SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997...Commission File Number 1-155
FIRST MEDICAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1920670
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State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1055 Washington Blvd., Stamford, CT 06901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 327-0900
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The Lehigh Group, Inc.
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 30, 1997
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Common Stock, par value 22,553,500 shares
$.001 per share
FIRST MEDICAL GROUP, INC.
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months Ended September 30, 1997 and 1996
and Nine Months Ended September 30, 1997 and 1996 1
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Changes in
Shareholders' Equity - Nine Months
Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-8
Part II. OTHER INFORMATION
Item 1. Legal Proceeding 9
Item 3. Defaults upon Senior Securities 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
PART 1 - FINANCIAL INFORMATION
FIRST MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
Revenue:
Capitated revenue - Humana $ 12,881 $ 12,519 $ 39,768 $ 33,694
Fee for service 2,304 1,964 6,727 5,176
Other revenue 4,041 155 5,514 665
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Total revenue 19,226 14,638 52,009 39,535
Medical expenses 13,330 11,523 43,843 32,335
Cost of sales 2,643 - 2,643 -
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Gross profit 3,253 3,115 5,523 7,200
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Operating Expenses:
Salaries and related benefits 1,208 1,641 2,540 2,625
General and administrative 1,565 1,048 4,355 2,999
Depreciation and amortization 285 157 610 404
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Total operating expenses 3,058 2,846 7,504 6,028
Income before interest, taxes and other 195 269 (1,981) 1,172
Other expense:
Interest expense, net (193) (14) (288) (37)
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(193) (14) (288) (37)
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Income (loss) before taxes 2 255 (2,269) 1,135
Provision for income taxes - 102 - 454
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Net income (loss) $ 2 $ 153 $ (2,269) $ 681
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Earnings (loss) per share
Primary $ 0.00 $ (0.16)
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Fully diluted $ 0.00 $ (0.01)
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Weighted average number of common shares
and share equivalents outstanding
Primary 21,562 14,590
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Fully diluted 281,919 258,126
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See accompanying notes to consolidated financial statements.
1
FIRST MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
September 30, December 31,
ASSETS 1997 1996
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Current assets:
Cash and cash equivalents $ 2,827 $ 63
Humana IBNR receivable and claims reserve fund 7,876 7,308
Other receivable, net of allowance for doubtful accounts 6,906 537
of $686 and $50
Due from related parties 975 462
Inventories 1,846 --
Prepaid expenses and other current assets 258 179
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Total current assets 20,688 8,549
Property and equipment, net 656 400
Intangible assets, net 7,275 2,864
Other assets 718 638
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$ 29,337 $ 12,452
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,739 $ 1,699
Accrued expenses 2,349 338
Accrued medical claims, including incurred but not reported 6,950 6,071
Corporate deposits 635 806
Loans payable to Humana 168 98
Loans payable to banks 3,830 750
Obligations to certain shareholders 506 422
Deferred income taxes, net 113 300
Income taxes payable 275 113
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Total current liabilities 18,564 10,596
Loans payable to Humana, net of current maturities 412 277
Loans payable to banks, net of current maturities 4,227 --
Obligations to certain shareholders, net of current maturities 254 746
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Total liabilities 23,458 11,620
Shareholders' Equity:
Capital stock, par value $.001;authorized shares 100,000,000 23 0
shares issued 22,553,500 in 1997
Additional paid in capital 7,801 380
Retained Earnings (1,945) 452
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Total shareholders' equity 5,879 832
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Commitments and contingencies
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TOTAL $ 29,337 $ 12,452
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See accompanying notes to consolidated financial statements.
