SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 001-00155
First Medical Group, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1920670
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1055 WASHINGTON BOULEVARD, STAMFORD, CT 06901
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (203) 327-0900
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Common Stock $.001 par value OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES X NO
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Approximate aggregate market value of the voting stock held by "nonaffiliates"
of the Registrant on March 20, 1999: $xxxx.
Number of shares of Common Stock outstanding of the Registrant as of March 20,
1999: 9,567,292.
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* Registrant's sole class of voting stock is its Common Stock $.001 par value,
which is listed on the OTC Bulletin Board. The determination of market value of
such Common Stock has been based solely on the closing price per share of such
stock on the OTC Bulletin Board on the date indicated. In making this
computation, all shares known to be owned by directors and executive officers of
the Registrant and all shares known to be owned by person holding in excess of
5% of the Registrant's Common Stock have been deemed held by "affiliates" of the
Registrant. Nothing herein shall affect the right of the Registrant to deny that
any such directors, executive officers or more than 5% stockholder is an
"affiliate."
PART I
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ITEM 1. BUSINESS
GENERAL
First Medical Group, Inc. ("FMG or the Company") owns and operates medical
clinics in Eastern Europe. The Company previously conducted its operations in
three divisions: (a) a physician practice management division which provides
physician management services including the operation of clinic facilities and
management services to medical groups, (b) an international division which
manages medical centers in Eastern Europe and (c) an electrical supply
distribution business for the construction industry. The Company was formed as a
result of a merger between The Lehigh Group, Inc. ("Lehigh") and First Medical
Corporation in July 1997. Subsequent to the merger, Lehigh changed its name to
First Medical Group, Inc. FMG is incorporated in the State of Delaware.
The Company incurred substantial losses from operations relating to its
physician practice management business ("managed care operations") in 1997 and
through the first quarter of 1998. As a result, the Company adopted a formal
plan to discontinue and dispose of its managed care operations. The decision to
dispose of these operations was based upon the view of management that such
operations would require substantial additional capital to sustain operating
losses that would be continued to be incurred by the Company. The Florida
managed care operation was sold in April 1998 and the Indiana and Texas managed
care operations were sold in July 1998.
The Company also adopted a formal plan to divest its electrical supply business
("Hallmark"). The decision to dispose of Hallmark was based upon an assessment
by management that the business did not meet the Company's operating strategy
for development and expansion of its international healthcare operations.
For financial reporting purposes, the Company has reflected the managed care and
electrical supply business as discontinued operations.
The Company believes that it is well-positioned to develop and expand its
international business in existing as well as new markets.
The Company, through its management company, American Medical Centers Management
Company, Ltd. ("AMC"), owns and operates outpatient and ancillary healthcare
facilities modeled after the American healthcare system. AMC's healthcare
facilities are currently structured as "A," "B," or "C" type facilities. The "C"
type facility is a full service outpatient primary care center with those
services provided as listed below, dependent upon both market and demand. The
"B" type clinic is similar to a "C" model but with increased diagnostics,
inpatient care facilities and between ten to fifteen overnight medical beds. The
"A" type facility provides both inpatient and outpatient care with 50 to 300
medical beds. The company currently operates five "C" locations in Moscow,
Russia; St. Petersburg, Russia; Kiev, Ukraine; Prague in the Czech Republic; and
Warsaw, Poland. In addition three "B" facilities are under construction in those
markets which are expected to be completed in the third quarter of 1999, and the
company is in the process of opening one additional "C" facility in Middle Asia
which is scheduled to open in the fourth quarter of 1999. Further, two "A"
facilities are under construction in Moscow and Warsaw and are expected to be
completed in the year 2001. Future plans call for additional upgrades of current
facilities in Eastern Europe and Middle Asia, and expansion to the Middle East,
Latin America, and The Pacific Basin. AMC clinics also supply Western-trained
emergency physicians in remote sites in St. Petersburg and Warsaw.
The Company's services include but are not limited to: trauma and emergency
care, general practice, family practice, full diagnostics, radiology, pharmacy,
dentistry, pathology, psychiatry and most specialty groups such as cardiology,
pediatrics, oncology, gynecology, orthopedics, and dermatology. The Company
strives to deliver a comprehensive range of medical services to meet the
specific needs of its clients in each of its unique markets. The Company employs
American board certified doctors, nurses, and ancillary personnel. Nationals are
also employed after being fully credentialed.
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CUSTOMERS
Eighty percent of the company's client base is represented by two specific
groups, expatriates and local employees of multinational corporations (to
include management) and nationals (referred to as those persons or groups of
local citizens that desire, appreciate and demand the American health care
delivery system both in outpatient and inpatient care). Tourists, students,
diplomats, and non-resident members that frequently travel to those markets
represent the remainder of this client base. The patient mix changes based on
season and market.
Revenues of the company are primarily derived from fee-for-service charges and
annual non-refundable membership fees charged to corporations, families, and
individuals. A variety of diverse membership plans are available and can be
tailored to meet the unique needs of the corporate clients. Local nationals now
account for fifteen to twenty-five percent of revenue, depending upon the
healthcare facility's location.
Corporations are required to pay an annual membership fee, as well as advance
deposits when requesting third party billing (insurance). Membership plans offer
a wide range of benefits including 24-hour emergency access, monthly medical
newsletters, special discounts on services, and reciprocal membership at all AMC
locations. The Company also offers the patient benefit of insurance processing
for members only. AMC corporate memberships include over five hundred
international companies.
In 1998, in order to meet the changing needs of corporate clients and to provide
to potential clients expanded access to American-style healthcare, AMC developed
and implemented a variety of comprehensive managed care plans. These plans range
from individual and family plans to corporate plans covering up to 2000 persons.
QUALITY ASSURANCE
The company believes that its affiliations with partner hospitals is a valuable
asset. Since 1992, the company has been affiliated with Baylor College of
Medicine in Houston, Texas ("Baylor"), to provide quality assurance,
tele-medicine, consultation, and credentialing. Baylor also conducts the
majority of the recruiting function for AMC medical personnel worldwide. In
1999, AMC, in conjunction with Baylor, has made application for acceptance by
the International Joint commission, part of the American Hospital Joint
accreditation commission and anticipates this process will take place over the
coming year.
NEW DEVELOPMENTS
In 1998 AMC, in conjunction with Baylor College of Medicine and City of
Moscow (Moscow Citi), signed an agreement for the development of New American
Hospital of Moscow and the Baylor Medical School Annex. The Annex is
scheduled to be completed and opened by August 1, 1999.
Also in 1998, the company signed a long-term lease with an option to buy the
new American Medical Center "B" facility in Warsaw due to be completed by the
third quarter of 1999.
On January 1, 1999 George Rountree, President and Chief Executive Officer of the
American Hospital of Istanbul (Koc Foundation), the American Medical Center of
Istanbul and the American Italian Hospital of Istanbul, joined the board of FMG.
On April 15, 1999, Mr. Rountree will become Chief Executive Officer of AMC and
President and Chief Operating Officer of the Company, in addition to his current
responsibilities.
MAJOR STRATEGY
The major strategy of AMC is to continue with its plan in developing new centers
throughout Eastern Europe, Mid-Asia, Middle East, Latin America, and the Pacific
Basin. The company believes that in order to support its plan it will be
necessary to seek additional capital.
COMPETITION
The company has relatively little competition in its current market area.
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DISCONTINUED OPERATIONS
In 1998 the company adopted a plan to discontinue and dispose of all of its
non-core businesses and allow all assets to be deployed into the successful AMC
operations. Consistent with that plan, the company sold the following
businesses:
1. On April 1, 1998 the Company sold its Florida managed care businesses for a
sale price of $6.75 million. Proceeds of the sale were used for the
continued development of AMC, as well as to retire existing bank debt.
2. On April 17,1998 the Company sold its electrical supply business for
consideration of $1.9 million.
3. On July 8, 1998 the Company sold its Indiana Managed care operations for
consideration of cash and reduction of debt in the amount of $527,000.
4. On July 16, 1998 the Company sold its Texas managed care business for
consideration of $90,000, in the form of a note payable bearing interest at
8% starting July 1999.
With these transactions, the Company has prepared, reorganized, and positioned
itself to support the development and growth of AMC's worldwide operations.
SUBSIDIARIES
The Company maintains the following subsidiaries:
First Medical Corporation, a Delaware corporation
First Medical Group International, Ltd. , a British Virgin Island
corporation
American Medical Centers Management Company, Ltd., a British Virgin
Island corporation
American Medical Clinics Moscow, Inc., a Cayman Island corporation
American Medical Center-St. Petersburg Ltd. , a British Virgin Island
corporation
American Medical Centers Sp. z.o.o., a Poland corporation
American Medical Centers s.r.o., a Czech Republic corporation
EMPLOYEES
As of March 1, 1999, the Company had approximately 222 full-time
employees.
The Company complies with local contract requirements in the respective
geographic locations of particular jobs with respect to wages, fringe benefits
and working conditions.
ITEM 2. PROPERTIES
FMG's principal executive office is located at 1055 Washington
Boulevard, Stamford, Connecticut 06901, and its telephone number is (203)
327-0900.
FMG leases approximately 2,400 square feet in Stamford, Connecticut.
Such lease is on a month-to-month term, at an annual rent of $51,000.
FMG, through its various subsidiaries, currently leases one location in
Poland with monthly rent of $2,400, two locations in Russia with monthly rents
of $11,000 and $30,000, respectively, one location in the Czech Republic with a
monthly rent of $4,500 and one location in the Ukraine with a monthly rent of
$5,000.
The Company believes that all of its facilities are adequate for the
business in which it is engaged.
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ITEM 3. LEGAL PROCEEDINGS
FMG is involved in various legal proceedings incidental to its
business, and in the opinion of the Company, no individual item of litigation or
group of similar items of litigation, taking into account the insurance coverage
available to FMG, is likely to have a material adverse effect on FMG's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is currently listed on the over-the-counter bulletin
board ("OTCBB"). On March 31, 1999, there were approximately 70 holders of
record of the Common Stock (excluding shares held in "nominee" or "street"
name).
