SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
AMENDMENT NO. 1
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998.....Commission File Number 1-155
FIRST MEDICAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-1920670
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1055 Washington Boulevard, Stamford, CT 06901
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 327-0900
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 6, 1998
- --------------------------------------------------------------------------------
Common Stock, par value 9,397,292
$.001 per share
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997...............................1
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997.....................................2
Consolidated Statements of Changes in
Shareholders' Equity (Deficit) -
Three Months Ended March 31, 1998 and 1997...............................3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997...............................4
Notes to Consolidated Financial Statements..............................5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................7-9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk..............................................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................10
Item 3. Defaults upon Senior Securities..........................................10
Item 5. Other Information........................................................10
Item 6. Exhibits and Reports on Form 8-K.........................................11
PART I - FINANCIAL INFORMATION
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
Revenue $ 2,764 $ 2,014
Cost of revenue 2,137 1,624
----------- -----------
Income from clinic operations 627 390
Operating expenses:
Salaries and benefits 332 98
General and administrative 233 167
Depreciation and amortization 32 31
----------- -----------
Total operating expenses 597 296
Income from operations 30 94
Interest expense, net (69) (14)
----------- -----------
(Loss) income before income tax provision (39) 80
Income tax provision (162) (45)
----------- -----------
(Loss) income from continuing operations before
discontinued operations (201) 35
Discontinued operations:
(Loss) income from operations of discontinued physician
practice management and electrical supply division (1,002) 57
(Loss) on disposal of electrical supply division (591) --
----------- -----------
(Loss) income from discontinued operations (1,593) 57
Cumulative effect of change in accounting principle (970) --
----------- -----------
Net (loss) income $ (2,764) $ 92
(Loss) income per share - basic and diluted:
(Loss) income from continuing operations $ (.02) $ --
(Loss) income from discontinued operations (.17) .01
Cumulative effect of change in accounting principle (.10) --
----------- -----------
(Loss) income per share $ (.29) $ .01
Weighted average number of common shares outstanding-
basic and diluted 9,397,292 9,021,400
See accompanying notes to consolidated financial statements.
1.
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 570 $ 1,421
Accounts receivable 206 98
Due from related parties 1,232 1,140
Inventories 11 --
Prepaid expenses and other current assets 39 51
-------- --------
Total current assets 2,058 2,710
Property and equipment, net 162 170
Intangible assets, net 1,323 2,014
Other assets -- 248
-------- --------
TOTAL $ 3,543 $ 5,142
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 338 $ 278
Accrued expenses 315 383
Deferred revenue 645 731
Notes payable and accrued interest payable 4,081 3,999
Net liabilities of discontinued operations 1,982 805
-------- --------
Total current liabilities 7,361 6,196
Commitments and contingencies
Shareholders' deficit:
Common stock, par value $.001; authorized
shares100,000,000; shares issued 9,397,292
at March 31, 1998 and December 31, 1997 9 9
Additional paid-in-capital 8,084 8,084
Accumulated deficit (11,911) (9,147)
-------- --------
Total shareholders' deficit (3,818) (1,054)
-------- --------
TOTAL $ 3,543 $ 5,142
See accompanying notes to consolidated financial statements.
2.
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF
SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Retained Total
Number of Common Additional Earnings Shareholders'
Shares Stock Paid-in Capital (Deficit) Equity (Deficit)
-----------------------------------------------------------------------------
Balance, December 31, 1996 10,000 $ -- $ 380 $ 324 $ 704
Net income -- -- -- 92 92
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 10,000 $ -- $ 380 $ 416 $ 796
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 9,397,292 $ 9 $ 8,084 $ (9,147) $ (1,054)
Net loss -- -- -- (2,764) (2,764)
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1998 9,397,292 $ 9 $ 8,084 $ (11,911) $ (3,818)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
3.