2
FIRST MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
Additional Retained Total
COMMON Paid-in Earnings Stockholders'
STOCK capital (Deficit) Equity
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Balance January 1, 1996 $ 2 $ 1 $ 225 $ 227
FMC corporate reorganization (1) 2 -- 1
Capital contribution to AMCD -- 152 -- 152
Net income for nine months ended 9/30/96 -- -- 909 909
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Balance September 30, 1996 $ 1 $ 155 $ 1,133 $ 1,289
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Balance January 1, 1997 $ 0 $ 380 $ 324 $ 703
Issuance of stock to FMC shareholders 23 2,256 -- 2,279
Capital contribution to FMG -- 5,000 -- 5,000
Capital contribution to AMCD -- 165 -- 165
Net loss for nine months ended 9/30/96 -- -- (2,269) (2,269)
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Balance September 30, 1997 $ 23 $ 7,801 $(1,945) $ 5,879
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See accompanying notes to consolidated financial statements.
3
FIRST MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands)
1997 1996
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Cash flow from operating activities:
Net income $(2,269) $ 681
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 610 404
Minority interest in net loss of consolidated subsidiaries (218) (175)
(Increase) decrease in assets, net of acquisitions:
Humana IBNR receivable and claims reserve fund (568) 570
Other receivables (1,473) (982)
Due from related parties, net (648) (826)
Inventories (201) --
Prepaid expenses and other current assets 12 27
Other assets (1,512) (152)
Increase (decrease) in assets, net of acquisitions:
Accounts payable and other accrued expenses 212 385
Accrued medical claims, including IBNR 879 (578)
Corporate deposits (172) (64)
Taxes payable (25) --
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Net cash used in operating activities (5,370) (710)
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Cash flows used in investing activities:
Capital expenditures (304) (198)
Organizational costs -- (287)
Acquisition of additional ownership interests in BMC, SPI -- 121
Broward, and Midwest, net of cash acquired
Proceeds from sale of investment -- 300
Acquisition of Lehigh, net of cash acquired 463 --
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Net cash used in investing activities 159 (64)
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Cash flow provided from financing activities:
Proceeds from loan payable Humana 254 375
Proceeds from loans payable to banks 8,689 200
Repayment of loan payable Humana (49) --
Repayments of loans payable to banks (5,200) (40)
Proceeds from payable to stockholders 132 200
Payment of obligations to stockholders (362) (266)
Contribution to capital of FMG 4,512 --
Contribution to capital of AMCD -- 152
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Net cash provided by financing activities 7,975 621
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Decrease in cash and cash equivalents 2,764 (153)
Cash and cash equivalents, beginning of the year 63 199
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Cash and cash equivalents, end of period $ 2,827 $ 46
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See accompanying notes to consolidated financial statements.
4
FIRST MEDICAL GROUP, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The financial information for the three months and nine months ended
September 30, 1997 and 1996 is unaudited. However, the information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for the fair statement of results for the
interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes included in the Company's December 31, 1996 Report on Form 10-K.
The results of operations for the nine month period ended September 30,
1997 are not necessarily indicative of the results to be expected for the full
year.
Loss per common share is calculated by dividing net loss by the weighted
average number of common shares and share equivalents outstanding during each
period. For the periods presented, there were no common stock equivalents
included in the calculation, since they would be anti-dilutive. Earning per
share is not presented for 1996 because such presentation would be meaningless.
2. Supplementary Schedule
1997 1996
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(in thousands)
Statement of cash flows
Nine months ended September 30,
Cash paid during the Nine months for:
Interest $ 411 $ 230
Income taxes 26 11
5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
THIRD QUARTER OF 1997 IN COMPARISON
WITH THIRD QUARTER OF 1996
REVENUE. Total revenue of First Medical Group, Inc. ("FMG") for the
three months ended September 30, 1997 and 1996 were $19.2 million and $14.6
million, respectively, of which 67% and 86%, respectively, was derived from
prepaid contractual agreements with Humana pursuant to which Humana pays FMG a
capitated fee ("HMO revenue"). During the three months ended September 30, 1997,
$13.1 million or 68% of FMG's revenue were derived from the physician practice
management division, $2.3 million or 12% was derived from the international
medical clinics division and $3.8 million or 20% was derived from the electrical
supply division (as a result of the merger in July, 1997). During the three
months ended September 30, 1996, revenue derived from the physician practice
management division was $12.9 million, or 88% of FMG's revenue and $1.7 million
or 12% was derived from the international medical clinics division. The HMO
revenue growth was primarily a result of new provider agreements, as of
September, 1996, to manage a center in New Port Richey, Florida and as of
October, 1996, to manage additional centers in Lutz, Florida and South Dale
Mabry, Florida. Revenue related to these centers represent an increase of $3.6
million and the revenue related to the other centers decreased by $3.4 million,
due to a decrease in membership in the South Florida market.