The following table reflects the range of the reported high and low
closing prices of Common Stock on the NYSE for the calendar quarters indicated.
The information in the table and in the following paragraph has been adjusted to
reflect retroactively all applicable stock splits and stock dividends but not
the Reverse Split, except for the fourth quarter for the period commencing
November 13, 1997 through December 31, 1997.
The prices below reflect trading of the Common Stock on the NYSE
through November 12, 1997. Subsequent to the delisting of the Common Stock from
the NYSE, the prices below for the period from November 13, 1997 through the
date hereof reflect trading of the Common Stock on the OTCBB.
1997:
First Quarter $ 1/4 $ 13/32
Second Quarter 14/32 1/8
Third Quarter 15/32 3/32
Fourth Quarter from October 1,
1997 through November 12, 1997 1/4 1/8
Fourth Quarter from November 13,
1997 through December 31, 1997 4-1/4 1-1/4
1998:
First Quarter $ 3 $ 23/64
Second Quarter 1 19/64 21/64
Third Quarter 1 1/32 9/64
Fourth Quarter 1 3/16 1/8
1999:
First Quarter $ 13/16 $ 1/8
The Company did not pay any dividends in 1997 or 1998.
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ITEM 6. SELECTED FINANCIAL DATA
FIRST MEDICAL GROUP, INC. & SUBSIDIARIES
Selected Financial Information
(in Thousands, Except For Per Share Data)
STATEMENT OF OPERATING DATA
Year Ended December 31,
1994(1)(2) 1995(1)(2) 1996(1)(2) 1997(1) 1998(1)
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Revenue -- -- $ 6,660 $ 9,019 $ 10,947
Cost of revenues -- -- 5,370 7,134 9,260
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Gross profit -- -- 1,290 1,885 1,687
Operating expenses:
Salaries and related benefits . -- -- 391 700 905
Other operating expenses -- -- 1,532 1,256 1,247
Impairment loss from
intangibles -- -- -- 1,024 --
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Total operating expenses -- -- 1,923 2,980 2,152
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Loss from operations -- -- (633) (1,095) (465)
Other expenses (income) -- -- 55 198 167
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Loss before income taxes and
cumulative effect of accounting
change -- -- (688) (1,293) (632)
Income tax provision (benefit) (3) -- -- -- (63) (473)
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Net (loss) before discontinued
operations and cumulative effect
of accounting change -- -- (688) (1,230) (159)
Income (loss) from
discontinued operations net of
income tax provision of $518,000 $ 818 $ (364) 1,011 (8,240) 2,008
Cumulative effect of change in
accounting principle net of
income tax benefit of $29,099 -- -- -- -- (940)
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Net income (loss) $ 818 $ (364) $ 323 $ (9,470) $ 909
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Net income (loss) per
share before income
(loss) from discontinued
operations and cumulative
effect of accounting principle -- -- $ (.07) $ (.13) $ (.01)
Cumulative effect per share of
change in accounting principle (.10)
Income (loss) per
share from discontinued
operations $ .09 $ (.04) .11 (.90) .21
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Net income (loss) $ .09 $ (.04) $ .04 $ (1.03) $ .10
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Pro forma fully diluted weighted
average number of FMG shares
currently outstanding (3) 9,021 9,021 9,021 9,202 9,496
Cash dividends as declared $ 117 $ 38 $ -- $ -- $ --
Balance Sheet Data
Working capital $ 972 $ 227 $ (899) $ (3,487) $ (3,305)
Total assets 972 227 2,335 5,143 4,992
Current liabilities -- -- 1,257 6,196 4,966
Stockholders' equity 972 227 703 (1,054) 26
Book value per share-fully diluted $ .11 $ .03 $ .08 $ (.11) $ --
6
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(1) The financial statements of the Company for the years ended December
31, 1994, 1995, 1996, 1997 and 1998 have been reclassified to reflect
the managed care and electrical supply business as discontinued
operations for financial reporting purposes.
(2) The selected financial data for the years ended December 31,1994 and
1995 has been derived from the audited combined financial statements of
MedExec, Inc. and subsidiaries; SPI Managed Care, Inc., and SPI Managed
Care of Hillsborough County, Inc. (collectively, "MedExec"). The data
for 1996 has been derived from the 1996 consolidated financial
statements of FMC.
(3) The amount of FMC stock issued and outstanding has been adjusted to
reflect the exchange of 10,000 shares for 11,276,750 shares of the
Lehigh Group, plus the conversion of the Preferred Stock and the
1-for-30 reverse stock split.
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 and has a like number of votes per
share, voting together with the Lehigh Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Management's Discussion and Analysis
of Financial Condition and Results of Operations may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Further description of the risks and uncertainties to the business are included
in detail in Item 1 of this Form 10-K.
The following discussion should be read in conjunction with the consolidated
financial statements, including the notes thereto, contained elsewhere in this
10-K.
The Company incurred substantial losses from operations relating to its
physician practice management business ("managed care operations") in 1997 and
through the first quarter of 1998. As a result, the Company adopted a formal
plan to discontinue and dispose of its managed care operations. The decision to
dispose of these operations was based upon the view of management that such
operations would require substantial additional capital to sustain operating
losses that would be continued to be incurred by the Company. The Florida
managed care operation was sold in April 1998 and the Indiana and Texas managed
care operations were sold in July 1998.
The Company also adopted a formal plan to divest its electrical supply business
("Hallmark"). The decision to dispose of Hallmark was based upon an assessment
by management that the business did not meet the Company's operating strategy
for development and expansion of its international healthcare operations.
7
RESULTS OF OPERATIONS - FMG
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YEAR ENDED DECEMBER 31, 1998
COMPARED WITH YEAR ENDED
DECEMBER 31, 1997
REVENUE. Revenue for the years ended December 31, 1998 and 1997 were
$10.9 million and $ 9.0 million, an increase of $1.9 million or 21% due to the
opening of two new clinics in Eastern Europe in late 1996 as well as increased
patient visits. Total patient and dental visits in 1998 were 21,605 and 4,333,
respectively, as compared to 18,805 and 3,246 in 1997, an increase of 14.9% and
33.5%, respectively.
COST OF REVENUE. Cost of revenue for the years ended December 31, 1998
and 1997 were $9.3 million and $7.1 million, respectively. Cost of revenue as a
percent of revenues were 85% and 79% for the year ended December 31, 1998 and
1997, respectively. The increase was related to increased staffing levels as a
result of the increase in visits.
OPERATING EXPENSES. Operating expenses for the years ended December
31, 1998 and 1997 were $2.2 million as compared to $3.0 million. Included in
operating expenses in 1997 was a write-off of $1.0 million relating to the
Lehigh merger. As a percent of revenues, operating expenses, excluding this
write-off of intangibles in 1997 were 20% and 22% in 1998 and 1997,
respectively.
The cumulative effect of a change in accounting principle of $940,454
relates to the write-off of start-up costs of the Warsaw operation pursuant to
the Accounting Standards Executive Board Statement of Position 98-5.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations for the year ended December 31, 1998 was $2.0 million as compared to
a loss of $8.4 million for the year ended December 31, 1997. In 1998, the
Company recorded a gain on the sale of discontinued operations of $4.1 million.
INCOME TAX BENEFIT. Income tax benefit for the year ended December 31,
1998 was $473,000 as compared to a tax benefit of $63,000 for the year ended
December 31, 1997. During 1998, the Company recorded a deferred tax asset of
$577,000 due to the likelihood that the deferred asset would be realized in the
near future.
NET INCOME (LOSS). Net income for the year ended December 31, 1998 was
$909,000 as compared to a loss of $(9.5) million for the year ended December 31,
1997. The increase in net income relates to those factors noted above.
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH YEAR ENDED
DECEMBER 31, 1996
REVENUE. Total revenue of FMG for the twelve months ended December 31,
1997 and 1996 were $9.0 million and $6.7 million, respectively, an increase of
$1.3 million, or 19%. The increase is attributable to the opening of two new
clinics in Eastern Europe in late 1996 as well as increased patient visits.
COST OF REVENUE. Cost of revenue for the years ended December 31, 1997
and 1996 were $7.1 million and $5.4 million, respectively. Cost of revenue as a
percent of revenues for the years ended December 31, 1997 and 1996 were 79% and
81%, respectively. The increase relates to the increase in staff as well as the
increase in the number of clinics.
OPERATING EXPENSES. Operating expenses for the years ended December 31,
1997 and 1996 were $3.0 million and $1.9 million, respectively. Included in
operating expenses for the year ended December 31, 1997 was a write-off of
intangibles of $1.0 million. Included in operating expenses for the year ended
December 31, 1996 were preopening and development costs of $829,000 relating to
the two new clinics.
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations for the year ended December 31, 1997 was $(8.2) million as compared
to income of $1.0 million for the year ended December 31, 1996.
INCOME TAX. Income tax benefit for the year ended December 31, 1997 was
$63,000.
NET (LOSS) INCOME. Net loss for the twelve months ended December 31,
1997 was $(9.5) million compared to net income of $.3 million for the same
period in 1996. The decrease in net income relates to those factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1998 was $909,000 as compared
to $1,421,000 at December 31, 1997. During 1998, the Company divested its
managed care and electrical supply operations. These divestitures resulted in a
gain recorded on the sales of discontinued operations of $4.7 million. The
proceeds from these sales were used to repay the existing bank loans ($3.6
million), repay Humana on certain outstanding obligations ($1.35 million), fund
operating losses on discontinued operations and settlement of certain
obligations with former employees and shareholders of the Company ($2.1
million).
Cash and cash equivalents at December 31, 1997 was $1,421,000 as
compared to $124,000 at December 31, 1996.
