in approximately 26 countries.
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 1, 1997, the Company had 3 employees and HallMark had 35.
Approximately 85% of such employees are compensated on an hourly basis.
The Company 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.
ITEM 2. PROPERTIES
The Company subleases approximately 300 square feet of space on the
27th floor of 810 Seventh Ave., New York, NY 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 additional warehouse facilities
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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.
ITEM 3. LEGAL PROCEEDINGS
The State of Maine and Bureau of Labor Standards commenced an action in
Maine Superior Court on or about November 29, 1990 against 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 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 $260,969.11 plus prejudgment interest and
reasonable attorneys' fees and costs to the Plaintiff upon their application
pursuant to Maine Rules of Civil Procedure 54(b) (3) (d). The Company filed a
timely appeal appealing that decision and the matter was argued before the Maine
Supreme Judicial Court on December 7, 1995. Prejudgment interest will accrue at
an annual rate of approximately $20,800 from November 29, 1990.
On February 18, 1997, the Supreme Judicial Court of Maine affirmed the
Superior Court's decision. The Company is currently considering an appeal to the
United States Supreme Court. Approximately $350,000 has been accrued by the
Company relating to this judgment.
The Company is involved in other minor litigation, none of which is
considered by management to be material to its business or, if adversely
determined, would have a material adverse effect on the Company's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange. The Company
did not pay cash dividends on the Common Stock during 1996, 1995 or 1994 and has
no intention of paying cash dividends on the Common Stock in the foreseeable
future. On March 3, 1997, there were approximately 7,791 holders of record of
the Common Stock (excluding shares held in "nominee" or "street" name).
The following table sets forth the reported high and low closing sales
prices of the Common Stock on the Composite Tape for the quarters indicated.
High Low
---- ---
1995:
First Quarter $ 3/4 $ 5/8
Second Quarter 5/8 3/8
Third Quarter 1/2 3/8
Fourth Quarter 33/64 13/64
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 (through
March 3, 1997) $ 3/8 $ 1/4
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ITEM 6. SELECTED FINANCIAL DATA
THE LEHIGH GROUP INC. & SUBSIDIARIES
Selected Financial Information
(in Thousands, Except For Per Share Data)
STATEMENT OF OPERATIONS DATA
Years ended
December 31, 1996 1995 1994 1993 1992
- ------------ ---- ---- ---- ---- ----
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 -- -- -- -- --
BALANCE SHEET DATA
DECEMBER 31, 1996 1995 1994 1993 1992
- ------------ ---- ---- ---- ---- ----
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)
(A) Includes long term debt, current maturities of long term debt and Note
payable - bank.
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ITEM 7. 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 the various subsidiaries which made up its discontinued interior
construction and energy recovery business segments subject to existing security
interests. The excess of liabilities over assets of subsidiaries sold amounted
to approximately $9.6 million. Since 1991, 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.
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 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
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 $139,000, $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 add back 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 $13,000, $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.
Net cash provided by (used in) financing activities was $276,000,
$(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, 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
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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. On
February 7, 1997, First Medical Corporation elected to convert the debenture in
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 execption 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.
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.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations
over the past three years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-19 and page S-1 of this Form 10-K, which are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NOT APPLICABLE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the directors and executive officers of the Company:
Name Age Position
---- --- --------
Salvatore J. Zizza 51 Chairman of the Board, President, Chief
Executive Officer and Director of the Company
Robert A. Bruno 40 Vice President, General Counsel, Secretary and
Director of the Company
Richard L. Bready 52 Director of the Company
Charles A. Gargano 61 Director of the Company
Anthony F. L. Amhurst 54 Director of the Company
Salvatore M. Salibello 51 Director of the Company
Joseph Delowery 62 President of HallMark
Mr. Zizza has been a director of the Company since 1985 (except that he
did not serve as a director during the period from March 15, 1991 through April
16, 1991) and Chairman of the Board of the Company since April 16, 1991, and was
Chief Executive Officer of the Company from April 16, 1991 through August 22,
1991 and President of NICO from 1983 through August 22, 1991. He also served as
President of the Company from October 1985 until April 16, 1991. He is also a
director of the Gabelli Equity Trust, Inc.; The Gabelli Asset Fund; The Gabelli
Growth Fund; The Gabelli Convertible Securities Funds, Inc. 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. Bready has been a director of the Company since May 18, 1994. He
has served since 1991 as the Chairman of the Board and Chief Executive Officer
of Nortek, Inc. (an NYSE-listed company engaged in the manufacture and marketing
of residential, commercial and industrial building products) and since 1979 as
its President.
