CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of:
SPI Managed Care of Broward, Inc.
We consent to the inclusion of our report dated May 17, 1996, with respect to
the financial statements of SPI Managed Care of Broward, Inc. as of December 31,
1995 and 1994, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the two year period ended
December 31, 1995, which report appears in Amendment No. 7 to Form S-1 (No.
333-11955) of The Lehigh Group, Inc. dated January 13, 1998 and reference to our
firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
January 13, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of
MedExec, Inc.;
SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.
We consent to the inclusion of our report dated May 17, 1996, except as to Note
15, which is as of December 23, 1996, with respect to the combined financial
statements of MedExec, Inc. and subsidiaries; SPI Managed Care, Inc.; and SPI
Managed Care of Hillsborough County, Inc. as of December 31, 1995 and 1994, and
the related combined statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1995,
which report appears in Amendment No. 7 to Form S-1 (No. 333-11955) of The
Lehigh Group, Inc. dated January 13, 1998 and reference to our firm under the
heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
January 13, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors of
First Medical Corporation
We consent to the inclusion of our report dated March 25, 1997, with respect to
the consolidated balance sheet of First Medical Corporation as of December 31,
1996 and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended which report appears in Amendment No. 7
to Form S-1 (No. 333-11955) of The Lehigh Group, Inc. dated January 13, 1998 and
reference to our firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
January 13, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS'
The Board of Directors
Broward Managed Care, Inc.
We consent to the inclusion of our report dated May 17, 1996, with respect to
the financial statements of Broward Managed Care, Inc. as of December 31, 1995,
and the related statements of operations, stockholders' deficit, and cash flows
for the year then ended, which report appears in Amendment No. 7 to Form S-1(No.
333-11955) of The Lehigh Group, Inc. dated January 13, 1998 and reference to our
firm under the heading "Experts".
KPMG Peat Marwick LLP
Miami, Florida
January 13, 1998
INDEX TO FINANCIAL STATEMENTS
FIRST MEDICAL GROUP INC. ("FMG"):
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 (Unaudited)..................................
Consolidated Statements of Income for the Nine Months Ended
September 30, 1997 and 1996........................................
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 1997 and 1996..................................
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996........................................
Notes to Consolidated Financial Statements...........................
FIRST MEDICAL CORPORATION
Independent Auditors' Report.........................................
Consolidated Balance Sheet - December 31, 1996.......................
Consolidated Statement of Income for the Year Ended
December 31, 1996..................................................
Consolidated Statement of Stockholders' Equity for the Year
Ended December 31, 1996............................................
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996..................................................
Notes to Consolidated Financial Statements...........................
MEDEXEC, INC. AND SUBSIDIARIES; SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.:
Independent Auditors' Report.........................................
Combined Balance Sheets - December 31, 1995 and 1994................
Combined Statements of Operations for Each of The Years in The
Three-Year Period Ended December 31, 1995.........................
Combined Statements of Stockholders' Equity For Each of The
Years in The Three-Year Period Ended December 31, 1995............
Combined Statements of Cash Flows for Each of The Years
in The Three-Year Period Ended December 31, 1995..................
Notes to Combined Financial Statements...............................
BROWARD MANAGED CARE, INC.
Independent Auditors' Report.......................................
Balance Sheet - December 31, 1995..................................
Statement of Operations for the years Ended December 31, 1995......
Statement of Stockholders' Deficit for the year ended
December 31, 1995................................................
Statement of Cash Flows for the year ended Deecmber 31, 1995.......
Notes to Financial Statements......................................
SPI MANAGED CARE OF BROWARD, INC.
Independent Auditors' Report.......................................
Balance Sheets - December 31, 1995 and 1994........................
Statements of Operations for the years ended December 31, 1995
and 1994.........................................................
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995 and 1994.................................
Statements of Cash Flows for the years ended December 31, 1995
and 1994.........................................................
Notes to Financial Statements......................................
THE LEHIGH GROUP INC. ("LEHIGH") AND SUBSIDIARIES:
Report of Independent Certified Public Accountants...................
Consolidated Balance Sheets as of 12/31/96 and 12/31/95..............
Consolidated Statements of Operations for the Years Ended
12/31/96, 12/31/95, and 12/31/94...................................
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the Years Ended
12/31/96, 12/31/95, and 12/31/94...................................
Consolidated Statements of Cash Flows for the Years Ended
12/31/96, 12/31/95, and 12/31/94...................................
Notes to Consolidated Financial Statements...........................
Schedule of Valuation and Qualifying Accounts for the
Years Ended 12/31/96, 12/31/95, and 12/31/94.......................
Consolidated Statements of Operations for the Six Months
Ended 6/30/97......................................................
Consolidated Balance Sheets for the Six Months Ended 6/30/97.........
Consolidated Statement of Changes in Shareholder's Equity
(Deficit) for the Six Months Ended 6/30/97.........................
Consolidated Statements of Cash Flowsfor the Six Months
Ended 6/30/97......................................................
Notes to Consolidated Financial Statements...........................
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction.........................................................
Pro Forma Combined Balance Sheet as of June 30, 1997.................
Pro Forma Combined Statement of Operations for First Medical
Corporation, and The Lehigh Group Inc.
for the year ended December 31, 1996...............................
Pro Forma Combined Statement of Operations for the Six Months
Ended June 30, 1997... ............................................
F-1
FIRST MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
September 30, December 31,
ASSETS 1997 1996
------ ------------- ------------
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
-------- --------
Total current assets 20,688 8,549
Property and equipment, net 656 400
Intangible assets, net 7,275 2,864
Other assets 718 638
-------- --------
$ 29,337 $ 12,452
======== ========
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
-------- --------
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
-------- --------
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
(Accumulated deficit) Retained Earnings (1,945) 452
-------- --------
Total shareholders' equity 5,879 832
-------- --------
Commitments and contingencies
-------- --------
TOTAL $ 29,337 $ 12,452
======== ========
See accompanying notes to consolidated financial statements.
F-2
FIRST MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- ------------
Revenue:
Capitated revenue - Humana $ 39,768 $ 33,694
Fee for service 6,727 5,176
Other revenue 5,514 665
----------- ------------
Total revenue 52,009 39,535
Medical expenses 43,843 32,335
Cost of sales 2,643 -
----------- ------------
Gross profit 5,523 7,200
----------- ------------
Operating Expenses:
Salaries and related benefits 2,540 2,625
General and administrative 4,355 2,999
Depreciation and amortization 610 404
----------- ------------
Total operating expenses 7,504 6,028
(Loss) Income before interest, taxes and other (1,981) 1,172
Other expense:
Interest expense, net (288) (37)
----------- ------------
(288) (37)
----------- ------------
(Loss) Income before taxes (2,269) 1,135
Provision for income taxes - 454
=========== ============
Net (loss) income $ (2,269) $ 681
=========== ============
(Loss) Earnings per share
Primary $ (0.16)
===========
Fully diluted $ (0.01)
===========
Weighted average number of common shares
and share equivalents outstanding
Primary 14,590
===========
Fully diluted 258,126
===========
See accompanying notes to consolidated financial statements.
F-3
FIRST MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
Additional Retained Total
COMMON Paid-in Earnings Stockholders'
STOCK capital (Deficit) Equity
---------- ------------- ------------- ---------------
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 9/30/97 -- -- (2,269) (2,269)
------- ------- ------- -------
Balance September 30, 1997 $ 23 $ 7,801 $(1,945) $ 5,879
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
FIRST MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands)
1997 1996
------------ ------------
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) --
------- -------
Net cash used in operating activities (5,370) (710)
------- -------
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 --
------- -------
Net cash used in investing activities 159 (64)
------- -------
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
------- -------
Net cash provided by financing activities 7,975 621
------- -------
Increase (Decrease) in cash and cash equivalents 2,764 (153)
Cash and cash equivalents, beginning of the year 63 199
------- -------
Cash and cash equivalents, end of period $ 2,827 $ 46
======= =======
Supplemented disclosure of Non cash flow:
1) The issuance of FMG stock to FMC shareholders, net $ 2,279
2) Capital contributions by GDSI in FMG in lieu of a payable 488
3) Capital contributions by GDSI in AMCD in lieu of a payable 165
See accompanying notes to consolidated financial statements.
F-5
First Medical Group, Inc.
Notes to Financial Statements
September 30, 1997
1. BASIS OF PRESENTATION
The financial statements presented reflect First Medical Corporation's
acquisition of Lehigh since the acquisition date of July 9, 1997. Although
legally the Lehigh Group acquired First Medical Corporation, for accounting
purposes First Medical Corporation is considered the accounting acquirer (i.e.,
the reverse acquisition). Therefore, the operating results of Lehigh are
included in the statement of operation since the acquisition date (July 9, 1997)
and the September 30, 1997 balance sheet reflects the effect of the acquisition
of Lehigh.
The financial information for the 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.
Earnings per share is not presented for 1996 because such presentation would be
meaningless.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits. For purposes of the
consolidated statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or
less to be a cash equivalent.
(b) HUMANA IBNR RECEIVABLE AND CLAIMS RESERVE FUNDS
Humana withholds certain amounts each month from the centers' Part A,
Part B, and supplemental funding in order to cover claims incurred but
not reported or paid. The amount is used by Humana to pay the centers'
Part A, Part B and supplemental costs. The amounts withheld by Humana
to cover incurred but not reported or paid claims varies by center
based on the history of the respective center and is determined solely
by Humana.
Humana also withholds a certain amount each month from the centers'
Part A capitation funding. This amount represents a "catastrophic
reserve fund" to be utilized for the payment of a center's Part A
costs in the event a center ceases operations and the incurred but not
reported reserves are not adequate to reimburse providers for Part A
services rendered. This amount is calculated monthly by Humana.
The withholdings are used to pay the centers' medical claims, which
Humana pays on the centers' behalf. The remaining amount after claims
have been paid is remitted to the company.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property
and equipment is calculated on the straight-line method over the
estimated useful lives. (Medical and office equipment - 5 years and
Furniture and fixtures - 7 years)
(d) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, 15 years. The Company
assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
F-6
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
The Company entered into a non-compete agreement with a former
employee and shareholder. This non-compete agreement is being
amortized on a straight-line basis over the life of the agreement
which is two years.
The Company entered into three employment/non-compete agreements with
three shareholders. The agreements consist of guaranteed payments
regardless if any services are rendered. These agreements are being
amortized on a straight line basis over 5 years which is the life of
the agreement (3 years) plus the subsequent non-compete period (2
years).
Deferred organization costs consist principally of legal, consulting
and investment banking fees which were incurred strictly in connection
with the incorporation of FMC and proposed merger with Lehigh. The
costs related to the FMC transaction are being amortized over five
years. The costs related to the Lehigh merger will begin amortizing
when the merger is complete.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement required that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events change in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used in measured by a comparison of the carrying
amount of an asset of future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair values less costs to sell. The Company has no impaired
assets at September 30, 1997.
(f) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment due.
(g) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and supplemental
funds is recognized monthly on the basis of the number of Humana
members assigned to the primary care centers and the contractually
agreed-upon rates. The primary care centers receive monthly payments
from Humana after all expenses paid by Humana on behalf of the
centers, estimated claims incurred but not reported and claims reserve
fund balances have been determined. In addition to Humana payments,
the primary care centers receive copayments from commercial members
from each office visit, depending upon the specific plan and options
selected and receive payments from non-Humana members on a
fee-for-services basis.
Medical services are recorded as expenses in the period in which they
are incurred. Accrued medical claims are reflected in the consolidated
balance sheet and are based upon costs incurred for services rendered
prior to and up to September 30, 1997. Included are services
F-7
incurred but not reported as of September 30, 1997, based upon actual
costs reported subsequent to September 30, 1997 and a reasonable
estimate of additional costs.
AMCMC and AMCD revenues are derived from medical services rendered to
patients and annual membership fees charged to individuals, families
and corporate members. Membership fees are non-refundable and are
recognized as revenue over the term of the membership. Corporate
members are also required to make advance deposits based upon plan
type, number of employees and dependents. The advance deposits are
initially recorded as deferred income and then recognized as revenue
when service is provided. As the advance deposits are utilized,
additional advance deposits are required to be made by corporate
members.
FMC-HS will recognize revenue under the management consulting service
agreements on a fee-for-service basis as services are rendered by
FMC-HS personnel.
Fee-for-service revenue is reported at the estimated net realizable
amounts from patients and third-party payors as services are rendered.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, Humana IBNR receivable claims reserve funds, other
receivables, prepaid expenses and other current assets, accounts
payable and other accrued expenses, accrued medical claims, loan
payable to Humana, loans payable to bank and obligations to certain
stockholders approximate fair value at September 30, 1997 because of
the short term maturity of these instruments.
(j) FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are
remeasured into the US dollar functional currency for consolidation
and reporting purposes. Current rates of exchange are used to
remeasure assets and liabilities and revenue and expense are
remeasured at average monthly exchange rates prevailing during the
year.
(k) STOP-LOSS FUNDING
The primary care centers are charged a stop-loss funding fee by Humana
for the purpose of limiting a center's exposure to Part A costs and
certain Part B costs associated with a member's health services.
For the nine months ended September 30, 1997, the stop-loss threshold
for both Part A and Part B costs for Medicare members was $40,000 per
member per calendar year for both SPI and SPI Hillsborough. For
commercial members, the stop-loss threshold for both Part A and Part B
costs was $20,000 and $15,000 for SPI Hillsborough, respectively.
Since the SPI and SPI Hillsborough centers are not responsible for
claims in excess of the threshold, income and the corresponding
expense, both equal to the stop-loss funding are recognized by SPI and
SPI Hillsborough. These amounts are included in revenue and medical
expenses, respectively, in the accompanying consolidated statement of
income.
F-8
For Midwest, the stop-loss thresholds for Part A and for Part B costs
for Medicare members were $45,000 and $15,000, respectively, per
member per calendar year and the stop-loss thresholds for Part A and
for Part B commercial members were $60,000 and $15,000 respectively,
per member per calendar year.
(l) MATERNITY FUNDING
The primary care centers are charged a maternity funding fee on
commercial membership for the purpose of limiting the center's
exposure to Part A and Part B costs associated with a commercial
member's pregnancy or related illness. Since the SPI and SPI
Hillsborough centers are not responsible for claims in excess of the
amount contributed to the maternity fund, income and expenses both
equal to the maternity fund are recognized by SPI Hillsborough and are
included in revenue and medical expenses, respectively in the
accompanying consolidated statement of operations.
3. INVESTMENT IN LEHIGH
In February, 1997, the Company elected to convert its $300,000 convertible
debenture into 937,500 shares of Lehigh. In addition, the Company purchased
1,920,000 shares in Lehigh for $539,000. As a result of these purchases of
stock, the Company owns 25.4% of Lehigh.
4. SUBSEQUENT EVENTS
On July 9, 1997 at a Special Meeting (the "Special Meeting") of stockholders of
the Lehigh Group, Inc. ("Lehigh"), the stockholders of Lehigh approved the
merger (the "Merger") pursuant to the terms of the Agreement and Plan of Merger
dated as of October 29, 1996 (the "Merger Agreement") among Lehigh, First
Medical Corporation ("FMC") and Lehigh Management Corp., a wholly-owned
subsidiary of Lehigh ("Merger Sub"). On the same day, Merger Sub was merged with
and into FMC and each outstanding share of common stock of FMC the "FMC Common
Stock"), was exchanged for (i) 1,127.675 shares of Lehigh's Common Stock, par
value $.001 per share ("Lehigh Common Stock") and (ii) 103.7461 shares of
Lehigh's Series A Convertible Preferred Stock, par value $.001 per share (the
"Lehigh Preferred Stock"), each of which is convertible into 250 shares of
Lehigh Common Stock. Prior to the Merger, FMC held apporximately 25.4% of the
outstanding shares of Lehigh Common Stock which were acquired through two series
of transactions.
There were outstanding 10,000 shares of FMC Common Stock immediately prior to
the Merger. These share were exchanged for a total of (i) 11,276,750 shares of
Lehigh Common Stock and (ii) 1,037,461 shares of Lehigh Preferred Stock.
FMC and Generale De Sante International, plc ("GDS") are parties to a
Subscription Agreement, dated June 11, 1996, pursuant to which GDS paid
approximately $4,500,000 in order to acquire a variety of ownership interests in
FMC and its subsidiaries, including 10% of the shares of FMC Common Stock (which
were automatically exchanged pursuant to the Merger for shares of Lehigh Common
Stock and Lehigh Preferred Stock) and shares of FMC's 9% Series A
F-9
Convertible Preferred Stock (the "FMC Preferred Stock") convertible into 10% of
the shares of FMC Common Stock, which shares of FMC Preferred Stock remained
outstanding and convertible following the Merger.