Net cash provided by operating activities was $92,000 for the year
ended December 31, 1998. Net cash used in investing activities was $6.6 million
which related mainly to capital expenditures. Net cash provided by financing
activities was $(2.9) million which related primarily to the repayment of the
Company bank debt. Cash used in discontinued operations for the year ended
December 31, 1998 was $(4.4) million.
As of December 31, 1998, the Company had no outstanding lines of
credit.
The Company believes that cash flow from existing operations will be
sufficient to satisfy its contemplated cash requirements through the first
quarter of the Year 2000. The Company's long term capital requirements beyond
1998 will depend on many factors , including but not limited to, the rate at
which the Company expands its business. To the extent that the funds generated
from operations are insufficient to fund FMG's activities in the short or long
term, FMG would need to raise additional funds through public or private
financing. No assurance can be given that additional financing would be
available or that , if available, it will be available on terms favorable to
FMG.
The Company is in default in the payment of interest (approximately
$968,400 interest was past due as of December 31, 1998) on the $390,000
aggregate principal amount of its 13 1/25 Senior Subordinated Notes due May 15,
1998 ("13 1/2% Notes") and 14 7/8% Subordinated Debentures due October 15, 1995
("14 7/8% Debentures") that remain outstanding and were not surrendered to the
Company in connection with its financial restructuring consummated in 1991. The
Company has been unable to locate the holders of the 13 1/2% Notes and 14 7/8%
Debentures (with the exception of certain of the 14 7/8% Debentures, which were
retired during 1996).
The working capital of the company is a deficit of $3.3 million.
Included in this deficit are notes payable and accrued interest of
approximately $1.4 million which the company believes will ultimately not be
paid. The company is currently reviewing the legal status of the matter to
determine its obligation given that the note holders cannot be located.
YEAR 2000
The Company is aware of the issues related with computer systems that
could be affected by the "Year 2000." The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year.
The Company primarily uses general business applications that are
licensed by the same vendor. It is expected that these applications will be year
2000 compliant. Should such systems not be 2000 year compliant, the Company
believes that reasonable manual alternatives are available to produce such data.
The Company believes that such cost to perform these tasks are not considered to
be material.
9
The Company is in the process of identifying those vendors that it
relies on to supply diagnostic tests results relating to patient testing and to
a small group of third-party payors. The Company intends to send inquires to
these vendors and third party payors to ascertain compliance.
Based upon the information currently available, the Company believes
that its risk associated with problems arising from year 2000 issues is not
significant. However, because of the many uncertainties associated with year
2000 issues, and because the Company's assessment is necessarily based upon
information from third-party payors and suppliers, there can be no assurance
that the Company's assessment is correct or as to the materiality or effect of
any failure of such assessment to be correct. The Company will continue with its
review process as described above and make modifications as deemed necessary
under the circumstances.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, the Accounting Standards Executive Board issued the
Statement of Position 98-5 ("the SOP"), Reporting on the Costs of Start-Up
Activities. The SOP requires that costs of start-up activities and
organization costs to be expensed as incurred. Prior to 1998, the Company
incurred $940,454, net of income tax benefit of $29,099 as cost related to
its start-up operations. The Company has reflected this amount in the
consolidated statement of income for the year ended December 31, 1998 as a
cumulative effect of a change in accounting principle as required by the SOP.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial
statements. The Company's consolidated financial statements are required to
include comprehensive income disclosures beginning with the first quarter of
fiscal year 1998. Restatement of prior period information are to be made for
comparative purposes. Effective January 1, 1998, the Company adopted this
pronouncement. The Company believes that the adoption of this pronouncement
did not have a material effect on the Company's results of operations or
financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the way
public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenue. The
Company has adopted SFAS No. 131 as of January 1, 1998. The Company believes
that the adoption of SFAS No. 131 will not have a material effect on the
Company's results of operations or financial condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company currently does not use derivatives and therefore
believes that this new pronouncement will not have a material effect on its
results of operations or financial condition.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations
over the past three years.
IMPACT OF EUROPEAN ECONOMY
Over recent years, Russia has undergone substantial political, economic
and social change. As an emerging market, Russia does not possess a
well-developed business infrastructure which generally exists in a more mature
free market economy. As a result, operations carried out in Russia involve
significant risks, which are not typically associated with those in developed
markets. Instability in market reform could subject the Group or its investments
to unpredictable changes in the basic business infrastructure under which they
currently carry out their operations. Uncertainties regarding the political,
economic, legal, tax or regulatory environment, including the potential for
adverse changes in any of these factors, could significantly affect the Group's
ability to operate commercially. It is not possible to estimate what changes may
occur or the resulting effect of any such changes on the Company's financial
condition or future results of operations.
10
It is not clear what action the Russian government will take as a
result of the current economic situation. Further, it is not possible to
determine the future effect a continuation of the economic crisis may have on
the Group's liquidity and earnings, including the effect on transactions with
the Company's suppliers. While the ultimate outcome of this matter cannot
presently be determined, management believes that this situation will not have a
material adverse impact on the financial condition of the Company. As a result,
the financial statements do not include any adjustments that may result from
these uncertainties. Related effects, if any, will be reported in the financial
statements as they become known and estimable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Note 2(k) of the financial statements
attached hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-14 and page S-1 of this Form 10-K, which are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information regarding the dismissal of BDO Seidman, LLP ("BDO") as its
certifying accountant in December 1998 and engagement of Arthur Anderson, LLP as
its new certifying accountants is incorporated by reference to FMG's Form 8-K
filed with the Securities and Exchange Commission on December 9, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table set forth below sets forth information with respect to the
directors and executive officers of the Company. Dennis A. Sokol, Elliot H.
Cole, Richard Berman and George Rountree are currently directors of the Company
and will serve as directors until the next annual meeting of stockholders of the
Company (or until their respective successors are duly elected and qualified or
until their earlier death, resignation or removal).
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE CURRENT POSITION
- ---- --- ----------------
Dennis A. Sokol 53 Chairman of the Board, Chief Executive
Officer and Director of the Company and
Chairman of the Board and Chief Executive
Officer of FMC
Elias M. Nemnom 48 Senior Vice President and Chief Financial
Officer of the Company
Elliot H. Cole 65 Vice Chairman of the Board and Director of
the Company
Richard Berman 53 Director of the Company
George Rountree 62 Director of the Company
Mr. Sokol has been a Director and Chairman of the Board and Chief
Executive Officer of the Company since the Merger, which was consummated on July
9, 1997. Mr. Sokol has served as the Chairman of the Board and Chief Executive
Officer of FMC since its formation in January 1996. Prior to the formation of
FMC, Mr. Sokol was Chairman of AMC, Inc. Prior to January 1995, Mr. Sokol served
as the Chairman of the Board and Chief Executive Officer of Hospital Corporation
International, Plc., the former international division of Hospital Corporation
of America, Inc., which entity owned and operated hospitals and primary care
facilities in the United Kingdom, Central
11
and Eastern Europe, the Middle East and Pacific Rim, and American Medical
Clinics, Ltd. In all, Mr. Sokol has over thirty years experience in the
medical services industry.
Mr. Nemnom has been the Chief Financial Officer of the Company since
December 1998. He had previously been the Chief Financial Officer of FMC from
May 1996 until the merger in July 1997. Prior to joining FMC, from March 1995 to
April 1996, Mr. Nemnom served as the Chief Financial Officer of MedE America
Corporation, an electronic data interchange company. From December 1985 to
January 1995, Mr. Nemnom served as the Chief Financial Officer of Medserv
Corporation. Before joining Medserv, Mr. Nemnom was a Senior Manager at Deloitte
& Touche for over ten years specializing in the healthcare industry. Mr. Nemnom
is a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants, the New York State Society of Certified Public
Accountants and the Healthcare Financial Management Association.
Mr. Cole has been a Director of the Company since July 1997 and has
served as the Co-Vice Chairman of FMC's Board of Directors since its formation
in January 1996. Mr. Cole is a senior partner in the law firm of Patton Boggs
LLP, Washington, D.C., a firm of approximately 250 lawyers. Mr. Cole has
practiced corporation law and has been engaged in Federal matters for more than
thirty-five years. Mr. Cole has served as a trustee of Boston University since
1977 as well as being a member of numerous corporate and not-for-profit boards.
Mr. Berman has been a Director of the Company since August 1997. Since
1995, Mr. Berman has been the President of Manhattanville College. From 1991 to
1994 he was employed by Howe-Lewis International, initially as President of
North America division and subsequently as President and Chief Executive
Officer. He also is a director of HCIA, Inc., Health Insurance Plan of Greater
New York and the Independent College Fund and a member of the Special Advisory
Panel on Empire Blue Cross/Blue Shield and the New York State Council on Health
Care. He has served on the Board of Directors for Lillian Vernon since 1997.
Mr. Rountree has been a Director of the Company since December 1998.
Mr. Rountree has been Chief Executive Officer of American Hospital of Istanbul
since 1991 and prior to that he was Chief Operating Officer. From 1987 to 1990,
Mr. Rountree was Project Manager of the International Hospital in Istanbul,
Turkey and President of Multi-Care Health Corporation and Quadrus International
from 1979 to 1990. Prior to 1979 Mr. Rountree was an Administrator at the
Methodist Hospital in Houston, Texas. Mr. Rountree is a fellow of the American
College of Healthcare Executives.
All directors will serve until the annual meeting of stockholders of
the Company and until their respective successors are duly elected and
qualified or until their earlier death, resignation or removal. Officers are
elected annually by the Board of Directors and serve at the discretion
thereof.
12
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation awarded to,
earned by or paid to the Chief Executive Officer and the other most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 ("Named Executive Officers") for services rendered in
all capacities to the Company during each of the years ended December 31, 1998,
1997 and 1996:
Summary Compensation Table
ANNUAL COMPENSATION
Long Term
Compensation Awards
Securities Underlying
Other Annual Options (Number of All Other
Name And Principal Position Year Salary Bonus Compensation (1) Shares) Compensation
- --------------------------- ---- ------ ----- ---------------- ------ ------------
Dennis Sokol (3) 1998 $300,000 0 0 500,000 $47,781(2)
1997 $296,800 0 0 0 $57,980(2)
1996 $267,200 0 0 0 $29,790(2)
Robert Bruno (4) 1998 $120,000 0 0 0 $8,400(5)
1997 $120,000 $7,200(5)
1996 $120,000 $7,200(5)
- ------------------------------
(1) As to each individual named, the aggregate amount of personal benefits
not included in the Summary Compensation Table does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported
for the named executive officer.