MEDICAL EXPENSE/COST OF SALES. Medical expenses increased $1.8 million,
or 16%, to $13.3 million for the three months ended September 30, 1997 from
$11.5 million for the same period in 1996. Medical expenses increased $3.8
million from medical services provided under the New Port Richey, Lutz and South
Dale Mabry agreements. Medical expenses related to the other centers decreased
by $2.0 million due to decreased membership. Medical expenses as a percentage of
HMO and fee for service revenue ("medical loss ratio") were 87.8% and 79.6%,
respectively, for the three months ended September 30, 1997 and 1996. Cost of
sales for the electrical supply business was 67.15%.
OPERATING EXPENSES. Operating expenses increased by $.2 million, or 7%,
to $3.1 million, for the three months ended September 30, 1997 from $2.8 million
for the same period in 1996. The increase was primarily due to the electrical
supply division of $1.2 million offset by lower operating expenses in the
medical centers . As a percent of revenue, operating expenses were 15.9% as
compared to 19.4% for the same period in 1996.
NET INCOME. Net income for the three months ended September 30, 1997
was $2,000 compared to net income of $150,000 for the same period in 1996.
6
RESULTS OF OPERATIONS
FIRST NINE MONTH OF 1997 IN COMPARISON
WITH NINE MONTH HALF OF 1996
REVENUE. Total revenue of FMG for the nine months ended September 30,
1997 and 1996 were $52.0 million and $39.5 million, respectively, of which 76%
and 85%, respectively, was derived from prepaid contractual agreements with
Humana pursuant to which Humana pays FMG a capitated fee ("HMO revenue"). During
the nine months ended September 30, 1997, $41.5 million or 80% of FMG's revenue
were derived from the physician practice management division, $6.8 million or
13% was derived from the international medical clinics divisional, and $3.8
million or 7% was derived from the electrical supply division (as a result of
the merger in July 1997). During the nine months ended September 30, 1996,
revenue derived from the physician practice management division was $34.6
million, or 88% of FMG's revenue and $4.9 million or 12% was derived from the
international medical clinics division. The HMO revenue growth was primarily a
result of new provider agreements, as of September 1996, to manage a center in
New Port Richey, Florida and as of October, 1996, to manage additional centers
in Lutz, Florida and South dale Mabry, Florida. Revenue related to these centers
represent an increase of $11.8 million and the revenue related to the other
centers decreased by $4.9 million, due to a decrease in membership in the South
Florida market.
MEDICAL EXPENSE/COST OF SALES. Medical expenses increased $11.5
million, or 35.6%, to $43.8 million for the nine months ended September 30, 1997
from $32.3 million for the same period in 1996. The entire increase ($11.5
million or 100%) resulted from medical services provided under the New Port
Richey, Lutz and South Dale Mabry agreements. Medical expenses as a percentage
of HMO and fee for service revenue ("medical loss ratios") were 94.3% and 83.2%,
respectively, for the nine months ended September 30, 1997 and 1996. The
increase in medical expenses was due to changes in the program benefits provided
by Humana. FMG has recently implemented controls to monitor expenses in the
future. Cost of sales for the electrical supply business was 67.1%.