F-10
Independent Auditors' Report
The Board of Directors
First Medical Corporation:
We have audited the accompanying consolidated balance sheet of First Medical
Corporation as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Medical Corporation as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
March 25, 1997
F-11
FIRST MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
Current assets:
Cash and cash equivalents $63,014
Humana IBNR receivable and claims reserve funds (note 10) 7,308,482
Other receivables, net of $50,000 reserve for uncollectible accounts 536,506
Due from related parties, net (note 7) 462,329
Prepaid expenses and other current assets (note 1(d)) 179,125
------------
Total current assets 8,549,456
Property and equipment, net (note 3) 399,841
Intangible assets, net (note 4) 2,735,848
Minority interest 338,077
Other assets (note 1(d)) 300,000
------------
$12,323,222
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued expenses $2,037,447
Accrued medical claims, including amounts incurred but not reported 6,070,506
Corporate deposits 806,476
Loans payable to Humana (note 5) 97,628
Loans payable to banks (note 6) 750,000
Obligations to certain stockholders (note 7) 421,600
Deferred income taxes, net (note 8) 112,500
Income taxes payable (note 8) 300,000
------------
Total current liabilities 10,596,157
Loans payable to Humana, net of current maturities (note 5) 277,372
Obligations to certain stockholders, net of current maturities (note 7) 746,196
-----------
Total liabilities 11,619,725
-----------
Stockholders' equity:
Capital stock 15,000 shares authorized; 10,000 shares issued and outstanding at 100
par value, $.01 per share
Additional paid-in capital 379,685
Retained earnings 323,712
-----------
Total stockholders' equity 703,497
-----------
Commitments and contingencies (note 12)
$12,323,222
===========
See accompanying notes to consolidated financial statements.
F-12
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996
Revenues:
Capitated revenue - Humana (note 10) $ 45,069,743
Fee for service 7,075,458
Other revenue 869,124
----------
Total revenue 53,014,325
-----------
Medical expenses 43,526,181
-----------
Gross profit 9,488,144
Operating expenses:
Salaries and related benefits (note 7) 3,502,860
General and administrative 4,172,568
Depreciation and amortization 530,490
Minority interest in net loss of consolidated subsidiaries (338,077)
Preopening and development costs related to international clinics 828,568
-----------
Total operating expenses 8,696,409
Income before interest, taxes, and other 791,735
-----------
Other expense:
Interest expense, net (55,523)
Other expense (55,523)
-------
Income before taxes 736,212
Provision for income taxes (note 8) 412,500
-----------
Net income $ 323,712
===========
See accompanying notes to consolidated financial statements
F-13
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1996
Additional Total
Capital paid- Retained stockholders'
Stock in capital earnings equity
----- ---------- -------- ------
Balance, December 31, 1995 $1,500 $1,200 $224,595 $227,295
FMC Corporate transaction (1,400) 225,995 (224,595) --
Capital contribution to AMCD -- 152,490 -- 152,490
Net income -- -- 323,712 323,712
------ -------- -------- --------
Balance, December 31, 1996 $ 100 $379,685 $323,712 $703,497
====== ======= ======= =======
See accompanying notes to consolidated financial statements.
F-14
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
Cash flows from operating activities:
Net income $323,712
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 530,490
Gain on equity investments (78,259)
Minority interest in net loss of consolidated subsidiaries (338,077)
Change in assets and liabilities, net of acquisitions :
Increase in Humana IBNR receivable and claims reserve funds (2,343,563)
Increase in other receivables (536,506)
Increase in due from related parties, net (457,447)
Increase in prepaid expenses and other current assets (94,438)
Increase in other assets (300,000)
Increase in accounts payable and other accrued expenses 450,634
Increase in accrued medical claims, including amounts incurred but not reported 1,858,086
Increase in corporate deposits 56,201
Increase in income taxes payable 278,272
Increase in deferred income taxes liability, net 83,027
--------
Net cash used in operating activities (567,868)
-----------
Cash flows used in investing activities:
Capital expenditures (119,328)
Organizational costs (477,790)
Acquisition of additional ownership interests in BMC, SPI Broward, and Midwest, net (151,249)
of cash acquired
Proceeds from sale of investment 300,000
---------
Net cash used in investing activities (448,367)
----------
Cash flows provided by financing activities:
Proceeds from loan payable to Humana 325,000
Proceeds from loans payable to banks 650,000
Repayment of loans payable to banks (250,000)
Proceeds from payable to stockholders 374,596
Payment of obligation to stockholders (371,600)
Contribution to capital of AMCD 152,490
---------
Net cash provided by financing activities 880,486
---------
Decrease in cash and cash equivalents (135,749)
Cash and cash equivalents, beginning of year 198,763
---------
Cash and cash equivalents, end of year $ 63,014
========
Supplemental disclosure cash flow information: Cash paid during the year for:
Interest $ 48,748
========
Income taxes $ 33,291
========
F-15
FIRST MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Supplemental disclosure of noncash flow:
(1) As described in note (1), AMCMC purchased certain assets and assumed
certain liabilities in the amount of $1,020,275 which is included in
goodwill at December 31, 1996 (note 4).
(2) The Company entered into a noncompete agreement with a shareholder and
former employee in the amount of $200,000.
(3) Effective January 1, 1996, the Company acquired a controlling interest in
two of its equity investments (see note 1(a)). The fair value of the assets
acquired and liabilities assumed were:
Assets Liabilities Net Assets
------ ----------- ----------
SPI Broward $ 117,085 55,558 61,527
Broward $3,082,464 3,242,579 (160,155)
(4) The Company entered into employment/non-compete agreements with three
executives in the amount of $964,800.
See accompanying notes to consolidated financial statements.
F-16
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION AND OPERATION
First Medical Corporation ("FMC" or the "Company") is an international provider
of management, consulting, and financial services to physicians, hospitals and
other health care delivery organizations and facilities. FMC's operations are
conducted through three divisions: (a) a physician practice management division
which provides physician management services including the operation of clinical
facilities and management services to medical groups, (b) an international
division which manages medical centers in Eastern Europe and the Commonwealth of
Independent States (the former Soviet Union) ("CIS"), and (c) a recently formed
hospital services division which will provide a variety of administrative and
clinical services to proprietary acute care hospitals and other health care
providers.
The consolidated financial statements include the accounts of FMC and its
majority owned subsidiaries: MedExec, Inc. and subsidiaries ("MedExec");
American Medical Clinics Management Company, Inc. ("AMCMC"); American Medical
Clinics Development Corporation, Limited ("AMCD") and FMC Healthcare Services,
Inc. ("FMC-HS"). All significant intercompany balances and transactions have
been eliminated in consolidation.
MedExec, Inc. ("MedExec") was incorporated on March 14, 1991.
On January 1, 1996 MedExec and American Medical Clinics, Inc. (AMC) entered into
a transaction which consisted of the following:
* AMC and MedExec incorporated FMC;
* All of the outstanding shares of MedExec and AMC were converted into shares
of FMC;
* The shareholders of MedExec and AMC received 48% and 52% of the shares of
FMC, respectively;
* 100% of the AMC shares were distributed to the shareholders of FMC (former
shareholders of MedExec received 48% of the distributed shares of AMC);
* In connection with the above transaction, FMC entered into separate
employment contracts with three executives of MedExec whereby the
respective executives are guaranteed payments regardless if any services
are rendered. The agreements are for a three year period and when the
contracts expire they include an additional two year covenant not to
compete. The employment/non-compete agreements have been classified as
intangible assets in the financial statements and are being authorized over
five years. (See Note 4).
The above transaction was accounted for under the purchase method of accounting
with MedExec being deemed the accounting acquirer despite the fact that AMC
received 52% of the shares of FMC. This result was reached due to among other
factors the fact that immediately after this transaction, the FMC Board of
Directors was comprised of four former shareholders of MedExec and three former
shareholders of AMC and the fact that MedExec constituted the larger share of
operations. Because of the short term monetary nature of AMC's assets and
liabilities, historical book values constituted fair value on the transaction
date resulting in no purchase price adjustments under Accounting Principles
Board No. 16.
F-17
On January 2, 1996, AMCMC, a newly formed subsidiary of FMC, acquired from AMC a
membership list (contracts to provide medical services to customers) and assumed
certain liabilities of AMC. The transaction was accounted for under the purchase
method of accounting because, in essence, the purchase of the membership list
represented the acquisition. AMCMC acquired the income stream of an operating
enterprise. Goodwill was recorded in the amount of $1,020,275 related to this
transaction.
AMCMC, a wholly owned subsidiary of the Company, has entered into a management
services agreement with the AMC clinics located in the CIS, whereby the AMC
clinics provide medical services to AMCMC customers (see note 7). AMCMC collects
all of the revenues directly from its members, which it is legally entitled to
collect. AMCMC also pays all of AMC's expenses, including but not limited to the
salaries of the physicians, which it is legally obligated to pay.
On January 20, 1996, the Company entered into an agreement with Generale de
Sante International, plc ("GDS") to form AMCD, an Irish company. AMCD was
established to develop and operate medical clinics throughout the world with the
exception of within the CIS. The Company and GDS's shareholderings in AMCD
Common Stock, as revised, are 51% and 49%, respectively. The authorized share
capital of AMCD is comprised of 1,000 shares of Common Stock, $1.00 par value.
As consideration for the shares, the Company agreed to contribute certain assets
at historical cost in the amount of $300,001. GDS agreed to contribute $299,999
to AMCD and provide a credit facility of up to $1.2 million to be used for the
development of new clinics. These contributions resulted in total capital of
AMCD of $600,000. Included in the statement of cash flows for the year ended
December 31, 1996 is $152,490 for GDS's capital contribution of $299,999. GDS
has an option to purchase up to 51% of the AMCD's Common stock in the event
certain changes in management control occur. The additional consideration will
be determined by the Company and GDS.
(A) PHYSICIAN PRACTICE MANAGEMENT DIVISION - MEDEXEC
The Company's physician practice management operations are currently conducted
through MedExec. MedExec functions in two capacities as a management services
organization: (i) owning and operating nine primary care centers (located in
Florida and Indiana) which have full risk contracts for primary care and part B
services and partial risk (50%) for part A services, and (ii) managing sixteen
multi-specialty groups (located in Florida and Texas) with fee-for service and
full risk contracts for primary care and part B services and partial risk (50%)
for part A services. Full risk contracts are contracts with managed care
companies where FMC assumes essentially all responsibility for a managed care
members' medical costs and partial risk contracts are contracts where FMC
assumes partial responsibility for a managed care members' medical costs.
Ownership and operation of primary care centers ("centers") with full risk
contracts are achieved through MedExec's subsidiaries: SPI Managed Care, Inc.
("SPI"), incorporated on February 19, 1988, SPI Managed Care of Hillsborough
County, Inc. ("SPI Hillsborough"), incorporated on April 20, 1993, Broward
Managed Care, Inc. ("BMC"), incorporated on January 21, 1994, and Midwest
Managed Care, Inc. ("Midwest"), incorporated on March 29, 1995.
F-18
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
SPI, SPI Hillsborough, and BMC provide health care services subject to
affiliated provider agreements entered into with Humana Medical Plan, Inc.;
Humana Health Plan of Florida, Inc.; and Humana Health Insurance Company of
Florida, Inc. and their affiliates. Midwest provides health care services
subject to affiliated provider agreements entered into with Humana Health Plan,
Inc., Humana Health Chicago, Inc.; and Humana Health Chicago Insurance Company,
Humana Insurance Company and their affiliates. All of the Humana entities will
collectively be known as "Humana". The Company is dependent on Humana for the
majority of its operations. For the year ended December 31, 1996, 85 percent of
the Company's revenue is from such agreements with Humana.
SPI operates two centers in Dade County, Florida located in Kendall and Cutler
Ridge.
SPI Hillsborough operates four centers in the west coast of Florida located in
Plant City, New Port Richey, Lutz, and South Dale Mabry. The affiliated provider
agreements to operate the centers in New Port Richey, Lutz and South Dale Mabry
were entered into in 1996.
BMC operates two centers in Broward County, Florida located in Plantation and
Sunrise.
During 1996, Midwest operated one center in Hammond, Indiana. In February 1997,
Midwest also began to operate an additional center in Gary, Indiana.
Health services are provided to Humana members through the centers and their
networks of physicians and health care specialists. Services to be provided by
the centers include medical and surgical services, including all procedures
furnished in a physician's office such as X-rays, nursing services, blood work
and other incidental, drugs and medical supplies. The centers are responsible
for providing all such services and for directing and authorizing all other care
for Humana members. The centers are financially responsible for all out-of-area
care rendered to a member and provide direct care as soon as the member is able
to return to the designated medical center.
Humana has agreed to pay the centers monthly for services provided to members
based on a predetermined amount per member ("capitation") comprised of
in-hospital services and other services defined by contract ("Part A"),
in-office ("Primary") and other medical services defined by the agreements
("Part B"). For new or start-up centers like the Gary center, Humana has
guaranteed a monthly amount to cover the costs of providing primary care
services and other operating costs. The guaranteed payments are made until the
earlier of the date on which the center achieves a certain membership level or
six months to one calendar year from the commencement date of the agreement at
which point Humana will pay the center a capitation.
SPI Managed Care of Broward, Inc. ("SPI Broward"), incorporated in the State of
Florida on July 15, 1992, manages the full risk managed care segment of a
nonaffiliated multi-specialty group practice in Broward County, Florida.
Effective February 1, 1996, First Medical Corporation-Texas Division
("FMC-Texas") began managing a multi-specialty medical practice in Houston,
Texas ("Houston medical practice") that has a full risk contract with Humana and
fee-for-service.
On December 31, 1995, FMC had a 23.75% and 50% investment, respectively, in BMC
and SPI Broward. Effective January 1, 1996 the Company acquired 71.25% and 50%
interest, respectively, in BMC and SPI Broward, respectively for $50,000 plus a
multiple of the average earnings before income taxes of these two entities
during the years ending December 31, 1996 and 1997. The multiple is three for
cash consideration, and 3.5 times for a combination of stock and cash. Based
upon the earnings of BMC for the year ended December 31, 1996 and assuming that
the multiple used is 3.5 times, the purchase price for the acquisition would
F-19
FIRST MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
approximate $1.7 million. This acquisition gives the Company a 95% and 100%
investment in BMC and SPI Broward, respectively. The final value of the
consideration is not yet determinable as the seller has the option of obtaining
cash and/or stock and as the price is based on the average of 1996 and 1997
earnings. Additional goodwill will be recorded at the time the transaction is
finalized in accordance with the purchase method of accounting. Goodwill at
December 31, 1996 amounted to $327,778.
On December 31, 1995, the Company had a 66 2/3% investment in Midwest. Effective
January 1, 1996, the Company acquired the remaining investment and recorded
goodwill of $150,855 as a result of the purchase method of accounting. Book
value constituted fair value on the transaction date.
(B) HOSPITAL SERVICES DIVISION- FMC-HS
FMC-HS was incorporated on June 13, 1996 and is 51% owned by the Company and 49%
owned by General de Sante International, PLC ("GDS"). The Company commenced
operations in August 1996 and plans to provide management, consulting, and
financial services to troubled not-for-profits and other health care providers.
(C) PROPOSED LEHIGH MERGER
On October 29, 1996, the Company entered into a proposed merger agreement with
the Lehigh Group, Inc. ("Lehigh") whereby upon merger, FMC would control
approximately 96% of Lehigh. The proposed merger is subject to stockholder
approval of Lehigh and the Company. Under the terms of the proposed merger, each
share of the FMC Common Stock would be exchanged for (i) 1,127.675 shares of
Lehigh Common Stock and (ii) 103.7461 shares of Lehigh Preferred Stock. Each
share of Lehigh Preferred Stock will be convertible into 250 shares of Lehigh
Common Stock and will have a like number of votes per share, voting together
with the Lehigh Common Stock. Currently, there are outstanding 10,000 shares of
FMC Stock. As a result of these actions, immediately following the merger,
current Lehigh stockholders and FMC stockholders will each own 50% of the issued
F-20
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
and outstanding shares of Lehigh Common Stock. In the event that all of the
shares of Lehigh Preferred Stock issued to the Company's stockholders are
converted into Lehigh Stock, Lehigh stockholders will own approximately 4% and
the Company's stockholders will own approximately 96% of the issued and
outstanding shares of Lehigh Common Stock. In addition, under the terms of the
proposed merger agreement, Lehigh will be renamed "First Medical Group, Inc."
In connection with the proposed merger, Lehigh issued a convertible debenture to
the Company in the amount of $300,000 with interest at two percent per annum
over the prime lending rate. The debenture is recorded in other assets. In
addition, the Company advanced $50,000 to Lehigh. The advance is included in
prepaid expenses and other current assets.
On February 12, 1997, the Company purchased 1,920,757 shares of Lehigh stock for
$.281 per share.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits. For purposes of the consolidated
statement of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be a cash
equivalent.
(B) HUMANA IBNR RECEIVABLE AND CLAIMS RESERVE FUNDS (63)
Humana withholds certain amounts each month from the centers' Part A, Part B,
and supplemental funding in order to cover claims incurred but not reported or
paid. The amount is used by Humana to pay the centers' Part A, Part B and
supplemental costs. The amounts withheld by Humana to cover incurred but not
reported or paid claims varies by center based on the history of the respective
center and is determined solely by Humana.
Humana also withholds a certain amount each month from the centers' Part A
capitation funding. This amount represents a "catastrophic reserve fund" to be
utilized for the payment of a center's Part A costs in the event a center ceases
operations and the incurred but not reported reserves are not adequate to
reimburse providers for Part A services rendered. This amount is calculated
monthly by Humana.