(2) Represents premiums paid by the Company with respect to term life
insurance for the benefit of the Named Executive Officer or the
Company, health insurance benefits and auto allowance.
(3) During 1998, 1997 and 1996, Mr. Sokol was employed by FMC as a result
of the reorganization among MedExec Inc., American Medical Clinics,
Inc. and FMC.
(4) Mr. Bruno became employed with the Company in 1983. As of
October 1, 1998, Mr. Bruno was no longer employed by the Company.
(5) Represents auto allowance paid by Company to the Named Executive
Officer.
COMPENSATION OF DIRECTORS
Executive directors receive no compensation; however, each
non-executive director is entitled to receive annually shares of Common Stock
with a fair market value of $10,000. During 1998, the non-executive directors
each received 10,000 shares of the Company's Common Stock.
OPTIONS
In 1998 525,000 options were granted to the executive officers of the
Company named in the Summary Compensation Table or to other employees of the
Company. Additionally, non-executive officer directors were granted on aggregate
425,000 stock options in 1998. In July 1997, the Board of Directors established
a Stock Option Plan (the "Stock Option Plan") and the Incentive Compensation
Plan (the "Incentive Compensation Plan").
Potential Realizable
Value
At Assumed Annualized
Rates of Stock Price
Appreciation for
Individual Grants OPTION TERM(1)
----------- ------------ ---------------- -------------- ------------- ----------------------
% of Total
Options
Number of Granted to Exercisable
Date of Options Employees in Price Per Expiration
Name Grant(2) Granted Fiscal Year Share Date 5% 10%
---- -------- ------- ----------- ----- ---- -- ---
Dennis J. Sokol 12/17/98 500,000 95% $0.120 12/31/02
13
(1) "Potential Realized Value" is disclosed in response to the SEC's rules which
require such disclosure for illustration purposes and is based on the
difference between the potential market value of shares issuable upon
exercise of such options and the exercise price of such options. The values
disclosed are not intended to be, and should not be interpreted by
stockholders as, representations or projections of future value of the
Common Stock or of the stock price.
No options were exercised by the executive officers of the Company
named in the Summary Compensation Table during the fiscal year ended December
31, 1998. The following table sets forth the number and dollar value of options
held by such persons on December 31, 1998, none of which were "in the money" at
December 31, 1998.
AGGREGATED OPTION EXERCISES IN
1998 AND YEAR-END OPTIONS
Number of Unexercised Options and Warrants at
YEAR-END
NAME Exercisable Unexercisable
- ---- ----------- -------------
Dennis Sokol 500,000 --
Robert Bruno 8,333 --
THE STOCK OPTION PLAN
The purpose of the Stock Option Plan is to advance the Company's
interests by providing additional incentive to attract and retain in the employ
of the Company and its subsidiaries, qualified and competent persons to provide
management services, to encourage the sense of proprietorship and to stimulate
the active interest of such persons in the development and financial success of
the Company and its subsidiaries. The Stock Option Plan provides for the grant
of incentive stock options and nonqualified stock options within the meaning of
Section 422 of the Internal revenue Code of 1986, as amended (the "Code"), as
well as stock appreciation rights ("Rights") with respect to stock options and
restricted stock ("Restricted Stock") awards.
The Stock Option Plan, which is administered by the Compensation
Committee of the Board of Directors of the Company (but can also be administered
directly by the Board of Directors), currently authorizes the issuance of a
maximum of 500,000 shares of Common Stock (on a post Reverse Split basis), which
may be newly issued shares or previously issued shares held by any subsidiary of
the Company. If any award under the Stock Option Plan terminates, expires
unexercised or is cancelled, the shares of Common Stock that would otherwise
have been issuable pursuant thereto will be available for issuance pursuant to
the grant of new awards.
The purchase price of each share of Common Stock purchasable under an
incentive option granted under the Stock Option Plan is to be determined by the
Compensation Committee at the time of grant, but is to not be less than 100% of
the fair market value of a share of Common Stock on the date the option is
granted; PROVIDED, HOWEVER, that with respect to an optionee who, at the time
such incentive option is granted, owns more than 10% of the total combined
voting power of all classes of stock of the Company or of any of its
subsidiaries, the purchase price per share is to be at least 110% of the fair
market value per share on the date of grant. The term of each option is to be
fixed by the Compensation Committee, but no option is to be exercisable more
than five years after the date such option is granted.
The aggregate fair market value, determined as of the date the
incentive option is granted, of shares of Common Stock for which incentive
options are exercisable for the first time to any optionee during any calendar
year under the Stock Option Plan (and/or any other stock options plans of the
Company or any of its subsidiaries) shall not exceed $100,000. The aggregate
number of shares of Common Stock subject to options granted under the Stock
Option Plan granted during any calendar year to any one director is not to
exceed that number of shares as equals ten percent of the outstanding shares of
the Company for which options may be granted under the Stock Option Plan.
14
The Compensation Committee shall have the authority to grant Rights
with respect to all or some of the shares of Common Stock covered by any option,
which Rights may be granted together with or subsequent to the grant of the
option. Rights entitle the holder to cash equal to the difference between an
Offer Price Per Share (as defined in the Stock Option Plan) and the exercise
price of the related option if shares of Common Stock representing 20 percent or
more of the aggregate votes of the Common Stock voting together as a single
class. If a Right is exercised, the related Option is terminated, and if an
option terminates or is exercised, the corresponding Right terminates.
In addition, the Compensation Committee shall have the authority to
award Restricted Stock which entitles the recipient to acquire, at no cost or
for a purchase price determined by the Compensation Committee, shares of Common
Stock subject to such restrictions and conditions as the Compensation Committee
may determine at the time of grant. Conditions may be based on continuing
employment and/or achievement of pre-established performance goals and
objectives. A recipient of Restricted Stock shall have the rights of a
stockholder with respect to the voting of the Restricted Stock, subject to such
other conditions contained in the written instrument evidencing the Restricted
Stock. However, generally Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of, and, generally,
upon the termination of the recipient's employment with the Company, the Company
shall have the right, at the discretion of the Compensation Committee, to
repurchase such Restricted Stock at its purchase price. Nonetheless, once the
pre-established performance goals, objectives and other conditions have been
attained, such shares of Restricted Stock shall no longer be Restricted Stock
and shall be deemed "vested" and will be freely transferable.
The Board of Directors may amend, suspend or terminate the Stock Option
Plan, except that no amendment may be adopted that would impair the rights of
any optionee without his consent. Further, no amendment may be adopted which,
without the approval of the stockholders of the Company, would (i) materially
increase the number of shares issuable under the Stock Option Plan, except as
provided in itself, (ii) materially increase the benefits accruing to optionees
under the Stock Option Plan, (iii) materially modify the eligibility
requirements for participation in the Stock Option Plan, (iv) decrease the
exercise price of an incentive option to less than 100% of the fair market value
per share of Common Stock on the date of grant or the exercise price of a
nonqualified option to less than 80% of the fair market value per share of
Common Stock on the date of grant, or (v) extend the term of any option beyond
that provided for in the Stock Option Plan.
The Compensation Committee may amend the terms of any option previously
granted, prospectively or retroactively, but no such amendment may impair the
rights of any option without his consent. The Compensation Committee may also
substitute new options for previously granted options, including options granted
under other plans applicable to the participant and previously granted options
having higher option prices, upon such terms as it may deem appropriate.
The number of shares of Common Stock available under the Stock Option
Plan and the terms of any option or other award granted thereunder are subject
to adjustment in the event of a merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the shares of Common Stock, if the Compensation Committee determines
that such event equitably requires such an adjustment.
As of March 1, 1999, there were no options outstanding under the Stock
Option Plan and no Restricted Stock had been awarded.
INCENTIVE COMPENSATION PLAN
The purpose of the Incentive Compensation Plan is to advance the
Company's interests by providing additional incentives to those key employees of
the Company who contribute the most to the growth and profitability of the
Company and to encourage such key employees to continue as employees by making
their compensation competitive with compensation opportunities in competing
businesses and industries.
The Incentive Compensation Plan, which is administered by the
Compensation Committee of the Board of Directors (but can also be administered
directly by the Board of Directors), authorizes the Compensation Committee to
determine by March 15 of each year which key employees will be eligible in such
year for incentive compensation pursuant to the Incentive Compensation Plan (the
"Participants") and to establish targets for such
15
fiscal year for the Company's earnings per share. If the targets are achieved
then each Participant will receive (i) a cash bonus equal to 10% of his base
salary for such year, (ii) an amount of Common Stock (the "Stock Bonus")
determined by dividing 30% of his base salary by (50%) of the average of the
high and low closing prices for the Common Stock during such year (or, if lower,
50% of the closing sales price on the last trading day of such year), and (iii)
a cash payment sufficient to satisfy such participant's income tax liability
with respect to his Stock Bonus. There is no maximum number of shares of Common
Stock, which may be awarded under the Incentive Compensation Plan.
The Compensation Committee may amend the Incentive Compensation Plan,
except that no amendment may be adopted that would impair the rights of any
Participant with respect to the year in which such amendment had been adopted.
The Plan shall terminate on December 31, 2002 except for the delivery
of shares of Common Stock and/or cash due to Participants with respect to such
year.
If, prior to the end of any Fiscal Year, a Participant's employment
terminates on account of (i) death, (ii) retirement, (iii) total and permanent
disability, or (iv) the Company's termination of the Participant without cause,
the Participant will nonetheless remain eligible to receive amounts under the
Incentive Compensation Plan for such year if the Participant shall have been an
active, full-time employee for a period of at least two years preceding such
termination. In all other cases, the Participant will be ineligible.