OPERATING EXPENSES. Operating expenses increased by $1.5 million, or
24%, to $7.5 million, for the nine months ended September 30, 1997 from $6.0
million for the same period in 1996. The increase was primarily due to the
electrical supply division for $1.2 million and the remaining increase was due
to the additional three centers. As a percent of revenue, operating expenses
were 14.4% as compared to 15.3% for the same period in 1996.
NET INCOME. Net loss for the nine months ended September 30, 1997 was
$2.3 million compared to net income of $.7 million for the same period in 1996.
7
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, FMG had cash of $2.8 million compared to $63,014
at December 31, 1996. The increase in cash was due to FMG receiving
approximately $4,500,000 as a result of the merger.
FMG believes that cash from operations and borrowings under existing
credit facilities will be sufficient to satisfy its contemplated cash
requirements for at least the next twelve months.
To date, FMG's principal uses of cash have been to support its
operating activities and to fund acquisitions. FMG has met its cash requirements
in recent years primarily from its operating activities, advances from Humana
and bank borrowings.
FMG also maintains a secured line of credit with a domestic bank for
$0.4 million bearing interest at prime. The $0.4 million drawn under this line
of credit at September 30, 1997 has been used by FMG in connection with the
satisfaction of development costs relating to FMG's Midwest operations.
Amortization of $5,000 per month will commence as to the first $200,000 in
November, 1997 and as to the remaining $200,000, in May, 1997.
FMG believes that funds generated from operations, availability under
its credit facilities, and lease financing will be sufficient to finance its
current and anticipated operations and planned capital expenditures at least
through 1997. FMG's long term capital requirements beyond 1997 will depend on
many factors, including, but not limited to, the rate at which FMG expands its
business. To the extent that the funds generated from the sources described
above are insufficient to fund FMG's activities in the short or long term, FMG
would need to raise additional funds through public or private financing. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms favorable to FMG.
As of September 30, 1997, FMG also has a credit facility for $2.5
million bearing interest at1/2% above prime, of which $500,000 is guaranteed by
certain current and former officers of FMG. FMG also borrowed an additional
$537,000 to purchase Lehigh stock in connection with the merger. This loan
matured September 20, 1997 and FMG is currently negotiating for an extension.
FMG, is in default in the payment of interest (approximately $744,000
interest was past due as of September 30, 1997) on the $390,000 aggregate
principal amount of its 13 1/2% Senior Subordinated Notes due May 15, 1998 ("13
1/2% Notes") and 14 7/8% Subordinated Debentures due October 15, 1995, ("14 7/8%
Debentures") that remain outstanding and were not surrendered to the Company in
connection with its financial restructuring consummated in 1991. The Company has
been unable to locate the holders of the 13 1/2% Notes and 14 7/8% Debentures
(with the exception of certain of the 14 7/8% Debentures, which were retired
during 1996).
8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in 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 3. Defaults Upon Senior Securities
The Company continues to be in default in the payment of interest (approximately
$744,000 interest is past due as of September 30, 1997) on $390,000 principal
amount of 13-1/2% Notes and 14-7/8% Debentures.
Item 5. Other Information
As reported on a Form 8-K filed on July 24, 1997, Lehigh Management Corp., a
subsidiary of the Company, was merged with and into First Medical Corporation
("FMC") and each outstanding share of common stock of FMC was exchanged for (i)
1,127.675 shares of Lehigh's Common Stock, par value $.001 per share ("Lehigh
Common Stock"), and (ii) 103.7461 shares of Lehigh's Series A Convertible
Preferred Stock, par value $.001 per share (the "Lehigh Preferred Stock"), each
of which is convertible into 250 shares of Lehigh Common Stock and has a like
number of votes per share, voting together with the Lehigh Common Stock.
Item 6. Exhibits and Reports on Form 8-K
A Form 8-K was filed on July 24, 1997 (see item 5).
9
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MEDICAL GROUP, INC.
By: /S/ Salvatore J. Zizza
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Salvatore J. Zizza
Executive Vice President
and Chief Financial Officer
Dated: November 13, 1997