The withholdings are used to pay the centers' medical claims, which Humana pays
on the centers' behalf. The remaining amount after claims have been paid is
remitted to the company.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight line method over the estimated useful
lives. (Medical and office equipment - 5 years and Furniture and fixtures - 7
years)
(D) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, 15 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
F-21
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
The Company entered into a non-compete agreement with a former employee and
shareholder. This non-compete agreement is being amortized on a straight line
basis over the life of the agreement which is two years.
The Company entered into three employment/non-compete agreements with three
shareholders. The agreements consist of guaranteed payments regardless if any
services are rendreed. These agreements are being amortized on a straight line
basis over 5 years which is the life of the agreement (3 years) plus the
subsequent non-compete period (2 years).
Deferred organization costs consist principally of legal, consulting and
investment banking fees which were incurred strictly in connection with the
incorporation of FMC and proposed merger with Lehigh. The costs related to the
FMC transaction are being amortized over five years. The costs related to the
subsequent Lehigh merger will begin amortizing when the merger is complete.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement required that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events change in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset of future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair values less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity. The Company has no
impaired assets at December 31, 1996.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(G) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and supplemental funds is
recognized monthly on the basis of the number of Humana members assigned to the
primary care centers and the contractually agreed-upon rates. The primary care
centers receive monthly payments from Humana after all expenses paid by Humana
on behalf of the centers, estimated claims incurred but not reported and claims
reserve fund balances have been determined. In addition to Humana payments, the
primary care centers receive copayments from commercial members from each office
visit, depending upon the specific plan and options selected and receive
payments from non-Humana members on a fee-for-service basis.
F-22
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Medical services are recorded as expenses in the period in which they are
incurred. Accrued medical claims are reflected in the consolidated balance sheet
and are based upon costs incurred for services rendered prior to and up to
December 31, 1996. Included are services incurred but not reported as of
December 31, 1996, based upon actual costs reported subsequent to December 31,
1996 and a reasonable estimate of additional costs.
AMCMC and AMCD revenues are derived from medical services rendered to patients
and annual membership fees charged to individuals, families and corporate
members. Membership fees are non-refundable and are recognized as revenue over
the term of the membership. Corporate members are also required to make advance
deposits based upon plan type, number of employees and dependents. The advance
deposits are initially recorded as deferred income and then recognized as
revenue when service is provided. As the advance deposits are utilized,
additional advance deposits are required to be made by corporate members.
FMC-HS will recognize revenue under the management consulting service agreements
on a fee-for-service basis as services are rendered by FMC-HS personnel.
Fee-for-service revenue is reported at the estimated net realizable amounts from
patients and third-party payors as services are rendered.
(H) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, Humana IBNR receivable and claims reserve funds, other receivables,
prepaid expenses and other current assets, accounts payable and other accrued
expenses, accrued medical claims, loan payable to Humana, loans payable to bank
and obligations to certain stockholders approximate fair value at December 31,
1996 because of the short term maturity of these instruments.
(J) FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are remeasured
into the US dollar functional currency for consolidation and reporting purposes.
Current rates of exchange are used to remeasure assets and liabilities and
revenue and expense are remeasured at average monthly exchange rates prevailing
during the year.
(K) STOP-LOSS FUNDING
The primary care centers are charged a stop-loss funding fee by Humana for the
purpose of limiting a center's exposure to Part A costs and certain Part B costs
associated with a member's heath services.
F-23
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
For the year ended December 31, 1996, the stop-loss threshold for both part A
and Part B costs for Medicare members was $40,000 per member per calendar year
for both SPI and SPI Hillsborough. For commercial members, the stop-loss
threshold for both Part A and part B costs was $20,000 and $15,000 for SPI and
SPI Hillsborough, respectively.
Since the SPI and SPI Hillsborough centers are not responsible for claims in
excess of the threshold, income and the corresponding expense, both equal to the
stop-loss funding are recognized by SPI and SPI Hillsborough. These amounts are
included in revenue and medical expenses, respectively, in the accompanying
consolidated statement of income. Stop-loss funding for the SPI and SPI
Hillsborough centers for the year ended December 31, 1996 was approximately
$4,733,000.
For Midwest, the stop-loss thresholds for Part A and for Part B costs for
Medicare members were $45,000 and $15,000, respectively, per member per calendar
year and the stop-loss thresholds for Part A and for Part B for commercial
members were $60,000 and $15,000 respectively, per member per calendar year.
(L) MATERNITY FUNDING
The primary care centers are charged a maternity funding fee on commercial
membership for the purpose of limiting the center's exposure to Part A and Part
B costs associated with a commercial member's pregnancy or related illness.
Since the SPI and SPI Hillsborough centers are not responsible for claims in
excess of the amount contributed to the maternity fund, income and expenses both
equal to the maternity fund are recognized by SPI and SPI Hillsborough and are
included in revenue and medical expenses, respectively in the accompanying
consolidated statement of operations. Maternity funding for the SPI and SPI
Hillsborough centers for the year ended December 31, 1996 was approximately
$1,403,000.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1996 consists of the following:
Medical, computer and office equipment $703,793
Furniture and fixtures 37,986
--------
741,779
Less: accumulated depreciation 341,938
---------
Property and equipment, net $399,841
=========
F-24
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1996 consist of:
Goodwill $1,498,908
Employment/non-compete agreements
with executives 964,800
Organization costs 480,337
Noncompete agreement with former
shareholder 200,000
----------
3,144,045
Less: accumulated amortization 408,197
----------
$2,735,848
==========
As stated in note 1, the following transactions created goodwill at December 31,
1996:
AMCMC $1,020,275
BMC and SPI Broward 327,778
Midwest Managed Care 150,855
----------
$1,498,908
==========
The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangible assets as well as the amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying value and estimates of useful lives. At this time, the Company believes
that no significant impairment of goodwill or other intangible assets has
occurred and that no reduction of the amortization periods is warranted.
(5) LOANS PAYABLE TO HUMANA
Loans payable to Humana at December 31, 1996 consist of the following:
Secured loan for $250,000 bearing interest at 9.5%. Payable in 48 monthly
installments beginning in February 1997 of $6,850 which includes principal
and interest. The loan is secured by the Company's equipment and
furnishings at the Houston Medical Practice. Proceeds from the loan were
used primarily for the purchase of equipment at the Houston medical
practice. $ 250,000
F-25
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Secured loan for $75,000 bearing interest at 9.5%. Payable in twelve
monthly installments beginning in February 1997 which includes principal
and interest of $7,172. The loan is secured by the Company's equipment and
furnishings at the Houston Medical Practice. Proceeds from the loan were
used primarily for working capital needs of the Houston medical practice. 75,000
Advance of $50,000 bearing interest at 10% per year for the purchase and
installation of a computer system and related training at the Midwest
locations. The loan is due by September 30, 2000. Monthly installments to
Humana will be a minimum of 10% of any positive balance in Midwest's Part A
Fund. In the event no positive balance exists in the Part A fund, Midwest
will make a minimum monthly payment of $1,268 until the loan is repaid.
50,000
--------
Total long-term loans payable to Humana 375,000
Less current installments 97,628
--------
Loans payable to Humana, excluding current installments $ 277,372
===========
The aggregate maturities of loans payable to Humana for each of the five years
subsequent to December 31, 1996 are as follows:
1997 $ 97,628
1998 81,751
1999 82,688
2000 106,097
2001 6,836
--------
$375,000
========
(6) LOANS PAYABLE TO BANKS
Loans payable to banks at December 31, 1996 consists of the following:
Unsecured line of credit for $200,000 bearing interest at prime (8.25% at
December 31, 1996). The line of credit is personally guaranteed by several
stockholders of the Company and other individuals. The principal balance is
due on June 2, 1997. Interest is due monthly. The $200,000 drawn under this
line of credit was used primarily for development costs relating to
Midwest. $ 200,000
F-26
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Line of credit for $1,500,000 bearing interest at 1/2% above prime (8.75%
at December 31, 1996). $900,000 of the line is secured by MedExec's cash
and certain net assets of the Company. Secured assets total $1,237,976 at
December 31, 1996. The principal balance is due on May 31, 1997 and
interest is due monthly. In order to borrow the additional $600,000
(unsecured portion of line), the bank would require the personal guarantee
of a stockholder of the Company. The $550,000 drawn under this line of
credit was used primarily for working capital requirements. 550,000
---------
$ 750,000
=========
FMC recently obtained a loan commitment in the amount of $3,300,000 from the
same bank which provided the $1,500,000 line of credit. The commitment is for a
120 day loan bearing interest at the prime plus 1/2% (8.75% at December 31,
1996). The purpose of the loan is to provide financing for the Lehigh merger.
The loan is secured by all of the assets of FMC, 50% of the shares of FMC Common
Stock owned by FMC's Chairman and Chief Executive Officer and any and all shares
of Lehigh Common Stock are issuable to FMC.
The various debt agreements contain certain covenants. Under the most
restrictive of these provisions, certain stockholders of the Company must
personally guarantee $600,000 for the $1,500,000 line of credit as well as the
additional $3,300,000 line of credit.
(7) RELATED PARTY TRANSACTIONS
At December 31, 1996, obligations to certain shareholders includes the
following:
Obligation to pay consulting fees to three stockholders in connection with
the transaction between MedExec and AMC. Obligations have been recorded as
a liability due to the stockholders not having to provide any services for
this consideration to be paid. Payable monthly in the amount of $26,800.
Obligations will be repaid by December 31, 1998. The amount of
consideration paid in 1996 related to these agreements was $321,600. $ 643,200
Credit facility bearing interest at 4.5% from General de Sante
International, plc of up to $1,200,000 to be used for the development of
the clinics of AMCD. $100,000 is to be repaid on demand at any time after
July 10, 2001, $100,000 is to be repaid on demand at any time after August
9, 2001 and $174,596 on demand any time after January 17, 2002, or on the
date GDS subscribes for shares in FMC under the subscription agreement (see
note 12). 374,596
F-27
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Obligation under non compete agreement with a former employee and
stockholder payable in monthly installments of $8,333 until June 1998 (note
4). 150,000
-------
Total obligations to stockholders 1,167,796
Less current installments 421,600
----------
Total obligations to stockholders, excluding current installments $ 746,196
==========
The aggregate maturities of obligations to stockholders for each of the five
years subsequent to December 31, 1996 are as follows:
1997 $421,600
1998 371,600
1999 --
2000 --
2001 200,000
Thereafter 174,596
----------
Total $1,167,796
==========
The Company paid salaries or consulting fees to stockholders of approximately
$1,520,700 which is included in the consolidated statement of income for the
year ended December 31, 1996.
Certain stockholders have guaranteed the $200,000 outstanding loan with the
financial institution which is described in note 6. In addition, a stockholder
will guarantee any amount in excess of $900,000 which becomes outstanding
related to the $1,500,000 line of credit described in note 6.
On January 24, 1997 the Company acquired director and officer liability
insurance in the amount of $3,000,000 with coverage expiring on December 5,
1997. Coverage under this policy extends to all duly elected or appointed
directors and officers (past, present and future).
At December 31, 1996, the Company has amounts outstanding from the AMC clinics
under its management agreement with AMCMC which total $462,329.
(8) INCOME TAXES
CURRENT DEFERRED TOTAL
US Federal $256,000 $112,500 $368,500
State and Local 44,000 -- 44,000
-------- -------- --------
$300,000 $112,500 $412,500
======== ======== ========
F-28
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Income tax expense differed from the amounts computed by applying the US
federal income tax rate of 34% to pretax income as a result of the following:
Income tax expense at the statutory rate $250,300
Reduction in valuation allowance (29,300)
Unutilized net operating losses of AMCD 122,000
State taxes, net of federal benefit 31,500
Nondeductible merger costs and meals and entertainment 38,000
--------
Income tax expense recorded in financial statements $412,500
========
The tax effects that give rise to a significant portion of the deferred income
tax assets for the year ended December 31, 1996 are as follows:
Deferred tax assets:
Executive compensation $250,616
Net loss carryforward 58,703
--------
Deferred tax asset 309,319
Valuation allowance (102,403)
--------
Net deferred tax asset 206,916
Deferred tax liabilities:
Goodwill asset 319,416
--------
Net deferred tax liability $112,500
========
The Company has provided a valuation allowance for deferred tax assets as of
December 31, 1996 for $102,403. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
or a portion of the deferred assets will be realized in the near future.
(9) LEASES
The Company has several noncancelable operating leases primarily for
office space and equipment that expire throughout 2001. Future minimum
lease payments required under noncancelable operating leases at
December 31, 1996 are as follows:
F-29
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
Year ending
December 31,
------------
1997 $ 349,327
1998 339,834
1999 120,487
2000 55,204
2001 49,656
--------
Total minimum lease payments $914,508
========
Rental expense during 1996 amounted to approximately $259,000.
(10) BUSINESS AND CREDIT CONCENTRATIONS
The Company derives the majority of its revenue from its affiliated
provider agreements with Humana 85% or approximately $45,070,000 of the
revenue of the Company for the year ended December 31, 1996 was derived
from such agreements with Humana. The amount of revenue is based on the
number of members assigned to each of the centers. Humana members
include 10,287 Medicare members and 10,420 commercial members at
December 31, 1996. The fluctuation of the number of members
significantly affects the Company's business. The receivable from
Humana at December 31, 1996 is $7,308,482.
Revenue generated by services provided by the AMC clinics in the CIS
represents 12% or approximately $6,534,000 of the revenue of the
Company for the year ended December 31, 1996.
(11) RETIREMENT PLANS
The Company sponsors 401(k) plans (the "Plans") for its domestic
operations. Employees who have worked a minimum of six months or 1000
hours and are at least 21 years of age may participate in the Plans.
Employees may contribute to the Plans up to 14 percent of their annual
salary, not to exceed $9,500 in 1996. The Company's matching
contribution is 25 cents for each dollar of the employee's elected
contribution, up to four percent of the employee's annual salary. The
Company's matching contribution was approximately $35,000 for the year
ended December 31, 1996.
(12) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company and certain stockholders are defendants in a lawsuit
brought on by a stockholder and former employee. The plaintiff is
seeking damages in excess of $1 million. Management, stockholders and
legal counsel for the Company intends to vigorously defend this action.
They are not able to determine the extent of damages, if any, at this
time. Therefore, no accrual has been recorded in the financial
statements at December 31, 1996.
To the best of the Company's knowledge, there are no material claims,
disputes or other unsettled matters (including retroactive adjustments)
concerning third party reimbursements that would have a material effect
on the consolidated financial statements of the Company.
F-30
FIRST MEDICAL CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1996
GOVERNMENTAL REGULATIONS
The Company's operations have been and may be affected by various forms
of governmental regulation and other actions. It is presently not
possible to predict the likelihood of any such actions, the form which
such actions may take, or the effect such actions may have on the
Company.
PHYSICIAN CONTRACTS
The Company has entered into employment agreements of two to three
years with its primary care physicians and into contracts with various
independent physicians to provide specialty and other referral services
both on a prepaid and a negotiated fee-for-service basis. Such costs
are included in the consolidated statement of income as medical
expense.
SUBSCRIPTION AGREEMENT
In June 1996, FMC entered into a subscription agreement with GDS by
which GDS has the right to purchase various percentages of interest in
both FMC and its subsidiaries.
MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance on a claims-made
basis through November 1, 1997 including retrospective coverage for
acts occurring since inception of its operations. Incidents and claims
reported during the policy period are anticipated to be covered by the
malpractice carrier. The Company intends to keep such insurance in
force throughout the foreseeable future. At December 31, 1996, there
are no asserted claims made against the Company that were not covered
by the policy.
Physicians providing medical services to members are provided
malpractice insurance coverage (claim-made basis), including
retrospective coverage for acts occurring since their affiliation with
the Company.
F-31
Independent Auditors' Report
The Board of Directors
MedExec, Inc.;
SPI Managed Care, Inc.; and
SPI Managed Care of Hillsborough County, Inc.:
We have audited the accompanying combined balance sheets of MedExec, Inc. and
subsidiaries; SPI Managed Care, Inc.; and SPI Managed Care of Hillsborough
County, Inc. as of December 31, 1995 and 1994, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements referred to above present
fairly, in all material respects, the combined financial position of MedExec,
Inc. and subsidiaries; and SPI Managed Care, Inc.; and SPI Managed Care of
Hillsborough County, Inc. as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996, except as to note 15,
which is as of December 23, 1996
F-32
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
Combined Balance Sheets
December 31, 1995 and 1994
ASSETS 1995 1994
------ ---- ----
Current assets:
Cash and cash equivalents $ 198,763 468,528
Humana IBNR receivable 2,062,924 2,848,518
Due from affiliates and related parties, net 54,565 196,745
Claims reserve funds 116,212 126,357
Prepaid expenses and other current assets 82,413 37,269
Deferred income taxes (note 12) -- 51,713
--------------------- -----------------------
Total current assets 2,514,877 3,729,130
Property and equipment, net (note 4) 298,060 207,199
Deferred income taxes (note 12) -- 8,287
Investments in other affiliated entities (note 3) 229,094 178,968
Intangible assets, net 2,547 4,896
--------------------- -----------------------
$ 3,044,578 4 ,128,480
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses 594,822 556,366
Accrued medical claims, including amounts incurred
but not reported 1,880,318 2,484,258
Due to Humana 192,143 56,152
Loan payable to Humana 50,000 --
Loan payable to bank 100,000 --
Income taxes payable -- 60,000
--------------------- -----------------------
Total current liabilities 2,817,283 3,156,776
--------------------- -----------------------
Commitments and contingencies (note 13)
Stockholders' equity (notes 8 and 9):
Capital stock 1,500 1,500
Additional paid-in capital 1,200 1,200
Retained earnings 224,595 969,004
--------------------- -----------------------
Total stockholders' equity 227,295 971,704
---------------- -----------------------
$ 3,044,578 4,128,480
===================== =======================
See accompanying notes to combined financial statements.