As of December 31, 1998, no bonuses or stock have been awarded under
the Incentive Compensation Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information on March 12, 1999 (except as
otherwise noted below) with respect to each person (including any "group", as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) known to the Company to be the beneficial owner of more than 5% of the
Common Stock of the Company.
Name of Address Amount and Nature of Percent
Of Beneficial Owner Beneficial Ownership (1) Of Class
------------------- ------------------------ --------
General De Sante 2,047,860 21.40%
International PLC
4 Cornwall Terrace
London, NW 1 4QP
England
SAJH Partners 1,595,021(2) 16.67%
1055 Washington Blvd.
Stamford, CT 06901
Dennis A. Sokol 982,644 (3) 10.27%
1055 Washington Blvd.
Stamford, CT 06901
- ------------------------
(1) Except as otherwise indicated, each of the person listed above has sole
voting and investment power with respect to all shares shown in the
table as beneficially owned by such person.
(2) Dennis Sokol is the Managing Partner of SAJH Partners and has a 1%
partnership interest in the partnership and consequently could be
deemed under Rule 13D-3 of the Exchange Act to have beneficial
ownership of such shares. Mr. Sokol disclaims ownership of all such
shares other than as a result of his 1% partnership interest.
(3) Includes 500,000 options to purchase shares of Common Stock of the
Company which are immediately exercisable.
16
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the number of shares of Common Stock beneficially
owned on March 12, 1999 by (i) each director of the Company, (ii) each of the
executive officers named in the Summary Compensation Table set forth above and
(iii) all directors and executive officers of the Company as a group.
Amount and Nature of
Name Of Beneficial Owner Beneficial Ownership (1) Percent Of Class
- ------------------------ ------------------------ ----------------
Dennis A. Sokol (2) 982,644 10.27%
Elliot H. Cole (3) 531,165 5.55%
Richard Berman (4) 60,000 *
Robert A. Bruno (5) 10,423 *
All executive officers
and directors as a group (6)
(6 persons) 1,615,482 16.89%
- -------------------------
* Less than 1%
(1) Except as otherwise indicated, each person listed above has sole voting
and investment power with respect to all shares shown in the table.
(2) See notes 2 and 3 of the table under the caption "Security Ownership of
Certain Beneficial Owners" above.
(3) Includes 200,000 options to purchase shares of Common Stock of the
Company which are immediately exercisable.
(4) Includes 50,000 options to purchase shares of Common Stock of the
Company which are immediately exercisable.
(5) As of October 1, 1998, Mr. Bruno was no longer employed by the Company.
(6) Includes 25,000 and 6,250 options to purchase shares of Common Stock of
the Company which are immediately exercisable and held by Messrs.
Nemnom and Rountree, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FMC and Dennis A. Sokol, the Chairman of the Board, Chief Executive
Officer and Director of the Company and Chairman of the Board and Chief
Executive Officer of FMC, have an oral agreement whereby FMC has agreed to pay
Mr. Sokol an annual salary of $300,000 per year for his services as FMC's
Chairman of the Board and Chief Executive Officer. In addition, at the
discretion of the Compensation Committee of the Board of FMC, Mr. Sokol may be
awarded an annual bonus. Mr. Sokol is also a shareholder of American Medical
Clinics, which is a plaintiff in the following lawsuit:
HOSPITAL CORPORATION INTERNATIONAL, LTD. AND AMERICAN MEDICAL CENTERS, INC. VS.
PEPSICO INC., Case Number 94CVS 888 Superior Court, Craven County, North
Carolina
On January 1, 1996, American Medical Clinics, Inc. ("AMC, Inc.")
shareholders and MedExec shareholders entered into a Reorganization Agreement to
form First Medical Corporation ("FMC"). As part of the Agreement, the AMC, Inc.
shareholders did not assign its interest to include any recovery from the
Litigation other than as stated below.
In this lawsuit instituted by Hospital Corporation International, Ltd.
and American Medical Centers Inc. against Pepsico Inc., and certain other
parties about which AMC, Inc. has fully informed the FMC (the "Litigation"), FMC
agreed to pay the ongoing legal fees and other expenses connected with the
Litigation. If the Litigation is settled or otherwise brought to a successful
conclusion, the proceeds of such settlement or other successful conclusion of
the Litigation (the "Proceeds") will be shared as follows: (a) AMC, Inc. and FMC
will first be reimbursed in full for their respective legal fees and expenses
incurred in connection with the Litigation (the "Fees") or a pro rata share of
the Fees incurred by each of them if the Proceeds are insufficient to reimburse
AMC, Inc. and FMC for the Fees in full; and (b) the balance of the Proceeds will
be shared on a proportionate basis between FMC and the former shareholders of
AMC, Inc. The portion to be paid to FMC shall be a fraction, the numerator of
which will be the amount of the Fees paid by FMC and the denominator of which
will be the net Proceeds remaining after the reimbursement of the fees pursuant
to subparagraph (a) above. The former shareholders of AMC, Inc. will receive the
balance of the Proceeds.
17
The Company and Elliot H. Cole, the Vice Chairman of the Board and
Director of the Company, have an oral agreement whereby the Company has agreed
to pay Mr. Cole a consulting fee of $60,000 per year for his services as the
Company's Vice Chairman of the Board. Mr. Cole is a member of the law firm
Patton Boggs, LLP which renders legal services to the Company and is
representing the Plaintiff in the aforementioned Litigation discussed in this
Item 13.
On April 17, 1998, the Company sold Hallmark which was a wholly-owned
subsidiary of the Company to a certain member of management of the Company and
certain members of management of Hallmark for a total sales price of $1.9
million. The purchase price of $1.9 million represented a cash payment of
$750,000 and the assumption of $1.15 million of liabilities and a covenant not
to compete by the member of management of the Company.
Pursuant to a reorganization agreement, effective July 1, 1998, the
American Medical Clinics Management Company, Ltd., a wholly-owned subsidiary
of First Medical Group International, Ltd., which in turn is a wholly-owned
subsidiary of the Company, acquired the stock of American Medical Clinics
Moscow, Inc. and American Medical Clinics-St. Petersburg Ltd. ("AMC-CIS").
The shareholders of AMC-CIS are shareholders of the Company. The total
consideration was approximately $1.3 million and represents accounts payable
to AMCMC by AMC-CIS. Prior to the reorganization agreement, AMCMC had a
management service agreement whereby AMC-CIS would provide medical services
to AMCMC customers.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
a. (1) Financial Statements
--------------------
The following financial statements are Included in Part II,
Item 8 of this Annual Report on Form 10-K:
The First Medical Group, Inc. ("FMG")
Report of Independent Public
Accountants as of December 31, 1998, 1997 and 1996 F-1
Consolidated Balance Sheet, December 31, 1998 and 1997 F-2
Consolidated Statement of Operations,
Years Ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Changes in
Shareholders' Equity (Deficit), Years
Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial
Statements for Years Ended December 31, 1998, 1997 and 1996 F-6 - F-14
18
a. (2) SCHEDULE
--------
The following schedule for the Years Ended December 31, 1998
and 1997 are submitted herewith:
Schedule II - Valuation and Qualifying
Accounts S-1
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
a. (3) EXHIBITS
--------
The Exhibits to this Annual Report on Form 10-K are listed in
the Exhibit Index annexed hereto and incorporated by
reference.
(b) REPORTS ON FORM 8-K
-------------------
There was no Form 8-K filed during the last quarter covered by
this report.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
First Medical Group, Inc.
By: /s/ Dennis A. Sokol
-------------------
Dennis A. Sokol
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Dennis A. Sokol Chairman of the Board of Directors, April 23, 1999
- ------------------- President and Chief Executive Officer
Dennis A. Sokol
/s/ Elias M. Nemnom Senior Vice President and April 23, 1999
- ------------------- Chief Financial Officer
Elias M. Nemnom
/s/ Elliot H. Cole Director and Vice Chairman April 23, 1999
- ------------------ of the Board
Elliot H. Cole
/s/ Richard Berman Director April 23, 1999
- -------------------
Richard Berman
/s/ George Rountree Director April 23, 1999
- -------------------
George Rountree
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Medical Group, Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of First Medical Group, Inc. (formerly
known as First Medical Corporation) for the year ended December 31, 1996.
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 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 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of First Medical Group, Inc. (formerly known as First Medical
Corporation) for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Miami, Florida
March 25, 1997, except as to
Note 2(i) which is as of
November 12, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
First Medical Group, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheet of First Medical
Group, Inc. as of December 31, 1997, and the related consolidated statements
of operations, shareholder's deficit and cash flows for the year then ended.
We have also audited the schedule listed in the accompanying index for the
same period. These financial statements have been restated to reflect the
discontinued operations described in Note 3. 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 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 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 audit 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 First
Medical Group, Inc., at December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also in our opinion, the
schedule presents fairly, in all material respects, the information set forth
therein for the year ended December 31, 1997.
New York, New York /s/ BDO Seidman, LLP
March 27, 1998, except for Note 3
which is as of July 16, 1998
Report of Independent Public Accountants
To the Shareholders of First Medical Group, Inc.:
We have audited the accompanying consolidated balance sheet of First Medical
Group, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' 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 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 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 First Medical Group, Inc.
and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for
organization cost in accordance with Statement of Position 98-5, "Reporting
on the Cost of Start-up Activities."