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Mr. Charles A. Gargano was elected as a director of the Company on
December 20, 1994. He has been an entrepreneur since August 1991 and was the
Finance chairman of the New York State Republican Committee in 1994. He served
as the United States Ambassador to the Republic of Trinidad and Tobago from
August 1988 through August 1991. Currently, Mr. Gargano is Commissioner of the
New York State Office of Economic Development and President and Chief Executive
Officer of the New York State Urban Development Corporation. Mr. Gargano is also
on the board of directors of Alpha Hospitality Corporation and Winners All
International, Inc., both Nasdaq-listed companies.
Mr. Anthony F. L. Amhurst was elected as a director of the Company on
December 20, 1994. He has been a Senior and Managing Partner of Amhurst Brown
Colombotti ( a law firm the principal office of which is in London) and a
Solicitor of the Supreme Court of Judicature of England for more than the past
five years.
Mr. Salibello was elected as a director of the Company on December 20,
1994. He is the founder and for more than the past five years has been the
managing partner of Salibello & Broder, a certified public accounting firm. He
is also a director of Nine West Group Inc. (an NYSE-listed company that designs,
develops and markets women's footwear).
Mr. Delowery has been the President of HallMark since July 1990. He
served as Vice President in charge of sales of HallMark from June 1988 through
July 1990.
No family relationship exists between any of the directors and
executive officers of the Company.
All directors will serve until the annual meeting of stockholders of
the Company to be held in 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation awarded to,
earned by or paid to the Chief Executive Officer and the other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
for services rendered in all capacities to the Company during each of the years
ended December 31, 1996, December 31, 1995 and December 31, 1994:
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SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensa-
tion
----------------------
Awards
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Securities
Underlying
Other Underlying All Other
Name and Principal Annual Options Compensation
- ------------------ Compen- (number of ------------
Position Year Salary Bonds sation(2) Shares) (3)
- -------- ---- ------ ----- --------- --------- ---
Salvatore J. Zizza (1) 1996 $200,000 0 0 0 $1,272
Chairman of the Board
1995 $200,000 0 0 0 $1,272
1994 $200,000 0 0 10,250,000(1) $ 800
Robert A. Bruno (4) 1996 $150,000 0 0 250,000(5) $1,272
Vice President and
General Counsel 1995 $150,000 0 0 0 $ 822
1994 * 0 0 0 $ 318
Joseph Delowery (5)
President of Hallmark
1996 $110,784 $ 1,500 0 0 $1,272
1995 $110,784 $13,469 0 0 $1,272
1994 $110,613 0 0 0 $1,272
* Mr. Bruno's compensation for 1994 did not exceed $100,000 and
therefore no disclosure was required to be provided for that year.
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(1) On August 22, 1994, the Company 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
the Company at an annual salary of $200,000 (subject to increase, in
the discretion of the Board, if the Company 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 the Company 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 to
their acquisition by the Company, 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.
(2) As to each individual named, the aggregate amounts of personal benefits
not included in the Summary Compensation Table do not exceed the lesser
of either $50,000 or 10% of the total annual salary and bonus reported
for the named executive officer.
(3) Represents premiums paid by the Company with respect to term life
insurance for the benefit of the named executive officer.
(4) On January 1, 1995, the Company and Mr. Bruno entered into an
employment agreement providing for his employment through December 31,
1999 as Vice President and General Counsel for the Company at an annual
salary of $150,000. Pursuant to such agreement, Mr. Bruno has deferred
one-third of his annual salary until such time as the Company's annual
revenues exceed $25 million. In April 1995 the Company granted Mr.
Bruno an option to purchase 250,000 shares of common stock at an
exercise price of $.50 per share. 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.
-13-
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 shall
be deferred and (iii) the term of the employment shall be extended for
an additional year through December 31, 2000.
(5) Mr. Delowery may be deemed to be an executive officer of the Company by
virtue of his position with HallMark. HallMark became the Company's
principal operating subsidiary following the 1993 Restructuring.