F-33
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF OPERATIONS
For each of the years in the three year period ended December 31, 1995
1995 1994 1993
-------------- ---------------------- --------------
Revenue (note 9) $22,671,902 21,317,887 11,086,690
Medical expenses 18,443,943 16,567,554 8,404,521
-------------- ---------------------- --------------
Gross profit 4,227,959 4,750,333 2,682,169
-------------- ---------------------- --------------
Operating expenses (note 9):
Salaries and related benefits 2,434,241 1,650,970 670,536
Depreciation and amortization 68,499 50,408 46,676
Other 2,131,639 1,720,198 944,237
-------------- ---------------------- --------------
Total operating expenses 4,634,379 3,421,576 1,661,449
-------------- ---------------------- --------------
Operating income (loss) (406,420) 1,328,757 1,020,720
-------------- ---------------------- --------------
Other (expense) income:
Gain (loss) on equity investments (note 3) 50,126 28,260 (149,295)
Interest income 11,310 9,593 4,071
Loss on Dominion Healthnet, Inc. (note 3) -- -- (80,009)
Other, net (19,425) (2,948) 7,356
-------------- ---------------------- --------------
Other income (expense), net 42,011 34,905 (217,877)
-------------- ---------------------- --------------
Net income (loss) $ (364,409) 1,363,662 802,843
============== ====================== ==============
(56)
See accompanying notes to combined financial statements.
F-34
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For each of the years in the three year period ended December 31, 1995
Capital Additional paid- Total
stock in capital Retained Due to stockholders'
(NOTE 8) (NOTE 8) EARNINGS STOCKHOLDERS EQUITY
------ ------ -------- ------------ ------
Balance, December 31, 1992 $ 900 1,200 143,701 37,000 182,801
Net income -- -- 802,843 -- 802,843
Dividend distributions -- -- (170,745) -- (170,745)
Issuance of stock 100 -- -- -- 100
Proceeds from due to stockholders -- -- -- 583,112 583,112
----- -------- ---------- -------- ------------
Balance, December 31, 1993 1,000 1,200 775,799 620,112 1,398,111
Net income -- -- 1,363,662 -- 1,363,662
Distribution of Midway Airlines stock, at cost -- -- (200,444) (599,556) (800,000)
Dividend distributions -- -- (970,013) -- (970,013)
Issuance of stock 500 -- -- -- 500
Repayment of due to stockholders, net -- -- -- (20,556) (20 ,556)
----- -------- -------- -------- ------------
Balance, December 31, 1994 1,500 1,200 969,004 -- 971,704
Net loss -- -- (364,409) -- (364,409)
Dividend distributions -- -- (380,000) -- (380,000)
----- ------- ---------- -------- -------------
Balance, December 31, 1995 $1,500 1,200 224,595 -- 227,295
===== ===== ========== ======== ============
See accompanying notes to combined financial statements.
F-35
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
COMBINED STATEMENTS OF CASH FLOWS
For each of the years in the three year period ended December 31, 1995
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(364,409) 1,363,662 802,843
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 68,499 50,408 46,676
Deferred income taxes -- (60,000) --
Loss on disposal of fixed assets -- -- 801
(Gain) loss on equity investments (50,126) (28,260) 149,295
Write-off of investments -- 597 --
(Increase) decrease in assets:
Humana IBNR receivable 785,594 (1,547,044) (764,831)
Due from affiliates and related parties 142,180 (177,572) 53,369
Claims reserve funds 10,145 13,217 (115,742)
Prepaid expenses and other current assets 14,856 (33,076) (3,653)
Increase (decrease) in liabilities:
Accounts payable and other accrued expenses 38,456 393,636 85,077
Accrued medical claims, including amounts incurred
but not reported (603,940) 1,359,770 583,266
Due to Humana 135,991 2,822 14,779
Income taxes payable (60,000) 60,000 --
-------- ----------- --------
Net cash provided by operating activities 117,246 1,398,160 851,880
-------- ----------- --------
Cash flows from investing activities:
Capital expenditures (157,011) (95,559) (133,922)
Proceeds from sale of fixed assets -- -- 19,900
Purchase of investments -- -- (1,100,600)
------- ---------- ----------
Net cash used in investing activities (157,011) (95,559) (1,214,622)
------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock -- 500 100
Proceeds from loan payable to Humana 50,000 -- --
Proceeds from loan payable to bank 100,000 -- --
Dividend distributions (380,000) (970,013) (170,745)
Due to stockholders -- (20,556) 583,112
-------- -------- --------
Net cash (used in) provided by financing activities (230,000) (990,069) 412,467
------- ---------- --------
(Decrease) increase in cash and cash equivalents (269,765) 312,532 49,725
Cash and cash equivalents, beginning of year 468,528 155,996 106,271
------- ------- -------
Cash and cash equivalents, end of year $198,763 468,528 155,996
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 60,000 -- --
======== ======= =======
Supplemental schedule of noncash investing and operating activities:
MedExec, Inc. distributed its $800,000 investment in Midway Airlines stock
as a dividend to its shareholders during the year ended December 31, 1994.
See accompanying notes to combined financial statements.
F-36
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) ORGANIZATION AND OPERATIONS
(A) ORGANIZATION
The accompanying combined financial statements include the
accounts of MedExec, Inc. and subsidiaries ("MedExec"); SPI
Managed Care, Inc. ("SPI"); and SPI Managed Care of
Hillsborough County, Inc. ("SPI Hillsborough") (collectively,
the "Company"), which are affiliated through common
stockholders and the same management. SPI and SPI Hillsborough
are 100%-owned by MedExec stockholders. (55)
MedExec was incorporated on March 14, 1991.
Dominion Healthnet, Inc. ("Dominion") was incorporated on
September 13, 1991. MedExec owned 55 percent of Dominion at
December 31, 1995, and 1994.
HCO Miami, Inc. ("HCO Miami") was incorporated on June 18,
1993. MedExec owned 70 percent and SPI owned 20 percent of HCO
Miami at December 31, 1995 and 1994.
Midwest Managed Care, Inc. ("Midwest") was incorporated on
March 29, 1995. MedExec owned 66.67 percent of Midwest at
December 31, 1995.
SPI, formerly known as Surgical Park, Inc. was incorporated on
February 19, 1988. Surgical Park, Inc. changed its name
pursuant to an amendment to its Articles of
Incorporation on May 7, 1990.
SPI Hillsborough was incorporated on April 20, 1993.
(B) NATURE OF OPERATIONS (57-61)
SPI and SPI Hillsborough operate in the state of Florida and
Midwest (which commenced operations during 1995) operates in
the states of Illinois and Indiana. SPI and SPI Hillsborough
provide health care services subject to affiliated provider
agreements entered into with Humana Medical Plan, Inc.; Humana
Health Plan of Florida, Inc.; Humana Health Insurance Company
of Florida, Inc. and their affiliates. Midwest provides health
care services subject to affiliated provider agreements
entered into with Humana Health Plan, Inc.; Humana Health
Chicago, Inc.; Humana Health Chicago Insurance Company; Humana
Insurance Company and their affiliates. All of the Humana
entities will collectively be known as "Humana". The Company
is dependent on Humana for the majority of its operations. For
the years ended December 31, 1995, 1994 and 1993, 96 percent,
95 percent, and 95 percent, respectively of the Company's
revenue are from such
F-37
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
agreements with Humana. Health services are provided to Humana
members through SPI, SPI Hillsborough and Midwest's primary
care medical centers and its network of physicians and health
care specialists.
SPI operates two centers in Dade County, Florida: in Kendall
("Kendall") and Cutler Ridge ("Cutler Ridge") at December 31,
1995 and 1994.
At December 31, 1994, SPI Hillsborough operated two centers in
Hillsborough County, Florida: in Brandon ("Brandon") and Plant
City ("Plant City"). Effective August 31, 1995, Humana
terminated its Brandon contract with SPI Hillsborough.
Included in accrued medical claims at December 31, 1995, is
approximately $103,000 pertaining to Brandon's open claims
through the termination date. The Brandon center had revenue
of approximately $3,521,000, $3,943,000, and $208,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Midwest operates one center in Hammond, Indiana ("Hammond").
Dominion provides networks of hospitals and doctors to
international travel assistance companies outside the United
States. At December 31, 1995, Dominion had one contract with a
Canadian insurance company to care for its insured traveling
to the United States.
HCO Miami provides utilization review and case management
services for HMO and PPO members of affiliated companies.
(C) AFFILIATED PROVIDER AGREEMENTS
Effective April 1, 1990 and September 1, 1990, SPI through the
Cutler Ridge and Kendall centers, respectively, entered into
provider agreements with Humana, which will continue
indefinitely unless terminated according to certain provisions
of the agreements. Such agreements specify that either party
may elect to terminate the agreements, with or without cause,
at any time upon giving 60 days written notice. In addition,
these agreements may be terminated by mutual written consent
of both parties at any time. Amendments to the original
provider agreements with Humana were entered into effective
September 1, 1991 and January 1, 1993 for the Cutler Ridge and
Kendall centers, respectively under full-risk agreements.
The Brandon and Plant City centers entered into five-year
non-risk provider agreements with Humana effective June 1,
1993 and January 1, 1994, respectively. Under these
agreements, the Brandon and Plant City centers are responsible
only for primary (in- office) medical services. These
agreements allow for similar termination provisions to the
agreements for the other centers, except that either party may
elect to terminate the
F-38
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
agreements without cause after the first two years upon giving
six months written notice. Amendments to the aforementioned
provider agreements with Humana were entered into effective
May 1, 1994 under full-risk agreements. The Brandon agreement
with Humana was terminated effective August 31, 1995.
The Hammond center entered into a three-year risk provider
agreement with Humana effective October 1, 1995 with an
automatic three-year renewal. However, the Hammond center is
operating under a non-risk amendment ("Amendment") to this
agreement and is responsible only for primary (in-office)
medical services. The Hammond center will continue to operate
under the Amendment until the earlier of the date on which
Midwest achieves a certain membership level or one calendar
year from the commencement date of the agreement, October 1,
1996. This agreement allows for similar termination provisions
to the agreements for the other centers, except that either
party may elect to terminate the agreement at any anniversary
date of the agreement upon giving at least six months written
notice.
Services to be provided by the SPI, SPI Hillsborough and
Midwest centers include medical and surgical services,
including all procedures furnished in a physician's office
such as X-rays, nursing services, blood work and other
incidentals, drugs and medical supplies. SPI, SPI Hillsborough
and Midwest centers are responsible for providing all such
services and for directing and authorizing all other care,
including emergency and inpatient care for Humana members. The
SPI and SPI Hillsborough centers are financially responsible
for all out-of-area care rendered to a member and provides
direct care as soon as the member is able to return to the
designated medical center.
Humana has agreed to pay the SPI and SPI Hillsborough centers
monthly for services provided to members based on a
predetermined amount per member ("capitation"), comprised of
in-hospital services and other services defined by contract
("Part A"), in- office ("Primary") and other medical services
defined by the agreements ("Part B"). Humana has agreed to pay
the Midwest center a guaranteed monthly amount ("guaranteed
payment") to cover the costs of providing primary care
services and to cover Midwest's other operating costs. The
guaranteed payments will be made until the earlier of the date
on which the Midwest center achieves a certain membership
level or one calendar year from the commencement date of the
agreement at which point Humana will pay Midwest capitation.
Midwest shall not be at risk for Parts A and B until Midwest
has been assigned certain membership.
(D) HUMANA IBNR RECEIVABLE (63)
Humana withholds a certain amount each month from the SPI and
SPI Hillsborough centers' Part A, Part B and supplemental
funding in order to cover claims incurred but
F-39
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
not reported or paid. This amount is to be used by Humana to
pay the centers Part A, Part B and supplemental costs. The
amounts withheld by Humana to cover incurred but not reported
or paid claims varies by center based on the history of the
respective center and is determined solely by Humana. The
amounts withheld are used to pay the centers' medical claims
which Humana pays on the centers' behalf. The remaining amount
after claims have been paid is remitted to the Company. (See
note 1(f))
Management does not believe it has a significant exposure to
effects related to third-party reimbursement programs and the
related revenue recognition policy because they generally
apply to hospitals. Furthermore, FMC has Medicare and Medicaid
contracts only in regard to one facility and fee-for-service
in only one facility. There is a risk, however, even though
FMC is not a direct recipient of third-party payor
arrangements because Medicare and Medicaid may change its
payments.
(E) DUE FROM AFFILIATES AND RELATED PARTIES
Due from affiliates and related parties represents current
amounts receivable from affiliates to cover their operating
expenses.
(F) CLAIMS RESERVE FUNDS
Humana withholds a certain amount each month from the SPI and
SPI Hillsborough centers' Part A capitation funding. This
amount represents a "catastrophic reserve fund" to be utilized
for the payment of the center's Part A costs in the event a
center ceases operations and the incurred but not reported
reserves are not adequate to reimburse providers for Part A
services rendered. This amount is calculated monthly by
Humana.
(G) DUE TO HUMANA
Due to Humana represents amounts advanced to SPI and SPI
Hillsborough by Humana to cover certain operating expenses. No
interest is charged by Humana. No due date is specified on the
amounts advanced.
(H) PHYSICIAN CONTRACTS
SPI, SPI Hillsborough and Midwest have entered into employment
agreements with its primary care physicians and into contracts
with various independent physicians to provide specialty and
other referral services both on a prepaid and a negotiated
fee-for-service basis. Midwest has also entered into a
consulting agreement with a physician. Prepaid physicians'
service costs are based upon a fixed fee per member, payable
on a monthly
F-40
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
basis. Such costs are included in the accompanying combined
statements of income as salaries and related benefits.
(I) MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
The Company maintains professional liability insurance on a
claims-made basis through July 1996, including retrospective
coverage for acts occurring since inception of its operations.
Incidents and claims reported during the policy period are
anticipated to be covered by the malpractice carrier. The
Company intends to keep such insurance in force throughout the
foreseeable future.
At December 31, 1995, there are no asserted claims against the
Company that were not covered by the policy. Management of the
Company has accrued approximately $181,100 for incidents which
may have occurred but have yet to be identified under its
incident reporting system, based on industry experience.
Physicians providing medical services to members are provided
malpractice insurance coverage (claims-made basis), including
retrospective coverage for acts occurring since their
affiliation with the Company.
(J) MEMBERSHIP
Humana members assigned to SPI and SPI Hillsborough centers
include approximately 3,100, and 4,200 Medicare members,
respectively, and 3,400, and 5,300 commercial members,
respectively, at December 31, 1995 and 1994. At December 31,
1995, Humana members assigned to the Midwest center include
approximately 60 commercial and 200 Medicare members.
(K) STOP-LOSS FUNDING
The SPI and SPI Hillsborough centers are charged a stop-loss
funding fee by Humana for the purpose of limiting a center's
exposure to Part A costs and certain Part B costs associated
with a member's health services. At December 31, 1995, Midwest
was under a non-risk agreement with Humana, and as such no
stop-loss funding fees were charged to the Midwest center.
For the year ended December 31, 1993, the stop-loss threshold
which applies to Part A costs only, for Medicare members of
SPI and SPI Hillsborough, was $20,000 and $25,000,
respectively, per hospital stay within certain admitting-time
criteria. For commercial members, the threshold is $15,000 for
SPI and SPI Hillsborough per calendar year for both Part A and
Part B costs. For the year ended December 31, 1994, the stop-
F-41
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
loss threshold, which applies to Part A costs only, for
Medicare members was $28,000 for SPI and $32,600 for SPI
Hillsborough per calendar year. For commercial members, the
threshold is $20,000 for SPI and $28,000 for SPI Hillsborough
per calendar year for both Part A and Part B costs. For the
year ended December 31, 1995, the stop-loss threshold for both
Part A and Part B costs for Medicare members was $40,000 per
member per calendar year for both SPI and SPI Hillsborough.
For commercial members, the stop-loss threshold for both Part
A and Part B costs was $20,000 and $15,000 for SPI and SPI
Hillsborough, respectively.
Since the SPI and SPI Hillsborough centers are not responsible
for claims in excess of the threshold, income and the
corresponding expense, both equal to the stop-loss funding are
recognized by SPI and SPI Hillsborough. These amounts are
included in revenue and medical expenses, respectively, in the
accompanying combined statements of income. Stop-loss funding
for the SPI and SPI Hillsborough centers for the years ended
December 31, 1995, 1994 and 1993 was approximately $2,115,000,
$1,919,000, and $956,000, respectively.