/s/ ARTHUR ANDERSEN LLP
New York, New York
April 9, 1999
F-1
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1998 1997
------------- ---------------
Current assets:
Cash and cash equivalents $ 909,064 $1,421,250
Accounts receivable, net of allowance for doubtful accounts of
$53,696 and $877 at December 31, 1998 and 1997, respectively 470,458 98,332
Inventories 116,984 -
Due from related parties - 1,139,760
Prepaid expenses and other current assets 163,996 50,406
------------ ------------
Total current assets 1,660,502 2,709,748
Property and equipment, net 603,433 170,281
Deferred tax asset 577,000 -
Intangible assets, net 2,079,369 2,014,170
Other assets 71,487 248,385
------------ ------------
$ 4,991,791 $ 5,142,584
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 852,237 $ 278,497
Accrued expenses 1,085,402 383,172
Deferred revenue 689,404 731,372
Notes payable to banks and others 1,358,444 3,998,733
Net liabilities of discontinued operations 980,750 804,531
------------ ------------
Total current liabilities 4,966,237 6,196,305
Commitments and contingencies
Shareholders' equity (deficit):
Capital stock, par value $.001; authorized shares 100,000,000; shares issued
9,567,292 and 9,397,292 at December 31, 1998
and 1997, respectively 9,567 9,397
Additional paid-in capital 8,253,318 8,083,488
Accumulated deficit (8,237,331) (9,146,606)
------------ ------------
Total shareholders' equity (deficit) 25,554 (1,053,721)
------------ ------------
$ 4,991,791 $ 5,142,584
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Revenues $ 10,947,463 $ 9,019,156 $ 6,660,210
Cost of Revenues 9,260,360 7,134,408 5,370,624
------------- ------------- -------------
Gross Profit 1,687,103 1,884,748 1,289,586
Operating expenses:
Salaries and related benefits 904,685 700,220 390,403
General and administrative 1,019,597 1,040,582 1,397,970
Impairment loss on intangibles -- 1,024,337 --
Depreciation and amortization 226,992 215,338 133,877
------------- ------------- -------------
Loss from operations (464,171) (1,095,729) (632,664)
Interest expense, net (167,170) (196,887) (55,523)
------------- ------------- -------------
Loss before (benefit) for income taxes (631,341) (1,292,616) (688,187)
Income tax benefit (473,000) (62,736) --
------------- ------------- -------------
Loss from continuing operations before discontinued
operations and cumulative effect to change in
accounting principle (158,341) (1,229,880) (688,187)
Discontinued operations:
Income (loss) from operations of discontinued managed care
and electrical supply division (2,129,943) (8,240,438) 1,011,899
Gain on disposal of managed care and electrical
supply division 4,138,013 -- --
------------- ------------- -------------
Income (loss) from discontinued operations, net of
taxes of $518,000 in 1998 2,008,070 (8,240,438) 1,011,899
Cumulative effect of change in accounting principle,
net of tax benefit of $29,099 (940,454) -- --
------------- ------------- -------------
Net income (loss) $ 909,275 $ (9,470,318) $ 323,712
------------- ------------- -------------
------------- ------------- -------------
Income (loss) per share - basic and diluted
Loss from continuing operations $ (.01) $ (.13) $ (.07)
Cumulative effect of change in accounting principle (.10) -- --
Net income (loss) from discontinued operations .21 (.90) .11
------------- ------------- -------------
Net income (loss) $ .10 $ (1.03) $ .04
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares outstanding - 9,495,566 9,202,117 9,021,400
basic and diluted ------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Retained
Number Earnings Total
of Additional Accumulated Shareholder
Shares Common Stock Paid-in Capital (Deficit) Equity (Deficit)
------ ------------ --------------- --------- ----------------
Balance, December 31, 1995 1,500 $ 1,500 $ 1,200 $ 224,595 $ 227,295
FMC Corporate transaction 8,500 (1,400) 225,995 (224,595) --
Capital contribution to AMCD -- -- 152,490 -- 152,490
Net income -- -- -- 323,712 323,712
--------- -------- ---------- ------------ -----------
Balance, December 31, 1996 10,000 100 379,685 323,712 703,497
Merger with Lehigh (recapitalization) 9,387,292 9,297 2,538,803 -- 2,548,100
Capital contribution from GDS -- -- 5,000,000 -- 5,000,000
Capital contribution to AMCD -- -- 165,000 -- 165,000
Net loss -- -- -- (9,470,318) (9,470,318)
--------- -------- ---------- ------------ -----------
Balance, December 31, 1997 9,397,292 9,397 8,083,488 (9,146,606) (1,053,721)
Issuance of common stock 170,000 170 169,830 -- 170,000
Net income -- -- -- 909,275 909,275
--------- -------- ---------- ------------ -----------
Balance, December 31, 1998 9,567,292 $ 9,567 $8,253,318 $(8,237,331) $ 25,554
--------- -------- ---------- ------------ -----------
--------- -------- ---------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 909,275 $(9,470,318) $ 323,712
Adjustments to reconcile net income (loss) to
net cash provided by (used in) continuing
operating activities:
(Income) loss from discontinued operations (2,008,070) 8,240,438 (1,011,899)
Depreciation and amortization 226,992 215,338 133,877
Deferred taxes (577,000) -- --
Minority interest -- -- (338,077)
Impairment loss from intangibles -- 1,024,337 --
Non-cash compensation expenses 170,000 -- --
Cumulative effect of change in accounting principle 940,454 -- --
(Increase) decrease in assets, net of acquisitions:
Accounts receivable 44,695 (92,522) (5,810)
Due from related parties, net (125,702) (977,431) (162,329)
Inventories 5,677 -- --
Prepaid expenses and other current assets 21,777 98,274 (65,222)
Intangibles and other assets (15,589) (451,308) (1,320,275)
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable and other accrued expenses 661,859 1,255,616 186,974
Deferred revenues (162,417) (75,104) 806,476
------------- ------------- ------------
Net cash provided by (used in) continuing operating
activities 91,951 (232,680) (1,452,573)
------------- ------------- ------------
Cash flows from investing activities:
Capital expenditures (134,872) (170,764) (37,887)
Organizational costs -- (386,975) (414,841)
Cash acquired in acquisitions 174,255 731,667 --
Net proceeds from sale of discontinued operations 6,590,000 -- --
------------- ------------- ------------
Net cash provided by (used in) investing activities of
continuing operations 6,629,383 173,928 (452,728)
------------- ------------- ------------
Cash flow from financing activities:
Proceeds from loans payable to banks -- 13,882,098 800,000
Repayments of loans payable to banks (2,827,812) (10,025,277) (250,000)
Proceeds from payable to stockholders -- 136,597 374,596
Capital contribution from GDS -- 4,511,512
Contribution to capital of AMCD -- -- 152,490
------------- ------------- ------------
Net cash provided by (used in) financing activities of
continuing operations (2,827,812) 8,504,930 1,077,086
------------- ------------- ------------
Cash provided by (used in) discontinued operations (4,405,708) (7,149,242) 952,529
------------- ------------- ------------
(Decrease) Increase in cash and cash equivalents (512,186) 1,296,936 124,314
Cash and cash equivalents, beginning of the year 1,421,250 124,314 --
------------- ------------- -----------
Cash and cash equivalents, end of the year $ 909,064 $ 1,421,250 $ 124,314
------------- ------------- ------------
------------- ------------- ------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 27,263 $ 115,166 $ 48,748
Cash paid for income taxes 325,384 69,914 33,291
The accompanying notes are an integral part of these consolidated financial
statements
F-5
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 and 1996
1. ORGANIZATION AND OPERATION
First Medical Group, Inc. ("FMG" or the "Company") owns and operates medical
clinic centers in Eastern Europe. The medical centers provide healthcare
services to expatriates and other local nationals. The medical clinic centers
are located in Moscow and St. Petersburg, Russia; Kiev, Ukraine; Prague, Czech
Republic and Warsaw, Poland.
The consolidated financial statements include the accounts of FMG and its
wholly-owned subsidiaries: First Medical Corporation ("FMC"); First Medical
Group International, Ltd.; American Medical Clinics Management Company, Inc.
("AMCMC"); American Medical Clinics Management Company, Ltd. ("AMCMC BVI"),
American Medical Clinics Development Corporation, Limited ("AMCD") and
MedExec Inc. and subsidiaries ("MedExec"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Over recent years, Russia has undergone substantial political, economic and
social change. As an emerging market, Russia does not possess a
well-developed business infrastructure which generally exists in a more
mature free market economy. As a result, operations carried out in Russia
involve significant risks, which are not typically associated with those in
developed markets. Instability in market reform could subject the Company or
its investments to unpredictable changes in the basic business infrastructure
under which they currently carry out their operations. Uncertainties
regarding the political, economic, legal, tax or regulatory environment,
including the potential for adverse changes in any of these factors, could
significantly affect the Company's ability to operate commercially. It is not
possible to estimate what changes may occur or the resulting effect of any
such changes on the Company's financial condition or future results of
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) Use of 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 the 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 those estimates.
(b) Discontinued Operations
The consolidated financial statements of the Company reflect the
results of operations of the Company's Physician practice management
and electrical supply divisions as discontinued operations for
financial reporting purposes.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits. For purposes of
the consolidated financial statement, the Company considers all highly
liquid debt instruments with original maturities of three months or
less to be cash equivalents.
(d) Accounts Receivable
Accounts receivable consist of amounts due the Company from insurance
companies and individuals for services rendered. Accounts receivable
are carried at net realizable value.
(e) Inventories
Inventories consist of medical and pharmacy supplies held for resale.
Inventories are stated at the lower of cost or market using the
first-in, first out basis to determine cost.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the
estimated useful lives ranging between 5 and 10 years. Amortization
of leasehold improvements is provided over the term of each
respective lease or the life of the asset, whichever is shorter.
(g) Intangible Assets
F-6
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized over the expected periods to be
benefited, ranging between 15 and 25 years. In accordance with
Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", 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 impairment, 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 the recoverability
of goodwill will be impacted if estimated future operating cash flows
are not achieved.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method
as required by Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). Under 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 are measured using enacted rates 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.
(i) Earning Per Share
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standard No. 128, "Earnings
Per Share." Accordingly, basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise of stock
options and other stock equivalents. On July 9, 1997 the Company
merged with the Lehigh Group, Inc. As a result of this merger and
the conversion of Preferred Stock and the 1-for-30 reverse stock
split on November 12, 1997, the Company had shares outstanding of
9,021,400 resulting in a net earnings per share of $.04 in 1996.