COMPENSATION OF DIRECTORS
Directors receive no compensation for serving on the Board other than
the reimbursement of reasonable expenses incurred in attending meetings. In
April 1995, the Company issued 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. On December 13, 1996, the Company issued
options to purchase 10,000 shares of 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 serving on the Board for 1996.
-14-
The following table sets forth the number of options exercised and the
dollar value realized thereon by the executive officers of the Company named in
the Summary Compensation Table, along with the number and dollar value of any
options remaining unexercised on December 31, 1996.
AGGREGATED OPTION EXERCISES IN
1996 AND YEAR-END OPTION VALUES
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)
---- ----------- ----------- ----------- ------------- ----------- -------------
Salvatore Zizza $ 0 $ 0 6,000,000 12,000,000 $ 0 $ 0
Robert Bruno $ 0 $ 0 250,000 $ 0 $ 0
(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.
-15-
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 and the
regulations of the Securities and Exchange Commission (the "SEC") thereunder
require the Company's executive officers and directors, and persons who own more
than ten percent of a registered class of the Company'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 the Company
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, the
Company believes that, during or with respect to the period from January 1, 1996
to December 31, 1996, all Section 16(a) filing requirements applicable to its
executive officers, directors and ten-percent stockholders were complied with.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Both Anthony Amhurst and Charles Gargano are members of the Company'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 the Company's
executive compensation policies and determining the compensation paid to the
Company'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 Company 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 the Company 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 the Company acquires one or
more new businesses, to a level commensurate with the compensation paid to the
top executives of comparable businesses. If the Company 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 Transactions." Pursuant to such employment agreement, the
Company also granted to Mr. Zizza options to purchase 10,250,000 shares of
Common Stock at exercise prices ranging from $.50 to $1.00 per share. For
information as to the terms and conditions of exercisability of such options,
see "Certain Transactions."
CHARLES A. GARGANO
ANTHONY F.L. AMHURST
-16-
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Common Stock of the Company with the cumulative total return on the NYSE Market
Index and MG Group Index (assuming the investment of $100 in the Company's
Common Stock, the NYSE Market Index and MG Group Index on January 1, 1992, and
reinvestment of all dividends).
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
COMPANY 1991 1992 1993 1994 1995 1996
LEHIGH GROUP INC 100 180.00 130.00 110.00 45.01 45.01
INDUSTRY INDEX 100 122.34 138.32 131.68 151.52 175.21
BROAD MARKET 100 104.70 118.88 116.57 151.15 182.08
-17-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information on 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 the Company to be the beneficial owner of more than 5% of the
Common Stock.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1) of Class
------------------- ------------------------ ---------
First Medical Corporation 2,858,257 (2) 25.4% (2)
5200 Blue Lagoon Drive
Miami, FL 33126 (2)
Fidelity Bankers Life Insurance 799,921 (2) 7.1% (2)
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 (2) 4.7% (2)
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
Salvatore J. Zizza 6,255,502 (3) 36.2% (3)
c/o The Lehigh Group Inc.
810 Seventh Ave.
New York, NY 10019
The Equitable Life Assurance 524,901 (2) 4.6% (2)
Society of the United States
("Equitable")
787 Seventh Ave.
New York, NY 10019 (2)
(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.
-18-
(2) Based on information set forth on Schedule 13G's filed with the SEC by
Equitable on February 9, 1996, The Godt Trust on September 27, 1994 and
Teachers on April 23, 1992 (assuming, in each case, no change in
beneficial ownership since such date except in connection with the 1993
Restructuring. Information as to FBL was obtained from an investment
specialist at 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) 1,750,000 shares
issuable upon the exercise of immediately exercisable warrants at a
price of $.50 per share. Excludes 12,000,000 shares of Common Stock
issuable upon the exercise of options held by Mr. Zizza at exercise
prices of $.75 per share, in the case of 3,000,000 shares, $1.00 per
share, in the case of 3,000,000 shares, 3,000,000 shares issuable upon
the exercise of warrants at a price of $.75 per share and 3,000,000
shares issuable upon the exercise of warrants at a price of $1.00 per
share. These options are not currently exercisable or expected to
become exercisable within the next 60 days, and will not be exercisable
until such time as (i) the Company receives aggregate net cash proceeds
of at least $10 million from the sale (whether public or private) of
its equity securities, (ii) the Company 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. The Company also
granted to him one demand registration right (exercisable only if the
Company 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.