The Company is responsible for payment of medical servicers
provided to is members by third party providers. As a result
of its agreements with Humana, which limits the Company's
exposure as to certain catastrophic and maternity claims, the
Company is reimbursed for the amounts in excess of certain
thresholds. Therefore, these amounts are shown as both
revenues and expenses.
(L) MATERNITY FUNDING
The SPI and SPI Hillsborough centers are charged a maternity
funding fee on commercial membership for the purpose of
limiting the centers' exposure to Part A and Part B costs
associated with a commercial member's pregnancy or related
illness. Since the SPI and SPI Hillsborough centers are not
responsible for claims in excess of the amount contributed to
the maternity fund, income and expenses both equal to the
maternity funding are recognized by SPI and SPI Hillsborough
and are included in revenue and medical expenses,
respectively, in the accompanying combined statements of
income. Maternity funding for the SPI and SPI Hillsborough
centers for the years ended December 31, 1995, 1994 and 1993
was approximately $825,000, $917,000, and $499,000,
respectively. At December 31, 1995, Midwest was under a
non-risk agreement with Humana and as such no maternity
funding fees were charged to the Midwest center.
F-42
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying combined financial statements include the
accounts of the companies listed in note 1(a) which are
related through common ownership and management. All
significant intercompany balances and transactions have been
eliminated in the consolidation of MedExec, Inc. and
subsidiaries, and the subsequent combination of MedExec, SPI
and SPI Hillsborough.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the combined statements of cash flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on
property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
(D) INVESTMENTS IN OTHER AFFILIATED ENTITIES
The Company accounts for equity investments with a percentage
of ownership between 20 percent and 50 percent under the
equity method of accounting, which requires the recognition by
the Company of its pro rata share of the investee's income or
loss. Equity investments of less than 20 percent are carried
at cost.
(E) INTANGIBLE ASSETS
Intangible assets arose in business acquisitions. These
intangibles are being amortized on a straight-line basis over
five years. At December 31, 1995 and 1994, accumulated
amortization was approximately $9,200 and $6,600,
respectively.
(F) INCOME TAXES
MedExec, Inc. qualified as an S corporation for income tax
purposes at December 31, 1995, and 1994. MedExec, Inc. uses
accelerated depreciation methods for reporting
F-43
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
taxable income or losses which are passed through to
stockholders under the Company's S Corporation status. As
stated in footnote 14 to these combined financial statements,
effective January 1, 1996 MedExec's tax status automatically
changed from an S Corporation to a C Corporation. The effect
of this change will result in additional state and federal
deferred income taxes attributable to the temporary
differences at the time of change to be recorded as a deferred
tax liability with a corresponding reduction in income. The
deferred tax liabilities at December 31, 1995 and 1994 were
approximately $13,500 and $126,000. The amount of the
liability at December 31, 1995 would be payable in future
years as the net cumulative temporary differences reverse.
SPI qualified as an S corporation for income tax purposes at
December 31, 1993. In May 1994, the stockholders of SPI
voluntarily revoked SPI's election to be treated as an S
corporation pursuant to the Internal Revenue Code Section
1362(d).
Effective January 1, 1993, SPI Hillsborough and Dominion
adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Effective May 1994, SPI adopted the provisions of SFAS
No. 109. The adoption of SFAS No. 109 had no cumulative effect
on the combined statements of income for the years ended
December 31, 1994 and 1993. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to be applied to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Under federal income tax principles, the Company cannot file a
consolidated income tax return. Thus, losses of one entity may
not offset income of another entity within the controlled
group.
(G) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and
supplemental funds are recognized monthly on the basis of the
number of Humana members assigned to the SPI and SPI
Hillsborough centers and the contractually agreed-upon rates.
The SPI and SPI Hillsborough centers receive monthly payments
from Humana after all medical expenses paid by Humana on
behalf of the SPI and SPI Hillsborough centers, estimated
claims incurred but not reported and claims reserve fund
balances have been determined. Medical expenses paid by Humana
on behalf of the Company, accordingly, are included in the
F-44
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
combined statements of operations. During 1995, Midwest
recognizes revenue based on the gross monthly guaranteed
payment amount. The Midwest center receives a net monthly
payment from Humana after all expenses paid by Humana on
behalf of the Midwest center have been determined. In addition
to Humana payments, the SPI, SPI Hillsborough and Midwest
centers receive copayments from commercial members for each
office visit, depending upon the specific plan and options
selected and receive payments from non-Humana members on a
fee-for-service basis.
Medical services are recorded as expenses in the period in
which they are incurred. Accrued medical claims for SPI and
SPI Hillsborough as reflected in the combined balance sheets
are based upon costs incurred for services rendered prior to
and up to the combined balance sheet date. Included are
services incurred but not reported as of the combined balance
sheet date based upon actual costs reported subsequent to the
combined balance sheet date and a reasonable estimate of
additional costs.
In the accompanying combined statements of operations, medical
expenses include amounts paid to hospitals, nursing care and
rehabilitative facilities, home health services, diagnostic
services, pharmacy costs, physician referral fees, and
hospital based physician costs.
(H) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(I) RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 financial statements have
been reclassified to conform with the 1995 presentation.
(3) INVESTMENTS IN OTHER AFFILIATED ENTITIES
At December 31, 1993, MedExec had a 30 percent investment in HCO
Networks, Inc. ("HCON"), a claims management company. MedExec has
accounted for its initial investment of $300,000 under the equity
method. For the years ended December 31, 1995, 1994 and 1993, MedExec's
equity interest in the net income (loss) of HCON was approximately
$50,000, $28,000 and ($150,000), respectively.
F-45
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
At December 31, 1993, MedExec had an $800,000 investment in Midway
Airlines ("Midway"), which represented approximately 16 percent
ownership in Midway. The Company has accounted for its investment in
Midway under the cost method. During the year ended December 31, 1994,
the Company distributed as a dividend to its stockholders its
investment in Midway. The recorded value of the investment approximated
the fair value at the time of distribution.
At December 31, 1995 and 1994, MedExec had a 55 percent interest in
Dominion. Dominion has been consolidated in the accompanying combined
financial statements.
MedExec also has a 50 percent investment in SPI Managed Care of
Broward, Inc. ("SPI Broward"), a health care management company, and a
23.75 percent investment in Broward Managed Care, Inc. ("BMC"), which
operates two Humana primary care health centers. At December 31, 1995
and 1994, MedExec's investment in SPI Broward and BMC is $0 under the
equity method of accounting.
F-46
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
Estimated
1995 1994 Useful Lives
---- ---- ------------
Medical and office equipment $453,035 267,578 5 years
Furniture and fixtures 32,276 68,426 7 years
------- -------
485,311 336,004
Less accumulated depreciation 187,251 128,805
------- -------
Property and equipment, net $298,060 207,199
======= =======
(5) LOAN PAYABLE TO HUMANA
Loan payable to Humana represents funds advanced to Midwest for the
purchase and installation of a computer system and related training.
The loan is due by September 30, 2000 and is payable in monthly
installments beginning the first month during which Midwest is at full
risk under the terms of the Humana provider agreement. Monthly
installments to Humana will be a minimum of 10 percent of any positive
balance in Midwest's Part A fund. In the event no positive balance
exists in the Part A fund on or at any time after September 30, 1996,
Midwest shall make a minimum monthly payment of $1,268 until the loan
is repaid. Interest is payable at 10 percent per year unless the note
is paid in full by Midwest by September 30, 1996 at which point any
interest owed to Humana will be waived. Management believes that it
will repay the loan before September 30, 1996 and as such has not
accrued any interest at December 31, 1995. The loan is secured by the
computer equipment which has a book value of approximately $55,000 at
December 31, 1995.
(6) LOAN PAYABLE TO BANK
At December 31, 1995, Midwest had a $200,000 unsecured line of credit
bearing interest at prime. The line of credit is personally guaranteed
by all of the stockholders of MedExec at December 31, 1995. The
principal balance is due October 1, 1996, and interest is due monthly.
At December 31, 1995, $100,000 was drawn under this line of credit and
was used primarily for development costs relating to Midwest.
F-47
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(7) LEASES
Future minimum lease payments required under non cancelable operating
leases at December 31, 1995 are as follows:
Year ended Operating
DECEMBER 31, LEASES
1996 $182,327
1997 188,584
1998 193,875
1999 3,968
Thereafter --
--------
Total minimum lease payments $568,754
========
Rent expense incurred under an assigned office lease agreement for the
years ended December 31, 1995, 1994 and 1993 amounted to approximately
$186,000, $70,000, and $54,000, respectively.
(8) Capital Stock
The shares' authorized, issued, related par value and additional
paid-in capital for each of the combined companies at December 31, 1995
and 1994 are as follows:
Stock Stock Stock total Additional
Authorized Issued par value paid-in capital
---------- ------ --------- ---------------
MedExec, Inc. 500 500 $ 500 700
SPI Managed Care, Inc. 500 500 500 500
SPI Managed Care of Hillsborough
County, Inc. 1,000 500 500 --
------ -----
$ 1,500 1,200
===== =====
(9) RELATED PARTY TRANSACTIONS
The Company paid salaries to stockholders of approximately $1,389,000,
$772,600, and $652,000 which are included in the combined statements of
income for the years ended December 31, 1995, 1994 and 1993,
respectively.
F-48
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
The Company recorded $111,459 and $225,288 in administration fee
revenue from SPI Broward during the years ended December 31, 1995 and
1994, respectively.
The Company recorded approximately $162,000 and $116,050 in utilization
revenue from BMC during the years ended December 31, 1995 and 1994,
respectively.
The Company had receivables from affiliates and related parties of
$59,023 and $196,745 at December 31, 1995 and 1994, respectively, and a
payable to related parties of $4,458 at December 31, 1995.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, accounts
receivable, prepaid expenses and other current assets, accounts payable
and other accrued expenses, loan payable to Humana and loan payable to
bank approximate fair value at December 31, 1995 because of the short
maturity of these instruments.
(11) RETIREMENT PLANS
The Company sponsors 401(k) plans (the "Plans"). Employees who have
worked a minimum of six months or 1,000 hours and are at least 21 years
of age may participate in the Plans. Employees may contribute up to 14
percent of their annual salary, not to exceed $9,240 in 1995 and 1994,
and $8,994 in 1993, to the Plans. The Company's matching contribution
is 25 cents for each dollar of the employee's elected contribution, up
to four percent of the employee's annual salary. The Company's matching
contribution was approximately $21,000, $14,000, and $8,000 in 1995,
1994 and 1993, respectively.
(12) INCOME TAXES
Income tax expense consists of the following:
1995 1994 1993
---- ---- ----
Current expense (benefit):
federal and state $(120,279) 60,000 --
Deferred expense (benefit) 120,279 (60,000) --
------- ------- ------
$ -- -- --
========= ======== ======
F-49
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
A reconciliation of income tax expense and the amount that would be computed
using the statutory federal income tax rate is as follows:
1995 1994 1993
---------------------- -------------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tax expense (benefit)at the
statutory rate (137,839) (34%) 463,645 34% 272,967 34%
S corporation income taxed
at the stockholder level 95,277 23% (532,270) (39)% (292,767) (37)%
Change in the beginning-
of-the year balance of the
valuation allowance for
deferred tax assets
allocated to income tax
expense 42,562 11% 68,625 5% 19,800 3%
-------- --- --------- ----- --------- ----
$ -- -- -- -- -- --
======== === ========= ====== ========= =====
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets and deferred tax liabilities of those entities for
which no Subchapter S election is in effect at December 31, 1995 and 1994, are
presented as follows:
1995 1994
---- ----
Deferred tax assets:
Revenue and expenses recognized for financial
reporting purposes in a different period than
for income tax purposes $ 7,646 127,925
Net loss carryforward 123,341 20,500
------- -------
Total deferred tax assets 130,987 148,425
Less valuation allowance (130,987) (88,425)
-------- --------
Net deferred tax asset -- 60,000
Deferred tax liabilities -- --
======= ======
Net deferred tax asset $ -- 60,000
======= ======
F-50
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
The valuation allowance for deferred tax assets as of January 1, 1994
was $19,800. The net change in the valuation allowance for the years
ended December 31, 1995 and 1994 is $42,562 and $68,625, respectively.
The Company reclassed $60,000 of its deferred tax asset as of December
31, 1995 to current tax receivable upon utilization of its net
operating loss.
At December 31, 1995, the companies not qualifying as S corporations,
collectively had a net operating loss carryforward of approximately
$486,000 for tax purposes, which expire in 2009.
(13) COMMITMENTS AND CONTINGENCIES
(A) GOVERNMENTAL REGULATION
The Company's operations have been and may continue to be
affected by various forms of governmental regulation and other
actions. It is presently not possible to predict the
likelihood of any such actions, the form which such actions
may take, or the effect such actions may have on the Company.
(B) STOCKHOLDER AGREEMENTS
The Company entered into employment agreements and change in
control severance agreements with the stockholders during
1994. Such agreements are in effect through April 1, 1999.
(14) SUBSEQUENT EVENTS
Effective January 1, 1996, the Company entered into an agreement with
First Medical Corporation ("FMC"). All of the outstanding shares of the
Company were converted into shares of FMC. In exchange for and in
conversion of all of the issued and outstanding shares of the Company,
FMC has issued and delivered common shares of FMC to the stockholders
of the Company.
Effective January 2, 1996, the Company acquired an additional one
percent interest in SPI Broward from Broward Medical Management ("BMM")
for $1.00 and an equal split of the profits of SPI Broward. Effective
January 2, 1996, the Company acquired an additional 27.25 percent
interest in Broward Managed Care from BMM for $100,000.
Effective January 1, 1996, the MedExec tax status automatically changed
from an S Corporation to a C Corporation as a result of its merger into
FMC. See Note 2(f) above.
On April 4, 1996, the Company sold its investment in HCON for $300,000,
resulting in a gain of $40,967.
F-51
MEDEXEC, INC. AND SUBSIDIARIES;
SPI MANAGED CARE, INC.; AND
SPI MANAGED CARE OF HILLSBOROUGH COUNTY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Effective February 1, 1996, the Company began operations in its Durham
center located in Houston, Texas.
The Company has entered into various employment and management services
agreements throughout 1996.
(15) OTHER MATTERS
In October, 1996 FMC entered into a merger agreement with The Lehigh
Group, Inc. ("Lehigh") whereby upon merger FMC would control
approximately 96 percent of the merged company. In connection with the
proposed merger, which is subject to stockholder approval of both
companies, FMC and Lehigh have been named in a lawsuit. In the opinion
of FMC and its legal counsel, such suit will not have a material effect
on the financial statements of FMC, if not resolved favorably.
In June, 1996 FMC entered into a subscription agreement with Generale
De Sante International, PLC ("GDS") by which GDS has the right to
purchase various percentages of interest in both FMC and its
subsidiaries.
F-52
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Broward Managed Care, Inc.:
We have audited the accompanying balance sheets of Broward Managed Care, Inc. as
of December 31, 1995, and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Broward Managed Care, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996
F-53
BROWARD MANAGED CARE, INC.
BALANCE SHEET
December 31, 1995
ASSETS
Current assets:
Cash and cash equivalents $ 201,324
Humana IBNR receivable 2,610,941
Claims reserve funds 174,842
Other receivable 1,514
---------
Total current assets 2,988,621
Property and equipment, net 93,843
----------
$3,082,464
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and other accrued expenses 666,169
Accrued medical claims, including amounts incurred but not reported 2,332,102
Due to Humana 99,237
Due to related parties 134,986
Income taxes payable 10,085
---------
Total current liabilities 3,242,579
---------
Commitments and contingencies
Stockholders' deficit:
Capital stock, $.01 par value. Authorized 1,000 shares; issued
and outstanding 500 shares
5
Accumulated deficit (160,120)
-----------
Total stockholders' deficit (160,115)
----------
$3,082,464
==========
See accompanying notes to financial statements.
F-54
BROWARD MANAGED CARE, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1995
Revenue $26,234,531
Medical expenses 23,632,301
----------
Gross profit 2,602,230
Operating expenses:
Salaries and related benefits 894,456
Depreciation and amortization 17,909
Other 1,515,054
----------
Total operating expenses 2,427,419
----------
Income before income taxes 174,811
Income tax expense 10,085
-----------
Net income $ 164,726
==========
See accompanying notes to financial statements.
F-55
BROWARD MANAGED CARE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1995
Total
Capital Accumulated stockholder's
stock deficit deficit
Balance, December 31, 1994 $ 5 (324,846) (324,841)
Net income - 164,726 164,726
- ------- -------
Balance, December 31, 1995 $ 5 (160,120) (160,115)
= ======= =======
See accompanying notes to financial statements.
F-56
BROWARD MANAGED CARE, INC.