(j) Revenue Recognition
Fee-for-service revenue is reported at the estimated net realizable
amount from patients and third-party payors as services are rendered.
Fee-for-service 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 a year period. Corporate members are also
required to make an advance deposit based upon plan type, number of
employees and dependents. The advance deposits are initially recorded
as deferred income and then as revenue when services are provided. As
the advance deposits are utilized, additional advance deposits are
required to be made by corporate members.
(k) Fair Value of Financial Instruments
The carrying amount of financial instruments including cash and cash
equivalents, account receivables, prepaid expenses and other current
assets, accounts payable and accrued expenses, corporate deposits and
notes payable approximate fair market value as of December 31, 1998
because of the short term maturities of these instruments.
(l) Foreign Currency
The financial statements of the Company's foreign subsidiaries are
translated from their functional currency into the US dollar
functional currency for consolidation and reporting purposes.
Year-end rates of exchange are used to translate assets and
liabilities and revenue and expense are translated at average
monthly exchange rates prevailing during the year. The effect
of translation adjustments does not have a material effect on the
financial statements.
F-7
(m) Change in Accounting Principle
Prior to 1998, the Company capitalized certain costs relating to
start-up operations. Pursuant to Statement of Position 98-5, Reporting
on the Costs of Start-Up Activities (the "SOP"), the Company recorded
$940,454, net of tax benefit of $29,099 as the cumulative effect of
the change in accounting principle relating to the write-off of such
start-up costs. This amount is reflected in the consolidated
statement of operations for the year ended December 31, 1998.
(n) Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
financial statements. The Company's consolidated financial
statements are required to include comprehensive income disclosures
beginning with the first quarter of fiscal year 1998. Restatement of
prior period information are to be made for comparative purposes. The
adoption of this pronouncement did not have a material effect on the
Company's results of operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes
the way public companies report information about operating
segments. SFAS No. 131, which is based on the management approach to
segment reporting, establishes requirements to report selected
segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material
countries in which the entity holds assets and reports revenue.
Effective January 1, 1998 the Company adopted SFAS No. 131. The
adoption of SFAS No. 131 did not have a material effect on the
Company's results of operations or financial condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. The Company currently does not use derivatives and
therefore believes that this new pronouncement will not have a
material effect on its results of operations or financial condition.
3. DISCONTINUED OPERATIONS
In April 1998, the Company's Board of Directors adopted a formal plan
to discontinue its physician practice management division (the "PPM
Division") and Hallmark Electrical Supplies Corp. (the "Electrical
Supply Division"). Accordingly, this business has been accounted for
as discontinued operations and the accompanying consolidated financial
statements presented herein have been restated to report separately
the net assets, net liabilities, operating results and net cash flows
of these discontinued operations. The operations of the Electrical
Supply Division ceased in April 1998; the operations of the PPM
Division ceased in July 1998. The Company sold the net assets of
both the PPM Division and Electrical Supply Division for aggregate
gross proceeds of $9.5 million, which resulted in a net gain on the
sales of approximately $4.1 million. The results of operations of the
PPM Division and Electrical Supply Division are included in the
consolidated statements of income under "Discontinued Operations".
The income tax provision of $518,000 is net of an income tax benefit
of approximately $1,186,000 recognized as a result of a decrease in
the prior year valuation allowance.
Summarized financial information for the discontinued operations is
as follows:
Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Revenue $19,632 $70,456 $46,354
------- ------- -------
------- ------- -------
Net (loss) income $2,008 ($8,240) $1,012
------- ------- -------
------- ------- -------
December 31,
----------------------
1998 1997
---- ----
Current assets - $18,386
Other assets 90 4,016
------ -------
Total assets - 22,402
------ -------
Total Noncurrent Liabilities (1,071) (23,207)
------ -------
Net liabilities of discontinued operations $(981) $(805)
------ -------
------ -------
4. ACQUISITION
Effective July 1, 1998, AMCMC BVI acquired the stock of American
Medical Clinics Moscow, Inc. and American Medical Center-St. Petersburg
Ltd. ("AMC-CIS"). The transaction was accounted for under the purchase
method of accounting. The total purchase consideration was
approximately $1.3 million and represented money owed to AMCMC by
AMC-CIS. The excess of the purchase consideration over the fair value
of net assets of AMC-CIS amounted to $848,108 and is being amortized
on a straight-line basis over
F-8
25 years. Prior to the acquisition, AMCMC had a management service
agreement with AMC-CIS whereby AMC-CIS would provide medical services
to AMCMC customers. As a result of the management agreement
arrangement, in accordance with EITF 97-2, "Application of APB
Opinion No. 16, Business Combinations," and FASB Statement No. 94,
"Consolidation of All Majority-Owned Subsidiaries, to Physicians'
Practice Entities and Certain Other Entities with Contractual
Management Arrangements" ("EITF 97-2"), the Company has historically
consolidated the results of operations of AMC-CIS. Consequently, the
Company's December 31, 1998 statement of operations reflect AMC-CIS'
results of operations for the twelve-months ended December 31, 1998.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1998 and 1997 consists of the
following:
1998 1997
---- ----
Medical, computer and office equipment $ 940,150 $176,016
Leasehold improvements 476,016 22,572
---------- ----------
1,416,166 198,588
Less: Accumulated depreciation and amortization (812,733) (28,307)
---------- ----------
Property and equipment, net $ 603,433 $170,281
---------- ----------
---------- ----------
Depreciation and amortization expense was $110,012, $26,931 and $11,439
for 1998, 1997, and 1996, respectively.
6. INTANGIBLE ASSETS, NET
Intangible assets net December 31, 1998 and 1997 consist of :
1998 1997
---- ----
Goodwill $ 1,868,383 $1,020,275
Organization costs - 830,658
Other 480,005 480,005
------------- ------------
2,348,388 2,330,938
Less: Accumulated amortization (269,019) (316,768)
------------- ------------
Intangible assets, net $ 2,079,369 $ 2,014,170
------------- ------------
------------- ------------
Amortization expense was $116,980, $188,406 and $122,438 for 1998, 1997
and 1996, respectively.
The Company continually reevaluates the propriety of the carrying
amount of goodwill as well as the amortization period to determine
whether current events and circumstances warrant adjustments to the
carrying value and estimates of useful lives. As of December 31, 1998,
the Company believed that no significant impairment of goodwill have
occurred and that no reduction of the amortization periods is
warranted.
As discussed in Note 2, in accordance with Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), the
Company wrote-off, net of tax benefit of $29,099, organization costs
of $940,454. In accordance with SOP 98-5 the write-off has been
accounted for as a cumulative change in accounting principle in the
accompanying December 31, 1998 statement of operations.
The Company recorded a $3.9 million impairment loss in 1997 resulting
from the Company's merger with The Lehigh Group, Inc. in 1997, of
which $2.9 million is included in discontinued operations.
F-9
7. NOTES PAYABLE TO BANKS AND OTHERS
Notes payable to banks and others at December 31, 1998 and 1997 were as
follows:
1998 1997
----------- ------------
Subordinated Debentures - 14-7/8% interest rate $ 290,000 $ 290,000
Senior Subordinated Notes - 13-1/2% interest rate 100,000 100,000
Accrued Interest 968,444 780,921
Secured term loan for $537,812 bore interest at 1/2% above Prime
(9.0% at December 31, 1997): The loan was secured by all shares of FMG
common stock issued to FMC. Principal payments were made monthly with
the balance due on October 1998. The $537,812 drawn under this loan was
used to purchase Lehigh's stock in connection with the merger -- 537,812
Line of credit for $2,500,000 bore interest at 1/2% above prime
(9.0% at December 31,1997). The line was secured by all of the assets of
FMC and $500,000 is guaranteed by certain current and former officers
of FMC. The amounts drawn under this line of credit were used primarily
for working capital requirements -- 2,290,000
----------- ------------
$1,358,444 $3,998,733
----------- ------------
----------- ------------
The Company is in default in the payment of interest (approximately
$968,000 and $781,000 interest was past due as of December 31, 1998 and
1997, respectively) on the $390,000 aggregate principal amount of its
13-1/2% Senior Subordinated Debentures due May 15, 1998 ("13-1/2%
Notes") and 14-7/8% Subordinated Debentures due October 15, 1995
("14-7/8% Debentures") that remain outstanding and were not surrendered
to the Company in connection with its financial restructuring
consummated in 1991. The Company has been unable to locate the holders
of the 13-1/2% Notes and 14-7/8% Debentures (with the exception of
certain of the 14-7/8% Debentures, which were retired during 1996).
8. RELATED PARTIES
As of December 31, 1998, the Company had obligations to former officers
and employees of the Company that amounted to approximately $290,000.
This obligation is included in accrued expenses.
The Company paid salaries or consulting fees to stockholders of
approximately $610,000, $1,650,000 and $1,520,000 which is included in
the consolidated statement of operations for the years ended December
31, 1998, 1997 and 1996.
At December 31, 1997, the Company had amounts outstanding from the
AMC clinics which is owned by certain current and former shareholders
of FMC, under its management agreement with AMCMC, which totaled
$1,139,760.
The Chairman of the Board of Directors, President and Chief Executive
Officer of the Company, while serving as Chairman of the Board of
Directors of American Medical Centers Inc. ("AMC") prior to AMC's
merger with MedExec and the formation of First Medical Corporation
("FMC") instituted a lawsuit, together with Hospital Corporation
International, Ltd., against Pepsico Inc. and certain other parties
(the "Litigation"). Presently, the Company, through its wholly-owned
subsidiary FMC has agreed to pay the ongoing legal fees and other
expenses connected to the Litigation. Expenses totaling approximately
$191,000 have been incurred through December 31, 1998 and have been
recorded as general and administrative expenses in the accompanying
December 31, 1998 Statement of Operations. The Company's management
estimates that additional legal fees and other related expenses
approximating $75,000 will be incurred in future periods in connection
with the Litigation. The Company's Board of the Directors will
determine the extent to which these future expenses will be borne by
the Company.