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the number of shares of Common Stock
beneficially owned on March 1, 1997 by (i) each director of the Company, (ii)
each of the executive officers named in the Summary Compensation Table set forth
above and (iii) all directors and executive officers of the Company as a group.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(1) Percent of Class
- ------------------------------ ------------------------------ ---------------------------
Salvatore J. Zizza 6,255,502(2) 36.2%(2)
Richard L. Bready 25,000(5) *
Robert A. Bruno 312,760(3) *
Charles A. Gargano 20,000(5) --
Salvatore M. Salibello 20,000(5) --
Anthony F. L. Amhurst 20,000(5) --
Joseph Delowery 0 --
All executive officers
and directors as a group
(7 persons) 6,653,262(4) 38.5(4)
- ---------------------
* Less than 1%.
-19-
(1) 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" above.
(3) Includes 250,000 options to purchase common stock at $.50 per share.
(4) Includes and excludes shares as indicated in notes (2) and (3) above.
(5) Represents options to purchase common stock at $.50 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 22, 1994, the Company sold 2,575,000 shares of Common Stock
pursuant to the Private Placement at a purchase price of $.40 per share,
including 250,000 shares sold to Salvatore J. Zizza (the Company's President,
Chairman of the board and Chief Executive Officer), 62,500 shares sold to Robert
A. Bruno (the Company'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 Common
Stock). Pursuant to a registration rights agreement dated as of August 22, 1994
among the Company and the investors that purchased 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. The Company is attempting to register such shares
under the Securities Act pursuant to the registration statement that was filed
on December 12, 1995 which has not yet been declared effective. On August 22,
1994, the Company also (i) issued to Goldis Financial Group, Inc. warrants to
purchase 386,250 shares of Common Stock at $.50 per share, as partial
consideration for its services as selling agent in connection with the Private
Placement, and (ii) granted to it certain piggyback registration rights as to
such shares. The shares of Common Stock issuable upon the exercise of such
warrants are attempting to be registered under the Securities Act pursuant to
the above mentioned registration statement.
On August 22, 1994 (immediately prior to the closing under the Private
Placement), (i) the Company 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 the Company at
an annual salary of $200,000 (subject to increase, in the discretion of the
Board, if the Company acquires one or more new businesses, to a level
commensurate with the compensation paid to the top executives of comparable
businesses), and (ii) the Company and Dominic Bassani entered into a consulting
agreement providing for Mr. Bassani to serve as a consultant to the Company for
a five year period and to provide during such period such financial advisory
services and assistance as the Company may request in connection with arranging
for financing for the Company (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
the Company 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 the Company, 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,
-20-
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 Company also granted (i) to Mr. Zizza options to purchase a total
of 10,250,000 shares of Common Stock: 4,250,000 exercisable at $.50 per share,
3,000,000 exercisable at $.75 per share, and 3,000,000 exercisable at $1.00 per
share; and (ii) to Mr. Bassani warrants to purchase a total of 7,750,000 shares
of Common Stock: 1,750,000 exercisable at $.50 per share, 3,000,000 at $.75 per
share, and 3,000,000 at $1.00 per share. In July 1995, Mr. Zizza purchased all
the warrants held by Mr. Bassani. At the time of such purchase, the Board
consented to the transaction and amended the Bassani warrants to make their
expiration date co-terminus with the other warrants which had been issued to Mr.
Zizza. The $.50 per share options are exercisable immediately; the $.75 and
$1.00 per share options will not be exercisable until such time as (i) the
Company has raised at least $10 million of equity, (ii) the Company 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 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 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. The Company also
granted to Mr. Zizza one demand registration right (exercisable only if the
Company 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 Common Stock purchasable upon exercise of the
options or warrants granted to him.
The Company will require that any future transactions (other than those
described above) between the Company and its officers, directors, principal
stockholders and the affiliates of the foregoing persons be on terms no less
favorable to the Company than could reasonably be obtained in arm's length
transactions with independent third parties.
In connection with the issuance by the Company 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 BAT, FBL,
Allstate and Teachers or their predecessors in interest), the Company 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 Common Stock held by BAT, FBL, Allstate
and Teachers (which is covered by such registration rights), see "Item 12.
Security Ownership of Certain Beneficial Owners and Management."