STATEMENT OF CASH FLOWS
Year ended December 31, 1995
Cash flows from operating activities:
Net income $ 164,726
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 17,909
Decrease (increase) in assets:
Humana IBNR receivable 1,104,052
Claims reserve funds (174,842)
Other receivable (1,514)
Decrease in liabilities:
Accounts payable and other accrued expenses (2,298)
Accrued medical claims, including amounts incurred but not
reported (949,597)
Due to Humana (141,303)
Due to related parties (73,676)
------------
Net cash used in operating activities (56,543)
------------
Cash flows from investing activities:
Capital expenditures (69,250)
-----------
Net cash used in investing activities (69,250)
----------
Decrease in cash and cash equivalents (125,793)
Cash and cash equivalents, beginning of year 327,117
----------
Cash and cash equivalents, end of year $ 201,324
==========
See accompanying notes to financial statements.
F-57
BROWARD MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
(1) ORGANIZATION AND OPERATIONS
(A) ORGANIZATION
Broward Managed Care, Inc. ("BMC") was incorporated in the
state of Florida on January 21, 1994 and is owned 71.25
percent by Broward Medical Management, Inc. ("BMM"), 23.75
percent by MedExec, Inc. ("MedExec") and 5 percent by the
medical director of the BMC centers.
BMC provides health care services subject to affiliated
provider agreements entered into with Humana Medical Plan,
Inc.; Humana Health Plan of Florida, Inc.; and Humana
Health Insurance Company of Florida, Inc. and their
affiliates (collectively known as "Humana"). Health
services are provided to Humana members through BMC's
primary care medical centers and BMC's network of
physicians and health care specialists. For the year ended
December 31, 1995, approximately 99 percent of BMC's
revenue is from such agreements with Humana.
BMC operates two centers in Broward County, Florida
(collectively known as the "BMC centers"): in Margate
("Margate") and in Plantation ("Plantation").
SPI Managed Care of Broward, Inc. ("SPI Broward") was
incorporated in the state of Florida on July 15, 1992, and
manages Margate and Plantation.
(B) AFFILIATED PROVIDER AGREEMENTS
Effective February 1, 1994 and May 1, 1994, BMC through
Margate and Plantation, respectively, entered into provider
agreements with Humana, which will continue indefinitely
unless terminated according to certain provisions of the
agreements. Such agreements specify that either party may
elect to terminate the agreements, with or without cause,
at any time upon giving 60 days written notice. In
addition, these agreements may be terminated by mutual
written consent of both parties at any time. Amendments to
the original provider agreements with Humana were entered
into effective September 1, 1994 under full-risk agreements
for Margate and Plantation.
Services to be provided by the BMC centers include medical
and surgical services, including all procedures furnished
in a physician's office, such as x-rays, nursing services,
blood work and other incidentals, drugs and medical
supplies. The BMC centers are responsible for providing all
such services and for directing and authorizing all other
care, including emergency and inpatient care for Humana
members. The BMC centers are also financially responsible
for all out-of-area care rendered to a member and provide
direct care as soon as the member is able to return to the
designated medical center.
Humana has agreed to pay the BMC centers monthly for
services provided to members based on a predetermined
amount per member ("capitation"), comprised of in-hospital
services and other services defined by contract ("Part A"),
in-office ("Primary") and other medical services defined by
the agreements ("Part B").
(Continued)
F-58
(C) HUMANA IBNR RECEIVABLE
Humana withholds a certain amount each month from the BMC
centers' Part A, Part B and supplemental funding in order
to cover claims incurred but not reported or paid. This
amount is to be used by Humana to pay the centers' Part A,
Part B and supplemental costs. The amounts withheld by
Humana to cover incurred but not reported on paid claims
varies by center based on the history of the respective
center and is determined solely by Humana. The amounts
withheld are used to pay the centers' medical claims which
Humana pays on the centers' behalf. The remaining amount
after claims have been paid is remitted to the Company [see
note 1(d)].
(D) CLAIMS RESERVE FUNDS
Humana withholds a certain amount each month from the BMC
centers' Part A capitation funding. This amount represents
a "catastrophic reserve fund" to be utilized for the
payment of the centers' Part A costs in the event a center
ceases operations and the incurred but not reported
reserves are not adequate to reimburse providers for Part A
services rendered. This amount is calculated monthly by
Humana.
(E) DUE TO HUMANA
Due to Humana represents amounts advanced to BMC by Humana
to cover certain operating expenses. No interest is charged
by Humana. No due date is specified on the amounts
advanced.
(F) DUE TO RELATED PARTIES
Due to related parties represents current amounts payable
to MedExec for operating expenses covered by MedExec.
(G) PHYSICIAN CONTRACTS
BMC has entered into employment agreements with its primary
care physicians and has entered into contracts with various
independent physicians, to provide specialty and other
referral services both on a prepaid and a negotiated
fee-for-service basis. Prepaid physicians' service costs
are based upon a fixed fee per member, payable on a monthly
basis. Such costs are included in the accompanying
statement of operations as salaries and related benefits.
(H) MALPRACTICE AND PROFESSIONAL LIABILITY INSURANCE
BMC maintains professional liability insurance on a
claims-made basis through July 1996, including
retrospective coverage for acts occurring since the
inception of its operations. Incidents and claims reported
during the policy period are anticipated to be covered by
the malpractice carrier. BMC intends to keep such insurance
in force throughout the foreseeable future.
At December 31, 1995, there are no asserted claims against
BMC that were not covered by the policy. Management of BMC
has accrued approximately $189,700 for incidents which may
have occurred but have yet to be identified under its
incident reporting system, based on industry experience.
Physicians providing medical services to members are
provided malpractice insurance coverage (claims-made
basis), including retrospective coverage for acts occurring
since their affiliation with BMC.
(I) MEMBERSHIP
At December 31, 1995, Humana members assigned to the BMC
centers include approximately 3,000 Medicare members and
7,400 commercial members.
(J) STOP-LOSS FUNDING
The BMC centers are charged a stop-loss funding fee by
Humana for the purpose of limiting a center's exposure to
Part A costs and certain Part B costs associated with a
member's health services.
F-59
For the year ended December 31, 1995, the stop-loss
threshold, which applies to both Part A and Part B costs
for Medicare members, was $40,000 per member per calendar
year. For commercial members, the stop-loss threshold for
both Part A and Part B costs was $20,000 per calendar year.
Since the BMC centers are not responsible for claims in
excess of the threshold, income and the corresponding
expense, both equal to the stop-loss funding are recognized
by BMC. These amounts are included in revenue and medical
expenses, respectively, in the accompanying statement of
operations. For the year ended December 31, 1995, stop-loss
funding for the BMC centers was approximately $2,742,000.
(K) MATERNITY FUNDING
The BMC centers are charged a maternity funding fee on
commercial membership for the purpose of limiting the
centers' exposure to Part A and Part B costs associated
with a commercial member's pregnancy or related illness.
Since the BMC centers are not responsible for claims in
excess of the amount contributed to the maternity fund,
income and expenses both equal to the maternity funding are
recognized by BMC and are included in revenue and medical
expenses, respectively, in the accompanying statement of
operations. For the year ended December 31, 1995, maternity
funding for the BMC centers was approximately $2,473,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the statement of cash flows, BMC considers all
highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
F-60
(B) REVENUE AND MEDICAL COST RECOGNITION
Revenue from Humana for primary care, Part A, Part B and
supplemental funds are recognized monthly on the basis of
the number of Humana members assigned to the BMC centers
and the contractually agreed-upon rates. The BMC centers
receive monthly payments from Humana after all medical
expenses paid by Humana on behalf of the BMC centers,
estimated claims incurred but not reported and claims
reserve fund balances have been determined. Medical
expenses paid by Humana on behalf of the Company,
accordingly, are included in the accompanying statement of
operations. In addition to Humana payments, the BMC centers
receive copayments from commercial members for each office
visit depending upon the specific plan and options selected
and receive payments from non-Humana members on a
fee-for-service basis.
Medical services are recorded as expenses in the period in
which they are incurred. Accrued medical claims as
reflected in the balance sheet are based upon costs
incurred for services rendered prior to and up to the
balance sheet date. Included are services incurred but not
reported as of the balance sheet date based upon actual
costs reported subsequent to the balance sheet date and a
reasonable estimate of additional costs. In the
accompanying statement of operations medical expenses
include amounts paid to hospitals, nursing care and
rehabilitation facilities, home health services, diagnostic
services, pharmacy costs, physician referral fees and
hospital-based physician costs.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on
property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
(D) INCOME TAXES
Effective January 1994, BMC adopted the provisions of
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the
asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected
to be applied to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is
recognized in income in the period that includes the
enactment date.
(E) USE OF ESTIMATES
Management of BMC has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-61
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
Estimated
useful lives
------------
Computer equipment $113,132 5 years
Medical and office equipment 5,886 5 years
-------
119,018
Less accumulated depreciation 25,175
---------
Property and equipment, net $ 93,843
=======
(4) RELATED PARTY TRANSACTIONS
At December 31, 1995, BMC had a payable of $134,986 to related
parties for operating expenses paid by MedExec on BMC's behalf.
BMC recorded approximately $162,000 in utilization expenses to
MedExec during the year ended December 31, 1995.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, other
receivables, and accounts payable and other accrued expenses
approximates fair value at December 31, 1995 because of the short
maturity of these instruments.
(6) RETIREMENT PLANS
BMC sponsors 401(k) plans (the "Plans"). Employees who have worked a
minimum of six months or 1,000 hours and are at least 21 years of
age may participate in the Plans. Employees may contribute up to 14
percent of their annual salary, not to exceed $9,240 in 1995, to the
Plans. BMC's matching contribution is 25 cents for each dollar of
the employee's elected contribution, up to four percent of the
employee's annual salary. BMC's matching contribution was
approximately $14,000 for the year ended December 31, 1995.
(7) INCOME TAXES
Income tax expense consists of the following:
Current:
Federal $ 7,590
State 2,495
-------
$10,085
=======
F-62
BROWARD MANAGED CARE, INC.
NOTES TO FINANCIAL STATEMENTS
A reconciliation of income tax expense and the amount that would be
computed using the statutory federal income tax rate is as follows:
Tax expense at the statutory rate $ 59,436
Change in the beginning-of-the-year
balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (22,000)
State taxes, net of related federal
benefit 6,346
Other (24,813)
Decrease in tax liability due to
graduated federal tax rates (8,884)
--------
$ 10,085
========
There are no deferred tax assets or liabilities at December 31,
1995.
The valuation allowance for deferred tax assets at January 1, 1995
was $22,000. The net change in the valuation allowance for the year
ended December 31, 1995 is $22,000.
(8) GOVERNMENTAL REGULATION
BMC's operations have been and may continue to be affected by
various forms of governmental regulation and other actions. It is
presently not possible to predict the likelihood of any such
actions, the form which such actions may take, or the effect such
actions may have on BMC.
(9) SUBSEQUENT EVENTS
Effective January 2, 1996, MedExec purchased an additional 71.25
percent interest in BMC from BMM.
F-63
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SPI Managed Care of Broward, Inc.:
We have audited the accompanying balance sheets of SPI Managed Care of Broward,
Inc. as of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SPI Managed Care of Broward,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
May 17, 1996
F-64
SPI MANAGED CARE OF BROWARD, INC.
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
------ ---- ----
Cash and cash equivalents $ 20,119 46,762
Due from affiliates and related parties, net 85,303 -
Deferred tax asset - 10,060
------- ------
Total current assets 105,422 56,822
Furniture and equipment, net 10,903 14,377
Other assets 760 760
------- ------
$117,085 71,959
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses 14,442 7,760
Due to affiliates and related parties, net - 71,014
Income taxes payable 11,643 -
Deferred tax liabilities 29,473 10,060
------- ------
Total current liabilities 55,558 88,834
------- ------
Commitments and contingencies
Stockholders' equity (deficit):
Capital stock, $.01 par value.
Authorized 1,000 shares; issued
and outstanding 500 shares 5 5
Retained earnings (accumulated deficit) 61,522 (16,880)
------ -------
Total stockholders' equity (deficit) 61,527 (16,875)
------ --------
$117,085 71,959
======= ======
See accompanying notes to financial statements.
F-65
SPI MANAGED CARE OF BROWARD, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1995 and 1994
1995 1994
---- ----
Management consulting fee income $579,951 682,601
Operating expenses:
Consulting fees to stockholders 222,660 450,576
Salaries 163,132 137,707
Depreciation 3,474 3,165
Other 71,167 91,153
-------- --------
Total operating expenses 460,433 682,601
------- -------
Income before income taxes 119,518 -
Income tax expense 41,116 -
------- ----
Net income $ 78,402 -
======== ====
See accompanying notes to financial statements.
F-66
SPI MANAGED CARE OF BROWARD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995 and 1994
Total
Accumulated stockholders'
Capital earnings equity
stock (deficit) (deficit)
----- --------- ---------
Balance, December 31, 1993 $ 5 (16,880) (16,875)
Net income - - -
---- -------- --------
Balance, December 31, 1994 5 (16,880) (16,875)
Net income - 78,402 78,402
---- ------- ------
Balance, December 31, 1995 $ 5 61,522 61,527
==== ======= ======
See accompanying notes to financial statements.
F-67
SPI MANAGED CARE OF BROWARD, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
1995 1994
---- ----
Cash flows from operating activities:
Net income 78,402 -
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 3,474 3,165
Deferred income taxes 29,473 -
Change in assets and liabilities:
Accounts payable and accrued expenses 6,682 7,760
Due to affiliates and related parties, net (156,317) 44,201
Income taxes payable 11,643 -
------ -------
Net cash (used in) provided by operating activities (26,643) 55,126
------- -------
Cash flows from investing activities:
Capital expenditures - (11,171)
------- ------
(Decrease) increase in cash and cash equivalents (26,643) 43,955
Cash and cash equivalents, beginning of year 46,762 2,807
------ -------
Cash and cash equivalents, end of year $20,119 46,762
====== ======
See accompanying notes to financial statements.
F-68
SPI MANAGED CARE OF BROWARD, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
(Continued)
(1) ORGANIZATION AND OPERATIONS
SPI Managed Care of Broward County, Inc. ("SPI Broward"),
incorporated in the state of Florida on July 15, 1992, is owned 50
percent by MedExec, Inc. ("MedExec") and 50 percent by Broward
Medical Management, Inc. ("BMM").
SPI Broward has management services agreements with an affiliate of
BMM and a nonaffiliated multispecialty group practice to manage
their managed care divisions.
MedExec and BMM provide management consulting services to SPI
Broward. The cost of such services are included in the statement of
operations as consulting fees to stockholders.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits. For
purposes of the statements of cash flows, SPI Broward
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(B) FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation on
furniture and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.
(C) DUE TO AFFILIATES AND RELATED PARTIES, NET
Due to affiliates and related parties, net represents
amounts paid by affiliates and related parties to cover
certain SPI Broward operating expenses. The amounts bear no
interest and have no due date.
(D) REVENUE RECOGNITION
Revenue is recognized monthly on the basis of the number of
members managed at contractually agreed upon rates,
adjusted by the profits and losses of the respective
companies managed.
SPI Broward receives monthly and quarterly payments based
on the above agreements.
(E) INCOME TAXES
Under the asset and liability method of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"),
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes
the enactment date.
F-69
(F) USE OF ESTIMATES
Management of SPI Broward has made a number of estimates
and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(3) FURNITURE AND EQUIPMENT, NET
Furniture and equipment, net consists of the following:
Estimated
1995 1994 useful life
---- ---- -----------
Furniture 2,612 2,612 7 years
Equipment 15,513 15,513 5 years
------ ------
18,125 18,125
Less accumulated depreciation 7,222 3,748
------- -------
Furniture and equipment, net 10,903 14,377
====== ======
(4) RELATED-PARTY TRANSACTIONS
At December 31, 1995, SPI Broward had a net receivable from
affiliates and related parties of $85,303 and a net payable to
related parties of $71,014 at December 31, 1994.
At December 31, 1995 and 1994, consulting fees to stockholders
represents SPI Broward's payment of approximate $111,000 and
$225,000, respectively, to each of its stockholders, MedExec and
BMM.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, and
accounts payable and accrued expenses approximate fair value at
December 31, 1995 because of the short maturity of these
instruments.
(6) RETIREMENT PLANS
SPI Broward sponsors 401(k) plans (the "Plans"). Employees who have
worked a minimum of six months or 1,000 hours and are at least 21
years of age may participate in the Plans. Employees may contribute
up to 14 percent of their annual salary, not to exceed $9,240 in
1995 and 1994, to the Plans. SPI Broward's matching contribution is
25 cents for each dollar of the employee's elected contribution, up
to four percent of the employee's annual salary.
SPI Broward's matching contribution was approximately $4,300 and
$100 in 1995 and 1994, respectively.
F-70
(7) INCOME TAXES
Income tax benefit consists of the following:
1995 1994
---- ----
Current (benefit) expense $11,643 -
Deferred expense (benefit) 29,473 -
------ ----
$41,116 -
====== ====
A reconciliation of income tax expense and the amount that would be
computed using the statutory federal income tax rate is as follows:
Tax expense at statutory rate $40,637
State taxes, net of federal benefit 4,339
Other 5,799
Increase in tax liability due to graduated
federal tax rates (9,659)
-------
$41,116
=======
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Deferred tax assets:
Total deferred tax assets $ - 10,060
Less valuation allowance - -
----- ------
Net deferred tax asset - 10,060
Revenue and expenses recognized for financial - -
reporting purposes in a different period
than for income tax purposes
Deferred tax liabilities (29,473) 10,060
------- ------
Net deferred tax (liability) asset (29,473) 10,060
====== =======
There was no valuation allowance at December 31, 1995 and 1994, and
there was no change in the valuation allowance for the year ended
December 31, 1995.