9. INCOME TAXES
The components of income/(loss) from continuing operations before
income tax for the year ended December 31, 1998 is as follows:
1998
----
Domestic $ (821,000)
Foreign 189,659
-----------------
Total income/(loss) before income tax
benefits, cumulative effect of changes in
accounting principle, income from
discontinued operations $ (631,341)
-----------------
-----------------
F-10
The income tax effects of temporary differences that give rise to
significant portions of deferred tax assets are presented as follows:
1998 1997
---- ----
Deferred Tax Assets:
Alternative minimum tax credit $ 59,000 $ --
Net operating loss carryforward 519,000 4,511,000
Deferred Tax Liabilities -- --
----------- ----------
Deferred tax asset/(liability) 578,000 4,511,000
Less: Valuation allowance 0 4,511,000
----------- ----------
Net deferred tax asset/(liability) $ 578,000 $ --
----------- ----------
----------- ----------
Taxable income for the year ended December 31, 1998 was substantially
offset by the utilization of net operating loss carryforwards ("NOLs")
from the year ended December 31, 1997. At December 31, 1998, The
Company has NOLs of approximately $1,297,000 to offset future taxable
income, which expire in 2112.
Due to the Company's significant loss in 1997, no federal taxes have
been provided in the accompanying consolidated statement of operations.
The significant components of the income tax provision/(benefit)
attributable to continuing operations for the years ended December 31,
1998 and 1997 are presented below:
1998 1997
---- ----
Current tax provision - domestic operations $ (376,000) $ 0
Deferred tax provision - domestic operations (519,000) 0
Current tax provision - foreign operations 422,000 267,291
Write off of prior year deferred tax liability 0 (112,500)
Write off of prior year income taxes payable 0 (217,527)
---------------- ---------------
Net income tax benefit $ (473,000) $ (62,736)
---------------- ---------------
---------------- ---------------
The Company has not provided any U.S. deferred income taxes on foreign
earnings due to its intent to permanently reinvest those earnings.
The components of deferred income tax (benefit) are:
1998
----
NOL Carryforward $(519,000)
---------
Deferred Tax Benefit $(519,000)
---------
---------
The difference between the actual income tax provision/(benefit) and
the income tax provision computed by applying the statutory federal
income tax rate to income from operations for the year ended December
31, 1998 is attributable to the following:
1998
----
Income tax provision/(benefit) at 34% $ (215,000)
Reduction in valuation allowance (519,000)
State taxes net of federal 74,000
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Foreign income taxes in excess of US Rate 127,000
Foreign income taxes of US entities 138,000
Other (78,000)
-----------------
Income tax (benefit) provision $ (473,000)
-----------------
-----------------
The domestic and foreign components of the income tax
provision/(benefit) are as follows:
1998
----
Domestic $ (895,000)
Foreign 422,000
-----------------
Total $ (473,000)
-----------------
-----------------
10. LEASES
The Company has several noncancelable operating leases primarily for
office space that expire throughout 2010. Future minimum lease payments
required under noncancelable operating leases at December 31, 1998 are
as follows (in thousands):
Year Ending
December 31,
------------
1999 $ 1,126
2000 2,094
2001 2,097
2002 1,791
2003 1,637
Thereafter 6,377
---------
Total minimum lease payments $ 15,122
---------
---------
Rental expense during 1998, 1997 and 1996 amounted to approximately
$503,000, $663,000 and $259,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On September 16, 1998, The Lehigh Group, Inc., now known as First
Medical Group, Inc. was sued along with other defendants in the
United States District Court of Northern Ohio Western Division pursuant
to the Comprehensive Environmental Response, Compensation and Liability
Act. The plaintiffs have alleged that the Company is the
successor-in-interest to the Hilfinger Corporation (a defunct
subsidiary of the Company) and claim that the Hilfinger Corporation
arranged for the disposal or treatment of waste chemicals containing
hazardous substances or arranged with a transporter for the transport
for the disposal or treatment of such waste chemicals at one or more
sites. The plaintiffs are seeking damages, jointly and severally,
against the defendants in excess of $25 million. The occurrence was
alleged to have taken place during the period of 1950 through 1972. The
Company has put several insurance carriers on notice of this matter,
however no determination has been made regarding whether there is
insurance coverage. The plaintiffs have offered a settlement package of
approximately $120,000. The Company has retained counsel in Ohio to
defend this claim.
On or about January 7, 1999, the United States Environmental Protection
Agency ("USEPA") forwarded a demand to the Company and the other
defendants for payment of USEPA's response costs at the various
landfills in an aggregate amount of approximately $792,000. A
tolling agreement was entered between USEPA and the Company, and other
parties to toll the statute of limitations until August 1, 1999 to
allow the parties to negotiate this demand. The demand asserts that the
liability of the Company is joint and several. To date, to the
knowledge of the Company's counsel handling this matter, no court
action has been instituted by USEPA against the Company with respect to
this matter.
On or about June 26, 1998, the Company was sued in the United States
District Court for the Southern District of Florida by plaintiffs who
seek damages ranging between $150,000 and $200,000 in connection
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with the sale of stock in Dominion Healthnet, Inc. to the Company.
Former employees of various subsidiaries of the Company have made
claims against the Company related to monies allegedly due the former
employees for accrued vacation and unpaid sick leave. The total amount
claimed, inclusive of an asserted right to attorneys' fees,
approximates $400,000.
In December 1998 a claim was filed against the Company by a former
employee who seeks approximately $50,000 plus attorneys' fees for
breach of an employment contract.
The Company will continue to vigorously defend itself against each
of the lawsuits discussed above. In the opinion of management, the
final resolution of such matters will not have a material adverse
effect on the financial position and results of operations of the
Company.
Malpractice and Professional Liability Insurance
The Company maintains professional liability insurance on a claims-made
basis through December, 1999 including retroactive 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, 1998, there
are no asserted claims made against the Company that were not covered
by the policy.
12. SEGMENT INFORMATION
The Company operates its medical clinics in Eastern Europe and derives
all of its revenues from that region. None of the Company's revenues
are concentrated in any customer that exceed 10% of its revenues.
13. STOCK OPTION AND INCENTIVE COMPENSATION PLANS
In July 1997 the Board of Directors established a Stock Option Plan
(the "Option Plan") and the Incentive Compensation Plan (the "Incentive
Plan").
The Option Plan provides for the grant of incentive stock options and
nonqualified stock options, as well as stock appreciation rights (the
"Rights") and restricted stock awards. The Option Plan is authorized
the issuance of up to 500,000 shares of Common Stock. No option is to
be exercisable more than five years after the date of grant. The
exercise price of an incentive stock option must be at least 100% of
the fair market value of the Company's share at the date of grant,
provided, however that with respect to an optionee who owns more than
10% of the total combined voting power of all classes of stock of the
Company or of any of its subsidiaries, the exercise price must be at
least 110% of the fair market value of the Company's share at the date
of grant. The exercise price of a nonqualified stock option shall be
determined by the Compensation Committee.
The Compensation Committee shall have the authority to grant Rights
with respect to all or some shares of Common Stock covered by any
option, which entitle the holder to cash equal to the difference
between the offer price (as will be determined by the Compensation
Committee) and the exercise price of the related option. In addition,
the Compensation Committee shall have the authority to award restricted
stock, which entitles the recipient to acquire for a purchase price to
be determined by the Compensation Committee, some shares of Common
Stock subject to restrictions and conditions as the Compensation
Committee may determine.
The Incentive Plan provides for incentive compensation to participants
in the form of cash, stock or cash and stock bonus, based on targets
established by the Compensation Committee. There is no maximum number
of shares of Common Stock, which may be awarded under the Incentive
Plan. Incentive Plan shall terminate on December 31, 2002.
At December 31, 1998 no options, stock bonus or other rights were
granted under these plans.
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In December 1998, the Company's Board of Directors approved to grant of
stock options to purchase up to 950,000 shares of common stock to
certain officers and directors at an exercise price of $0.125, which
was equal to the fair market value on the date of grant. These options
may not be exercised after four years from the date of grant. 725,000
options were vested at the date of the grant. 225,000 options are
exercisable ratably over a four-year period.
The Company accounts for awards granted to employees and directors
under APB No. 25, under which no compensation cost has been recognized
for stock options granted. Had compensation cost for these stock
options been determined consistent with SFAS No. 123, the Company's net
income and net income per share would have been increased to the
following pro forma amounts:
Year Ended
December 31,
1998
----
Net income:
As reported.............................................. $ 909,275
Pro forma................................................ 873,462
Basic and diluted income per share:
As reported.............................................. $ 0.10
Pro forma................................................ 0.09
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts as additional awards in future years
are anticipated.
Option activity for the year ended December 31, 1998 is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
Options outstanding, December 31, 1997 -- --
Granted........................................... 950,000 0.125
Canceled.......................................... -- --
Exercised......................................... -- --
-- --
------- -------
Options outstanding, December 31, 1998 950,000 $ 0.125
------- -------
------- -------
The weighed average fair value of options granted is $0.05 for the year
ended December 31, 1998. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1998: risk-free interest rate of 4.6%; expected life of 2.5 years;
expected volatility of 54% and expected dividend yield of 0%.
The following table summarizes information with respect to stock
options outstanding at December 31, 1998:
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
-------------- ------------------ ------------------- ----------------- ------------------ ---------------
$0.125 950,000 2.5 $0.125 725,000 $0.125
F-14
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE AT CHARGED TO OTHER
BEGINNING OF ACQUISITION OF COSTS AND CHARGES AND BALANCE AT
DECEMBER 31, DESCRIPTION YEAR AMC-CIS EXPENSES (DED'S) END OF YEAR
.................... .................... ................ ................. ............... ............. .............
1998 Allowance for
doubtful accounts $ 1 (30) 151 (68) 54
1997 Allowance for
doubtful accounts $ 1 - 3 (3) 1
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