-21-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
a. (1) Financial Statements
--------------------
The following financial statements are
included in Part II, Item 8 of this Annual
Report on Form 10-K:
Report of Independent Public
Accountants as of December 31, 1996,
1995 and 1994. F-2
Consolidated Balance Sheets, December
31, 1996 and 1995. F-3 - F-4
Consolidated Statements of Operations,
Years Ended December 31, 1996, 1995
and 1994. F-5
Consolidated Statements of Changes in
Shareholders' Equity (Deficit), Years
Ended December 31, 1996, 1995 and 1994. F-6
Consolidated Statements of Cash Flows,
Years Ended December 31, 1996, 1995
and 1994. F-7
Notes to Consolidated Financial F-8 - F-19
Statements.
a. (2) SCHEDULE
The following schedule for the Years
Ended December 31, 1996, 1995 and 1994
are submitted herewith:
Schedule II - Valuation and Qualifying
Accounts S-1
All other schedules are omitted because
they are not applicable or the required
information is shown in the financial
statements or notes thereto.
a. (3) EXHIBITS
The Exhibits to this Annual Report on
Form 10-K are listed in the Exhibit Index
annexed hereto and incorporated by
reference.
(b) REPORTS ON FORM 8-K
There was one report on Form 8-K filed
during the last quarter covered by this
report, dated November, 1996.
-22-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Salvatore J. Zizza
- ---------------------------- Chairman of the Board Director March 25, 1997
Salvatore J. Zizza and President Chief Executive
Officer (Chief Financial Officer)
/S/ Robert A. Bruno
- ---------------------------- Vice President, General March 25, 1997
Robert A. Bruno Counsel, Secretary and Director
/s/ Richard L. Bready
- ---------------------------- Director March 25, 1997
Richard L. Bready
- ---------------------------- Director March , 1997
Charles A. Gargano
- ---------------------------- Director March , 1997
Anthony F.L. Amhurst
/s/ Salvatore M. Salibello Director March 25, 1997
- ----------------------------
Salvatore M. Salibello
-23-
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Certified Public Accountants as of
December 31, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets, December 31, 1996 and 1995 F-3 and F-4
Consolidated Statements of Operations, Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Changes in Shareholders' Equity,
(Deficit) Years Ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows, Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8 to F-19
Schedule, Years Ended December 31, 1996, 1995 and 1994
II - Valuation and Qualifying Accounts S-1
All other schedules are omitted because the required
information is either or is included in the consolidated
financial statements or the notes thereto.
F-1
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-2
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
- --------------------------------------------------------------------------------
(in thousands except for per share data)
ASSETS
CURRENT ASSETS:
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
(Notes 5 and 6)
Other assets 29 34
------ ------
TOTAL ASSETS $5,625 $6,622
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-3
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in thousands except for per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
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 (Note 6) 2,725 2,080
-------- ---------
Deferred credit applicable to the sale of
discontinued operations (Note 4) - 250
-------- ---------
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
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-4
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(in thousands except for per share data)
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 4) 250 250 5,000
-------- -------- -------
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
=========== =========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Preferred
Stock Common Stock
----- ------------
Additional Treasury
Number of Number of Paid-In Deficit From Stock
Shares Amount Shares Amount Capital Jan. 1, 1986 At Cost Total
-------- ------ ------- ------ --------- ------------ --------- ------
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
Net Income -- $ -- -- -- 4,590 -- 4,590
------ ------ ------- ------ -------- --------- ------- ------
Balance December 31, 1994 -- 10,339 $11 $106,594 $(104,441) $(1,654) $ 510
====== ====== ====== === ======== ========== ======== =======
Net Loss -- -- -- -- $ (308) -- $ (308)
------ ------ ------- ------ -------- --------- ------- --------
Balance December 31, 1995 $ -- 10,339 $11 $106,594 $(104,749) $(1,654) $ 202
====== ====== ====== === ======== ========== ======== =======
Net Loss -- -- -- $ $ (288) -- $ 288
======= ====== ======= ==== ======== ========== ======= =======
Balance December 31, 1996 -- $ -- 10,339 $11 $106,594 $(105,037) $(1,654) $ 86
======= ====== ====== === ======== ========== ======== =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 11)
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
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 69
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
====== ====== =====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
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:
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 is
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 tax bases of assets and
liabilities. The financial statements do not include a provision for income
taxes due to the Company's net operating losses.