(8) SUBSEQUENT EVENTS
Effective January 2, 1996, MedExec acquired an additional fifty
percent interest in SPI Broward from BMM.
F-71
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
The Lehigh Group Inc.:
We have audited the accompanying consolidated balance sheets of The Lehigh Group
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. We have
also audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Lehigh Group
Inc. and subsidiaries at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
/S/ BDO SEIDMAN, LLP
--------------------
BDO Seidman, LLP
New York, New York
February 18, 1997
F-72
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
(Note 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-73
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
` (in thousands except for per share data)
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current maturities of long-term debt (Note 6) $ 390 $ 510
Note payable -bank (Note 6) -- 360
Accounts payable 954 1,839
Accrued expenses and other current liabilities (Notes 5, 6 and 8) 1,642 1,381
------ -----
Total current liabilities 2,986 4,090
----- -----
Long-term debt, net of current maturities 2,725 2,080
----- ------
(Note 6)
Deferred credit applicable to the sale of continued -- 250
------- -------
operations (Note 4)
Commitments and Contingencies (Notes 6 and 8)
Shareholders' equity (Deficit)
Preferred stock, par value $.001; authorized
5,000,000 shares, none issued -- --
Common stock, par value $.001 authorized shares 100,000,000 , in 1996 and 1995;
shares issued 10,339,250 in 1996 and 1995
which excludes 3,016,249 and 3,016,249
shares held as treasury stock in 1996 and
1995 , respectively 11 11
Additional paid-in capital (Note 6) 106,594 106,594
Accumulated deficit from January 1, 1986 (105,037) (104,749)
Treasury stock - at cost (1,654) (1,654)
--------- ---------
Total shareholders' equity (Deficit) (86) 202
---------- ---------
Total liabilities and shareholders' equity (Deficit) $ 5,625 $ 6,622
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-74
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 250 250 5,000
----- ----- -----
4)
Income (loss) before extraordinary item (670) (308) 4,590
Extraordinary item:
Gain on early extinguishment of debt
(Note 6) 382 -- --
----- ------ ------
Net income (loss) $ (288) $ (308) $ 4,590
======== ======== =======
EARNINGS PER SHARE - PRIMARY AND FULLY
DILUTED
Loss before discontinued operations and
extraordinary item $ (0.09) $ (0.05) $ (0.04)
Income from discontinued operations 0.02 0.02 0.49
Income (loss) before extraordinary item (0.07) (0.03) 0.45
Net Income (loss) (0.03) (0.03) 0.45
Weighted average Common Shares
and share equivalents outstanding
Primary and Fully diluted 10,339,250 10,339,250 10,169,000
============ ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-75
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 Paid-In Deficit From Stock At
Shares Amount of Shares Amount Capital Jan. 1, 1986 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
-- $ -- -- -- 4,590 -- $ 4,590
--- ------ ------ ------ ------ ------------ ------ --------
Net Income ------------ -------
Balance December 31, 1994 -- 10,339 $11 $106,594 $(104,441) $(1,654) $ 510
=== ====== ====== === ======== =========== ======== ======
Net Loss -- -- -- -- $ (308) -- $(308)
--- ------ ------ ------ ------ ----------- ------- --------
Balance December 31, 1995 $ -- 10,339 $11 $106,594 $(104,749 ) $(1,654) $ 202
--- ------ ====== === ======== =========== ======== --------
Net Loss -- -- -- $-- $ (288) -- $(288)
--- ------ ------ ---- ------ ----------- ------ --------
Balance December 31, 1996 -- $ -- 10,339 $11 $106,594 ($105,037) $(1,654) $ (86)
--- ------ ====== === ======== ========= ========= --------
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-76
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 59
Deferred credit applicable to sale of discontinued operations (250) (250) (5,000)
Changes in assets and liabilities:
Accounts receivable 754 276 93
Inventories 608 (78) (108)
Prepaid expenses and other current assets (257) 55
Other assets 5 (1) 6
Accounts payable (885) (72) 64
Accrued expenses and other current liabilities 442 101 81
----- ------ -----
Net cash used in operating
activities (224) (267) (160)
------- ------- ------
Cash flows from investing activities:
Capital expenditures (18) (21) (39)
------ ------ -----
Cash flows from financing activities:
Repayment of capital leases (10) (20) (3)
Net payments under bank debt (2,340) (270) (360)
Payment on subordinated debenture (9) -- --
Net proceeds from sale of stock --- -- 1,019
Issuance of convertible debenture 300 -- --
Net borrowings from C.I.T. revolver 2,425 -- --
------ ----- -----
Net cash provided by (used in) financing
activities 366 (290) 656
--------- ------- ------
Net change in cash and cash equivalents 124 (578) 457
Cash and cash equivalents at beginning of period 347 925 468
----- ----- -----
Cash and cash equivalents at end of period $ 471 $ 347 $ 925
====== ====== ======
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
F-77
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES INCLUDED IN THE FOOTNOTES ARE IN THOUSANDS EXCEPT FOR PER SHARE DATA)
1 - General
The Lehigh Group Inc. (the "Company"), through its wholly owned
subsidiary, HallMark Electrical Supplies Corp. ("HallMark"), is engaged in the
distribution of electrical supplies for the construction industry both
domestically (primarily in the New York Metropolitan area) and for export.
HallMark was acquired by the Company in December 1988. HallMark's sales include
electrical conduit, armored cable, switches, outlets, fittings, panels and wire
which are purchased by HallMark from electrical equipment manufacturers in the
United States. Approximately 70% of HallMark's sales are domestic and 30% are
export. Export sales are made by sales agents retained by HallMark. Distribution
is made in approximately 26 countries.
EXPORT SALES AS A PERCENTAGE OF TOTAL SALES ARE SUMMARIZED AS FOLLOWS:
December 31,
1996 1995 1994
Central America 10% 16% 14%
South America 8% 18% 16%
Caribbean 6% 6% --
West Indies 2% -- 6%
OTHER 4% -- 2%
- ---------------------- --- ---- ---
Total 30% 40% 38%
=== === ===
2 - Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include all
of the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
INVENTORIES - Inventories are stated at the lower of cost or market using a
first-in, first-out basis to determine cost. Inventories consist of electrical
supplies held for resale.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost. Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements are
provided over the life of each respective lease.
INCOME TAXES - The Company uses the liability method of accounting for deferred
income taxes. The provision for income taxes typically includes Federal, state
and local income taxes currently payable and those deferred because of temporary
timing differences between the financial statement and taxes bases of assets and
liabilities. The consolidated financial statements do not include a provision
for income taxes due to the Company's net operating losses.
F-78
EARNINGS PER SHARE - Earnings per common share is calculated by dividing net
income (loss) applicable to common shares by the weighted average number of
common shares and share equivalents outstanding during each period. Excluded
from fully diluted computations are certain stock options granted (12,000,000
options which are contingently exercisable pending the occurrence of certain
future events).
TREASURY STOCK - Treasury stock is recorded at net acquisition cost. Gains and
losses on disposition are recorded as increases or decreases to capital with
losses in excess of previously recorded gains charged directly to retained
earnings.
STOCK OPTIONS - The Company uses the intrinsic value method of accounting for
employee stock options as permitted by statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation". Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount the employee must pay to acquire the stock. The compensation is
recognized over the vesting period of the options.
ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
LONG-LIVED ASSETS - The Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" in 1996. The Company reviews certain
long-lived assets identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. In that regard, the Company assesses the recoverability of such
assets based upon estimated non-discounted cash flow forecasts. The Company has
determined that no impairment loss needs to be recognized for long lived assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of financial
instruments including cash and cash equivalents, accounts receivable and
accounts payable approximate fair value at December 31, 1996, because of the
relative short maturities of these instruments. It is not possible to presently
determine the market value of the long term debt and notes payable given the
Company's current financial condition.
STATEMENTS OF CASH FLOWS - Cash equivalents include time deposits with original
maturities of three months or less.
REVENUE RECOGNITION - Revenue is recognized when products are shipped or when
services are rendered.
PRESENTATION OF PRIOR YEARS DATA - Certain reclassifications have been made to
conform prior years data with the current presentation.
3 - Merger
On October 29, 1996, the Company and First Medical Corporation ("FMC")
entered into a Merger Agreement. Under the terms of the Merger Agreement, each
share of the FMC Common Stock would be exchanged for (i) 1,033.925 shares of
Lehigh Common Stock and (ii) 95.1211 shares of Lehigh Preferred Stock. Each
share of Lehigh Preferred Stock will be convertible into 250 shares of Lehigh
Common Stock and will have a like number of votes per share, voting together
with the Lehigh Common Stock. Currently, there are outstanding 10,000 shares of
FMC Common Stock. As a result of these actions, immediately following the
Merger, current Lehigh stockholders and FMC stockholders will each own 50% of
the issued and outstanding shares of Lehigh Common Stock. In the event that all
of the shares of Lehigh Preferred Stock issued to the FMC stockholders are
converted into Lehigh Common Stock, current Lehigh stockholders will own
approximately 4% and FMC stockholders will own approximately 96% of the issued
and outstanding shares of Lehigh Common Stock. In addition, under the terms of
the Merger Agreement Lehigh will be renamed "First Medical Group, Inc.".
Although the Company has entered into this merger agreement there can be no
assurance at this time that the Company will be able to consummate this
transaction.
F-79
4 - Discontinued Operations
On December 31, 1991, the Company sold its right, title and interest in
the stock of the various subsidiaries which made up its discontinued interior
construction and energy recovery business segments subject to existing security
interests. The Company did not retain any of the liabilities of the sold
subsidiaries. The excess of liabilities over assets of subsidiaries sold
amounted to approximately $9.6 million. Since 1991, the Company has reduced this
deferred credit (the reduction is shown as income from discontinued operations)
due to the successful resolution of the majority of the liabilities for amounts
significantly less than was originally recorded. The deferred credits were
reduced as follows:
1992 $ 2,376
1993 $ 1,760
1994 $ 5,000
1995 $ 250
1996 $ 250
5 - Property, Plant and Equipment
December 31
------------------------- Estimated
Useful Lives
------------
1996 1995
---- ----------
Machinery and equipment $ 483 $ 475 3 to 5 years
Leasehold improvements 295 285 Term of leases
----- -----
778 760
Less accumulated depreciation and
amortization (728) (699)
------ ------
$ 50 $ 61
====== ======
6 - Long-Term Debt
December 31,
-----------------------------------------------
INTEREST RATE 1996 1995
-------------
Subordinated Debentures 14-7/8% $ 290 $ 400
Senior Subordinated Notes 13-1/2% 100 100
Convertible Debenture 10.25% 300 --
Note Payable-BNL 10.56% -- 2,440
Revolving Credit Facility-C.I.T. 10.56% 2,425 --
Other Long-Term Debt Various -- 10
-------- --------
3,115 2,950
F-80
Less Current Portion (390) (870)
--------- ---------
Total Long-Term Debt $ 2,725 $ 2,080
======= =========
Subordinated Debentures and Senior Subordinated Notes
On March 15, 1991, pursuant to a restructuring done by the Company (the
"1991 Restructuring"), the holders of $8,760,000 principal amount of the 14-7/8%
Debentures exchanged such securities, together with the accrued but unpaid
interest thereon, for $2,156,624 principal amount of Class B Notes and
53,646,240 shares of Common Stock. Additionally, the holders of $33,840,000
principal amount of the 13-1/2% Notes exchanged such securities, together with
the accrued but unpaid interest thereon, for $8,642,736 principal amount of
Class B Notes and 212,650,560 shares of Common Stock.
The Company was in default of certain covenants to the holders of Class
A Notes and Class B Notes (the "Notes") at December 31, 1992 and 1991 and, as a
consequence, the Notes were classified as current in the 1992 and 1991 Financial
Statements. The Company continues to be in default in the payment of interest
(approximately $628,000 and $653,000 of interest past due as of December 31,
1996 and 1995) on the $500,000 principal amount of 13-1/2% Notes and 14-7/8
Debentures that were not tendered in the Company's 1991 Restructuring. In May
1993 the Company reached an agreement (the "1993 Restructuring") whereby
participating holders of the Notes ("Noteholders") surrendered their Notes,
together with a substantial portion of their Common Stock, and, in exchange
therefore, the Noteholders acquired, through a newly formed corporation ("LVI
Holding"), all of the stock of LVI Environmental Services Group Inc. ("LVI
Environmental"), a subsidiary of the Company that conducted its asbestos
abatement operations. Management of LVI Environmental have a minority equity
interest in LVI Holding. As a consequence, the Company's outstanding
consolidated indebtedness was reduced from approximately $45.9 million to
approximately $3.6 million (excluding approximately $120,944 of indebtedness
under Class B Notes that LVI Holding agreed to pay in connection with the 1993
Restructuring but for which the Company remains liable). Since the Noteholders
were also principal stockholders of the Company, the gain from this transaction,
net of the carrying value of LVI Environmental, was credited directly to
additional paid-in capital.
In accordance with Statement of Financial Accounting Standards No. 15,
the Class A Notes and the Class B Notes were carried on the consolidated balance
sheet at the total expected future cash payments (including interest and
principal) specified by the terms of the Notes. A gain on early extinguishment
of debt occurred as a result of the carrying amounts of the 13-1/2% Notes,
14-7/8% Debentures and Senior Secured Notes (including accrued but unpaid
interest and unamortized deferred financing costs) being greater than the fair
market value of the common stock issued, the net assets transferred to a
liquidating trust, and total expected future cash payments of the Class A Notes
and Class B Notes, net of direct restructuring costs.
Included in interest and other income in 1996 and 1995 is approximately
$106,000 and $380,00 respectively of other income which represents an adjustment
to the value of certain items which relate to the Company's 1991 Restructuring.
During 1996, the Company retired $110,000 of the 14-7/8% debentures
plus accrued and unpaid interest of $181,000 for approximately $9,000. The gain
on extinguishment of debt of approximately $282,000 is included in extraordinary
item of $382,000.
F-81
REVOLVING CREDIT FACILITY
In November 1996, HallMark entered into a three year revolving credit
facility with a financial institution, which provides a maximum line of credit
equal to the lesser of eligible accounts receivable and inventory or $5 million.
The credit facility bears interest at the prime rate plus 2%, and is
collaterized by the Company's accounts receivable, inventory and property and
equipment.
The Company used proceeds from the revolving credit facility to pay
down its outstanding note payable with a bank. The extinguishment of debt
resulted in a gain of approximately $100,000. This gain is included in the
extraordinary item of $382,000.
Convertible Debenture
On October 29, 1996 in connection with the execution of the definitive
merger agreement described in Note 3 between the Company and FMC, the Company
issued a convertible debenture in the amount of $300,000 plus interest at two
(2%) percent per annum over the prime lending rate of Chase Manhattan Bank, N.A.
payable on the first day of each subsequent month next ensuing through and
including twenty four months thereafter. On the twenty fourth month, the
outstanding principal balance and all accrued interest shall become due and
payable.
The proceecs of the loan from FMC were used to satisfy the loan the
Company previously obtained from DHB Capital Group Inc. on June 11, 1996. On
February 7, 1997, First Medical Corporation elected to convert the debenture in
937,500 shares of the Company's common stock.
7 - Income Taxes
At December 31, 1996 and 1995, the Company had a net deferred tax asset
amounting to approximately $2.2 million and $1.6 million, respectively. The net
deferred tax asset consisted primarily of net operating loss ("NOL")
carryforwards, and temporary differences resulting from inventory and accounts
receivable reserves, and it is fully offset by a valuation allowance of the same
amount due to uncertainty regarding its ultimate utilization. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities:
DECEMBER 31, 1996 1995
- ------------
Deferred tax assets:
Nondeductible accruals and allowances $ 206 $ 65
Net operating loss carryforward 2,008 1,575
------ ------
2,214 1,640
Deferred tax liabilities:
Depreciation and amortization 30 30
------ -----
Net deferred tax asset $2,184 $1,610
Less: Valuation Allowance 2,184 1,610
----- -----
Deferred Income Taxes --- ---
------ -----
--- ---
====== =====
The Company did not have Federal taxable income in 1996, 1995, and 1994
and, accordingly, no Federal taxes have been provided in the accompanying
consolidated statements of operations. As of December 31, 1996, the Company had
NOL carryforwards of approximately $5 million expiring through 2011.
F-82
8 - Commitments and Contingencies
Leases
The Company and its subsidiaries lease machinery, office and warehouse
space, as well as certain data processing equipment and automobiles under
operating leases. Rent expense aggregated $165,000, $177,000 and $148,000, for
the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum annual lease commitments, primarily for office and
warehouse space, with respect to noncancellable leases are as follows:
1997 104
1998 105
1999 114
2000 118
2001 121
Thereafter 313
-------
$ 875
======
In addition to the above, certain office and warehouse space leases
require the payment of real estate taxes and operating expense increases.