EARNINGS PER SHARE - Earnings per common share is calculated by dividing net
income (loss) applicable to common shares by the weighted average number of
common shares and share equivalents outstanding during each period. Excluded
from fully diluted computations are certain stock options granted (12,000,000
options which are contingently exercisable pending the occurrence of certain
future events).
F-8
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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 "According 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 cost 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 and identifible 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.
F-9
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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.
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 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
F-10
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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-CIT 10.56% 2,425 --
Other Long-Term Debt 10.25% -- 10
-------- --------
3,115 2,950
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.
F-11
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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 is 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 $380,000 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.
The Company continues to be in default in the payment of interest
(approximately $628,000 and $653,000 at December 31, 1996 and 1995,
respectively) and principal approximately $390,000 and $500,000 at December 31,
1996 and 1995 respectively on the 13-1/2 Notes and 14-7/8 Debentures not
tendered in the Company's 1991 Restructuring. The principal of $390,000 and
$500,000 is included as current maturities of long term debt and the unpaid
interest is included in accrued expenses and other current liabilities.
F-12
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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 proceeds 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.
F-13
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
7 - INCOME TAXES
At December 31, 1996 and 1995, the Company had a net deferred tax asset
amounting to approximately $2.2 and $1.6 million respectively. The net deferred
tax asset consists 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.
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.
F-14
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Future minimum annual lease commitments, primarily for office and
warehouse space, with respect to non-cancelable 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.
F-15
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
LITIGATION
The State of Maine and Bureau of Labor Standards commenced an action
against the Company and Dori Shoe Company (an indirect former subsidiary) to
recover severance pay under Maine's plant closing law. The case was tried
without a jury on December 12 and 13, 1994 in Maine Superior Court. Under that
law, an "employer" who shuts down a large factory is liable to the employees for
severance pay at the rate of one week's pay for each year of employment.
Although the law did not apply to the Company at the time that the Dori Shoe
plant was closed it was amended so as to arguably apply to the Company
retroactively.
In a prior case brought against the Company (then known as Lehigh
Valley Industries) and its former subsidiary under the Maine severance pay
statute prior to its amendment the Company was successful against the State of
Maine (see CURTIS V. LOREE FOOTWEAR AND LEHIGH VALLEY INDUSTRIES, 516 A. 2d 558
(Me. 1986).
The Superior Court by decision docketed April 10, 1995 entered
judgement in favor of the former employees of Dori Shoe Company against Dori
Shoe and the Company in the amount of $260,969. plus prejudgment interest and
reasonable attorneys' fees and costs to the Plaintiff upon their application
pursuant to Maine Rules of Civil Procedure 54(b) (3) (d). Interest and other
fees are approximately $100,000 at December 31, 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 by the Company relating to this judgment.
F-16
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
9 - STOCK OPTIONS
The following table contains information on stock options for the three
year period ended December 31, 1996:
Exercise price Weighted
Option shares range per share average price
- -----------------------------------------------------------------------------------------
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
Forfeited 0 0 0
- -----------------------------------------------------------------------------------------
Outstanding December 31, 1996 18,752,187 $0.50 to $1.00 $0.75
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 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 and loss per share would have been adjusted to the pro forma amounts
indicated below:
F-17
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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)
The following table summarizes information about stock options outstanding at
December 31, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Peixwa at 12/31/96 Life Price at 12/31/96 Prices
------ ----------- ---- ----- ----------- ------
$0.50 to $1.00 18,752,187 3 years $0.75 6,752,187 $0.50
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.
F-18
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-19
THE LEHIGH GROUP INC. AND SUBSIDIARIES
SCHEDULE II
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
Balance at Charged to
Beginning Costs and Charged to Other Charges Balance at
December 31, Description of Year Expenses Other Accounts Add (Deduct) End of Year
- ------------------------------------------------------------------------------------------------------------------------------------
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
S-1
EXHIBIT INDEX
EXHIBIT
2 Agreement and Plan of Merger, dated as of October 29,
1996, between the Company, the Company's Acquisition
Corp., and First Medical Corporation, as amended (filed
as Appendix A to the Joint Proxy Statement/Prospectus
(incorporated by reference to Exhibit 2.1 to the
Company's Form S-4 Amendment No. 1 dated December 27,
1996).