Employment Agreements
On August 22, 1994 the Company and Mr. Salvatore Zizza entered into an
employment agreement providing employment to Mr. Zizza through December 31, 1999
as President, Chairman of the Board and Chief Executive Officer of the Company
at an annual salary of $200,000. On December 20, 1996, the Company agreed to
extend Mr. Zizza's employment contract through December 31, 2000.
On January 1, 1995 the Company and Mr. Robert Bruno entered into an
employment agreement providing employment to Mr. Bruno through December 31, 1999
as Vice President and General Counsel of the Company at an annual salary of
$150,000. The agreement calls for deferral of $50,000 of Mr. Bruno's salary each
year until the Company's annual revenues exceed $25 million. The $50,000
deferral has not been accrued due to uncertainty regarding the Company achieving
$25 million in sales. On December 20, 1996, the Company agreed to extend Mr.
Bruno's employment agreement through December 31, 2000. Mr. Bruno reduced his
annual salary to $120,000 no part of which shall be deferred pending
consummation of the proposed merger with First Medical Corporation.
Litigation
The State of Maine and Bureau of Labor Standards commenced an action
against the Company and Dori Shoe Company (an indirect former subsidiary) to
recover severance pay under Maine's plant closing law. The case was tried
without a jury on December 12 and 13, 1994 in Maine Superior Court. Under that
law, an "employer" who shuts down a large factory is liable to the employees for
severance pay at the rate of one week's pay for each year of employment.
Although the law did not apply to the Company at the time that the Dori Shoe
plant was closed it was amended so as to arguably apply to the Company
retroactively.
F-83
In a prior case brought against the Company (then known as Lehigh
Valley Industries) and its former subsidiary under the Maine severance pay
statute prior to its amendment the Company was successful against the State of
Maine (see CURTIS V. LOREE FOOTWEAR AND LEHIGH VALLEY INDUSTRIES, 516 A. 2d 558
(Me. 1986)).
The Superior Court by decision docketed April 10, 1995 entered
judgement in favor of the former employees of Dori Shoe Company against Dori
Shoe and the Company in the amount of $260,969. plus prejudgment interest and
reasonable attorneys' fees and costs to the Plaintiff upon their application
pursuant to Maine Rules of Civil Procedure 54(b) (3) (d). Interest and other
fees are approximately $100,000 at December 31, 1996. The Company filed a timely
appeal appealing the decision and the matter was argued before the Maine Supreme
Judicial Court on December 7, 1995. On February 18, 1997 the Supreme Judicial
Court of Maine affirmed the Superior Court's decision. The Company is currently
considering an appeal to the United States Supreme Court. Approximately $350,000
has been accrued for by the Company relating to this judgement.
9 - Stock Options
The following table contains information on stock options for the three
year period ended December 31, 1996:
Exercise price Weighted average
Option shares range per share 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
F-84
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 market value based method prescribed in
FASB Statement 123. The Company estimates the fair value of each stock option at
the grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995 and 1996,
respectively: no dividends paid for both years; expected volatility of 30% for
both years; risk-free interest rates of 6.78% and 6.42%; and expected lives of 4
and 5 years.
Under the accounting provisions of FASB Statement 123, the Company's
net loss per share would have been adjusted to the pro forma amounts indicated
below:
1996 1995
---- ----
Net Loss
As reported (288) (308)
Pro forma (304) (310)
Primary earnings per share
As reported (0.03) (0.03)
Pro forma (0.03) (0.03)
Fully diluted earnings per share
As reported (0.03) (0.03)
Pro forma (0.03) (0.03)
F-85
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Prices
--------------- ----------- ---- ----- ----------- ------
$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.
10 - Significant Customer
Sales to a customer accounted for approximately 21%, 25% and 22% for years ended
December 31, 1996, 1995 and 1994, respectively. This customer accounted for
approximately 14%, 21% and 15 % of accounts receivable on December 31, 1996,
1995 and 1994, respectively.
11 - Supplementary Information
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
Cash paid during the year for:
Interest $252 $278 $264
Income taxes 1 12 78
Supplemental disclosure of non-cash financing activities:
DECEMBER 31, 1996 and 1995
Accounts payable and operating loss were both reduced by approximately $106,000
and $380,000 for December 31, 1996 and 1995, respectively relating to an
adjustment to the value of certain items which relate to the Company's 1991
Restructuring.
F-86
THE LEHIGH GROUP INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
Balance at Charged to
Beginning of Costs and Charged to Other Charges Balance at End
Dec. 31, Description Year Expenses Other Accounts Add (Deduct) of Year
- ------------------------------------------------------------------------------------------------------------------------------------
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
F-87
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED MARCH 31, 1997 1996
- --------------------------------------------------------------------------------
Revenues earned $ 5,765 $ 5,988
Cost of revenues earned 3,776 4,201
------------ ------------
Gross profit 1,989 1,787
Selling, general and administrative expenses 1,966 1,969
------------ ------------
Operating income (loss) 23 (182)
Other income (expense):
Interest expense (236) (220)
Interest and other income 12 7
Amortization of deferred finance (14) --
------------ ------------
(238) (213)
Loss before income taxes (215) (395)
------------ ------------
Net Loss $ (216) $ (396)
============ ============
Loss per share-Primary and Fully Diluted
Net Loss $ (0.02) $ (0.04)
Weighted average Common Shares
and share equivalents outstanding
Primary and Fully diluted 11,089,000 10,339,250
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-88
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 463 $ 471
Accounts receivable, net of
allowance for doubtful
accounts of $404 and $342 4,897 3,581
Inventories, net 1,645 1,215
Prepaid expenses and other current assets 91 279
------ ------
Total current assets 7,096 5,546
Property, plant and equipment, net of
accumulated depreciation and
amortization 55 50
Other assets 26 29
------ ------
Total assets $7,177 $5,625
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-89
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited) (Audited)
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 390 $ 390
Accounts payable 1,585 954
Accrued expenses and other liabilities 1,775 1,642
--------- ---------
Total current liabilities 3,750 2,986
--------- ---------
Long-term debt, net of current maturities 3,429 2,725
--------- ---------
Commitments and contingencies -- --
Preferred stock, par value $.001;
authorized 5,000,000
shares none issued
Common stock, par value $.001
authorized shares 100,000,000,
in 1996 and 1995; shares issued
10,339,250 in 1996 and 1995
which excludes 3,016,249 shares
held as treasury stock in 1996 and 1995,
respectively 12 11
Additional paid-in capital 106,893 106,594
Accumulated deficit from January 1, 1986 (105,253) (105,037)
Treasury stock - at cost (1,654) (1,654)
--------- ---------
Total shareholders' equity (deficit) (2) (86)
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 7,177 $ 5,625
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-90
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(IN THOUSANDS)
Additional Accumulated Treasury
Common Paid in Deficit From Stock
Stock Capital Jan. 1, 1986 At Cost Total
-------- -------- ------------ ------- -------
Balance January 1, 1996 $ 11 $ 106,594 $(104,749) $ (1,654) $ 202
Net loss -- -- (396) -- (396)
Balance June 30, 1996 $ 11 $ 106,594 $(105,145) $ (1,654) $ (194)
========= ========= ========= ========= =========
Balance January 1, 1997 $ 11 $ 106,594 $(105,037) $ (1,654) $ (86)
Debenture Conversion $ 1 299 -- -- 300
Net loss -- -- (216) -- (216)
Balance June 30, 1997 $ 12 $ 106,893 $(105,253) $ (1,654) $ (2)
========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-91
THE LEHIGH GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net loss $(216) $(396)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 43 18
Changes in assets and liabilities:
Accounts Receivable (1,316) (134)
Inventories-net (430) (230)
Prepaid and other current assets 188 (28)
Accounts payable 631 159
Accrued expenses 129 155
----- -----
Net cash used in operating activities (971) 4
----- -----
Cash flows from investing activities:
Capital expenditures -- --
Net cash provided by (used in) investing activities (41) (11)
----- -----
Cash flows from financing activities:
Net borrowings from C.I.T. Revolver 1,004 --
Net payments under bank debt -- (180)
Repayment of Capital leases -- (7)
Convertible Debenture -- 300
Net cash provided by (used in) financing activities 1,004 113
----- -----
Net changes in cash (8) 106
Cash at beginning of period 471 347
----- -----
Cash at end of period $ 463 $ 453
===== =====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-92
THE LEHIGH GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information for the six months ended June 30, 1997 and 1996 is
unaudited. However, the information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair statement of results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes included in the Company's December 31, 1996 Report on Form 10-K.
The results of operations for the six month period ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
Loss per common share is calculated by dividing net loss by the weighted average
number of common shares and share equivalents outstanding. For the periods
presented, there were no common stock equivalents included in the calculation,
since they would be anti-dilutive.
2. SUPPLEMENTARY SCHEDULE
1997 1996
---- ----
(in thousands)
Statement of cash flows
Six months ended June 30,
Cash paid during the six months for:
Interest $155 $134
Income taxes 1 1
Supplemental disclosure of non-cash financing activities:
On February 7, 1997, First Medical Corporation elected to convert the debenture
into 937,500 shares of the Company's common stock.
F-93
PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The pro forma data presented in the pro forma combined financial statements are
included in order to illustrate the effect on the financial statements of Lehigh
and FMC of the transactions described below. The pro forma information is based
on the historical financial statements of FMC and Lehigh.
The pro forma combined balance sheet data at June 30, 1997 gives effect to the
reverse acquisition of Lehigh by FMC. The adjustments are presented as if, at
such date, FMC had acquired Lehigh (which was expected to be finalized during
the third quarter 1997).
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
The pro forma combined financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto of FMC and
the audited consolidated financial statements and Notes thereto of Lehigh
appearing elsewhere in this document. The pro forma combined statement of
operations data are not necessarily indicative of the results that would have
been reported had such events actually occurred on the date specified, nor are
they indicative of the companies' future results. There can be no assurance that
the Lehigh reverse acquisition by FMC will be consummated.
F-94
First Medical Corporation and subsidiaries and Lehigh Group Inc.
and subsidiaries Pro Forma Combined Balance Sheet
June 30, 1997
(unaudited)
(in thousands)
FMC LEHIGH Adjustments Proforma
--- ------ ----------- --------
(1) (2) (3)
--- --- ---
ASSETS
Current assets:
Cash $ 45 463 -- -- $4,512 $5,020
Accounts and receivable, net 194 4,897 -- -- -- 5,891
Humana IBNR receivable and claims
reserve funds 7,950 -- -- -- 7,950
Due from related parties 950 -- -- -- 950
Inventories -- 1,645 -- -- -- 1,645
Prepaid assets 217 91 -- -- -- 308
------ ----- ------ ------ ----- -----
Total current assets 10,156 7,096 -- -- 4,512 21,764
Property and equipment, net 384 55 -- -- -- 439
Goodwill related to Lehigh Group -- -- 3,319 -- -- 3,319
Investment in Lehigh 819 -- (819) -- -- --
Other Intangible assets 3,033 -- -- -- -- 3,033
Other assets 746 26 -- -- -- -- 772
----- ----- ---------- ----- ---- ------
TOTAL $15,137 $7,177 $2,500 $ -- $4,512 $29,326
LIABILITIES AND SHAREHOLDERS' EQUITY (Deficit)
Current liabilities:
Accounts payable and accrued
expenses $2,348 $3,360 -- -- -- $5,708
Accrued medical claims 8,722 -- -- -- -- 8,722
Current portion of long-term
obligations 268 390 -- -- -- 658
Corporate deposits 673 -- -- -- -- 673
Loans payable to banks 2,651 -- -- -- -- 2,651
Obligations to certain shareholders 431 -- -- -- -- 431
Other liabilities 413 -- -- -- -- 413
----- ---- ----- ----- ----- ------
Total current liabilities 15,505 3,750 -- -- -- 19,255
Other long-term liabilities 230 3,429 -- -- -- 3,659
Obligations to certain
shareholders', net of current
portion 969 -- (488) 481
Stockholders' equity (deficit)
Common stock -- 12 (12) -- -- --
Additional paid in capital 380 106,893 (104,315) -- 5,000 7,958
Retained earnings (deficit) (1,947) (105,253) 106,827 (1,654) -- (2,027)
Treasury stock, at cost -- (1,654) -- 1,654 -- --
----- -------- ------ ------- ----- -----
Total stockholders' equity (deficit):(1,567) (2) 2,500 -- 5,000 5,931
TOTAL $15,137 $7,177 $2,500 $ -- $4,512 $29,326
F-95
Adjustments
(1) To record the conversion of Lehigh note payable to FMC by issuing
additional shares to FMC prior to the consummation of the merger and to
record the issuance of shares of FMC for the reverse acquisition and the
resulting goodwill on the issuance of 10,000,000 shares at approximately
$.25 per share.
(2) To retire Lehigh's treasury stock.
(3) To record GDS's capital contribution of $5 million net of $488 previously
provided by GDS, of which $5 million will be contributed as capital to FMC
for shares which upon conversion will represent 22.7% of the ownership of
the combined entity. FMC will issue the following securities to GDS:
1. 10% of FMC Common Stock, which will automatically be exchanged in the
Merger for 1,127,675 shares of Lehigh Common Stock and 103.7461 shares of
Lehigh Preferred Stock.
2. Shares of FMC's 9% Series A Convertible Preferred convertible into 10%
of FMC Common Stock; each such share will be convertible into one share of
FMC Common Stock. Following the Merger, this class of preferred stock will
remain outstanding as a security of FMC: however, it will be convertible in
accordance with its terms into the same Merger consideration as all other
shares of FMC Common Stock. Consequently, when and if GDS decides to
convert its shares of FMC's 9% Series A Convertible Preferred Stock, GDS
will receive 1,127,675 shares of Lehigh Common Stock and 103.7461 shares of
Lehigh Preferred Stock. Together with the shares issued in step 1 above,
these shares will give GDS a total of approximately 22.7% ownership
interest and voting power of Lehigh.
3. Until the fifth anniversary of the Merger, GDS will have the option to
increase its ownership interest in Lehigh to 51%, at a price equal to 110%
of the average 30-day trailing market price. This increase in ownership
would occur through the issuance of new stock by Lehigh; as a result, all
other stockholders' ownership interests would be diluted and GDS would gain
control of Lehigh.
F-96
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND
SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(unaudited)
(unaudited in thousands except share and per share data)
Combined
FMC Lehigh Adjustments(1) Proforma
--- ------ -------------- --------
REVENUE $53,014 $10,446 -- $63,460
Medical expense 43,526 -- -- 43,526
Cost of sales -- 7,134 -- 7,134
------- -------- -------- --------
Group profit 9,488 3,312 12,800
Selling, general and administrative
expenses 8,696 3,874 -- 12,570
--------- -------- --------- ---------
Operating Income (loss) 792 (562) -- 230
Other Income (expense):
Interest expense (55) (471) -- (526)
Other Income -- 113 -- 113
--------- -------- --------- ---------
(55) (358) (413)
Amortization of goodwill-Lehigh -- -- 147 (147)
Income (loss) before taxes,
discontinued operations and
extraordinary item 737 (920) (147) (330)
Provision for income taxes 413 -- -- 413
-------- --------- --------- ----------
Income (loss) before discontinued
operations and extraordinary item 324 (920) (147) (743)
Income from discontinued operations -- 250 -- 250
-------- --------- --------- ---------
Income (loss) before extraordinary
item 324 (670) (147) (493)
Extraordinary item-gain on early -- 382 -- 382
-------- --------- --------- ----------
extinguishment of debt
Net Income (loss) $ 324 $ (288) $ (147) $ (111)
Net loss per share ($0.001)
Weighted average number of shares
outstanding after consummation of
the merger 237,000,000
1. To amortize the goodwill on the FMC and Lehigh acquisition over a period of
15 years.
F-97
FIRST MEDICAL CORPORATION AND SUBSIDIARIES AND LEHIGH GROUP INC. AND
SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1997
(unaudited)
(unaudited in thousands except share and per share data)
Combined
FMC Lehigh Adjustments Proforma
--- ------ ----------- --------
Revenue $32,783 $5,765 -- $38,548
Medical expense 30,513 -- -- 30,513
Cost of sales -- 3,776 -- 3,776
------- ------ -------- -------
Gross profit 2,270 1,989 4,259
Selling, general and administrative expenses(2) 4,426 1,966 (21) 6,371
------- ------- -------- -------
Operating income (loss) (2,155) 23 21 (2,112)
Other income (expense):
Interest expense (94) (236) -- (330)
Other income (expense) (21) (2) -- (23)
------ ------- ------- -------
(115) (238) -- (353)
Amortization of goodwill-Lehigh(1) -- -- (101) (101)
Income (loss) before taxes (2,271) (215) (80) (2,566)
Provision for income taxes 0 1 -- 1
------ ------- ------- -------
Net Income (loss) $(2,271) $ (216) $ (80) ($2,567)
Net loss per share $(0.0108)
Weighted average number of shares
outstanding after consummation of the
merger 237,000,000
1. To amortize the goodwill on the FMC and Lehigh acquisition over a period
of 15 years.
2. To reverse equity loss in Lehigh recorded by FMC.
F-98