3(a) Restated Certificate of Incorporation, By-Laws and
Amendments to By-Laws (incorporated by reference to
Exhibits A and B to Company's Annual Report on Form 10-K
for the year ended December 31, 1970. Exhibits 3 and 1,
respectively, to Company's Current Reports on Form 8-K
dated September 8, 1972 and May 9, 1973, and Exhibit to
Company's Current Report on Form 8-K dated October 10,
1973, and Exhibit 3 to Company'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 Company'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 Company filed with the Secretary of
State of the State of Delaware on October 31, 1985
(incorporated by reference to Exhibit 4(c) to Company's
Current Report on Form 8-K dated November 7, 1985).
3(d) Certificate of Amendment to Restated Certificate of
Incorporation of Company filed with the Secretary of
State of the State of Delaware on January 2, 1986
(incorporated by reference to Exhibit 3(d) to Company'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 Company filed with the Secretary of
State of the State of Delaware on June 4, 1986
(incorporated by reference to Exhibit 4(a) to Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1986).
3(f) By-Laws of Company, as amended to date (incorporated by
reference to Exhibit 3(f) to Company's Annual Report on
Form 10-K for the year ended December 31, 1990).
3(g) Certificate of Amendment to Restated Certificate of
Incorporation of Company filed with the Secretary of
State of the State of Delaware on March 15, 1991
(incorporated by reference to Exhibit 3(g) to Company's
Annual Report on Form 10-K for the year ended December
31, 1990).
3(h) Certificate of Amendment to Certificate of Incorporation
of Company filed with the Secretary of State of the State
of Delaware on December 27, 1991 (incorporated by
reference to Exhibit 3(h) to Company's Annual Report on
Form 10-K for the year ended December 31, 1991).
3(i) Certificate of Amendment to Certificate of Incorporation
of Company filed with the Secretary of State of the State
of Delaware on January 27, 1995 (incorporated by
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reference to Exhibit 3(i) to Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
3(j) Amended and Restated By-laws of the Company, as amended
to date (incorporated by reference to Exhibit 3(ii) to
the Registrant's Current Report of 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
Company, as Trustee, including therein the form of the
subordinated debentures to which such Indenture relates
(incorporated by reference to Exhibit 4(a) to the
Company'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 Company, NICO, the guarantors
signatory thereto, and Continental Stock Transfer and
Trust Company, 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 Company'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
Company, as trustee under the Class B Note Indenture
(incorporated by reference to Exhibit 4(h) to Company's
Annual Report on Form 10-K for the year ended December
31, 1993).
4(e) Form of indenture between the Company, 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
Company's Registration Statement on Form S-2 dated May
13, 1988).
10(a) Guaranty of LVI Environmental dated as of May 5, 1993
(incorporated by reference to Exhibit 10(f) to the
Company'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, Company and certain directors and
officers of Company (incorporated by reference to Exhibit
10(h) to the Company'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
Company, 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 Company'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 Company in favor of those
persons participating in the Company's exchange offers
(incorporated by reference to Exhibit 10(j) to the
Company's Annual Report on Form 10-K/A Amendment #2 for
the year ended December 31, 1993).
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10(e) Employment Agreement between Company and Salvatore J.
Zizza dated August 22, 1994 (incorporated by reference to
Exhibit 10.1 to the Company'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 Company
(incorporated by reference to Exhibit 10.2 to the
Company'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 Company (incorporated by
reference to Exhibit 10.3 to the Company'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 Company (incorporated by
reference to Exhibit 10.4 to the Company'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 Company
(incorporated by reference to Exhibit 10.5 to the
Company'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 Company (incorporated by
reference to Exhibit 10.6 to the Company'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 Company and the investors in the
Private Placement (incorporated by reference to Exhibit
10.7 to the Company'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
Company (incorporated by reference to Exhibit 10.8 to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission in September 1994).
10(m) Employment Agreement between the Company and Robert A.
Bruno dated January 1, 1995 (incorporated by reference to
Exhibit 10(m) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
27* Financial Data Schedule to the Company's 10-K for the
year ended December 31, 1995. *Filed herewith.
The Company will provide a copy of any of the exhibits included in this Annual
Report on Form 10-K upon written request and payment of a fee to cover the
reasonable expense of furnishing such exhibits to The Lehigh Group Inc., 810
Seventh Avenue, New York, New York, 10019, Attention: Secretary (Telephone:
(212) 333-2620).
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