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended March 31,
1998 1997
-------------------------
Cash flows from operating activities:
Net (loss) income $(2,764) $ 92
Adjustments to reconcile net (loss)
income to net cash used in continuing
operating activities:
Depreciation and amortization 32 31
Cumulative effect of change in accounting
principle 970 --
Increase in intangibles and other assets (55) (52)
Increase (decrease) in net liabilities
of discontinued operations 1,178 (375)
Other changes, net (294) (26)
------- -------
Net cash used in continuing operating
activities (933) (330)
Capital expenditures -- (27)
Investment in Lehigh -- (834)
Proceeds from loan payables and others 82 1,314
------- -------
Increase (decrease) in cash and cash equivalents (851) 123
Cash and cash equivalents, beginning of year 1,421 124
------- -------
Cash and cash equivalents, end of the period $ 570 $ 247
------- -------
------- -------
See accompanying notes to consolidated financial statements.
4.
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information for the three months ended March 31, 1998 and 1997 is
unaudited. However, the information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair statement of results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes included in First Medical Group, Inc.'s ("the Company") December 31, 1997
Report on Form-10K.
The results of operations for the three month period ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full year.
Earnings (loss) per common share is calculated by dividing net income (loss)
by weighted average number of common shares 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. For the periods presented, there were no common stock
equivalents included in the calculation, since they would be anti-dilutive.
2. DISCONTINUED OPERATIONS
On April 14 and 15, 1998, the Company through certain of its wholly owned
subsidiaries completed the sale of its Florida physician practice management
operations. The sales price was approximately $6.75 million for certain
assets of the Company. The Company is also divesting its Texas and Mid-West
physician practice management operations. As a result of these transactions,
the Company has reflected its physician practice management operations as
discontinued operations for financial statement purposes.
On April 17, 1998, the Company sold Hallmark Electrical Supplies Corp.
("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 the
management of the Company.
5.
Summarized financial information for discontinued operations is as follows (in
thousands):
Three Months Ended March 31,
1998 1997
----------------------------
Revenue $ 19,532 $ 14,289
Net (loss) income $ (1,593) $ 57
March 31,1998
-------------
Current assets $ 19,256
Other assets 3,367
------------
Total assets 22,623
Total liabilities 24,605
------------
Net liabilities of discontinued operations $ (1,982)
3. 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 Company recorded $970,000 as a cumulative effect of the
change in accounting principle relating to the write-off of such costs. This
amount is reflected in the consolidated statement of operations for the three
months ended March 31, 1998.
4. SUPPLEMENTARY SCHEDULE
1998 1997
(In Thousands)
--------------
Cash paid during the three months ended March 31 for:
Interest $ 69 $ 27
Income taxes 162 -
6.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
Statements made in this filing about management's intentions, hopes,
beliefs, expectations or predictions of the future are forward-looking
statements. It is important to note that actual results could differ
materially from those projected in such forward-looking statements. Factors
that could cause future results to vary materially from current expectations
include, but are not limited to competition in the health care industry,
legislation and regulatory changes, changes in the economy and stability in
the international markets in which the Company operates.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS. At March 31, 1998, the Company had cash of $
570,000 as compared to $ 1.4 million at December 31, 1997. The decrease in
cash and cash equivalents relates primarily to operating losses incurred
during the three months ended March 31, 1998 in the physician practice
management division.
INTANGIBLE AND OTHER ASSETS. The decrease in intangible and other assets
relates primarily to the write-off of start up costs of certain operations due
to the change in accounting principle.
NET LIABILITIES OF DISCONTINUED OPERATIONS. Net liabilities of discontinued
operations at March 31, 1998 was $2.0 million as compared to $.8 million at
December 31,1997. The increase in net liabilities is due to losses incurred
in connection with the physician practice management division.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1998 IN COMPARISION
WITH FIRST QUARTER OF 1997
REVENUE. Total revenue of the Company for the three months ended
March 31, 1998 and 1997 was $2.8 million and $2.0 million, respectively, an
increase of 37%, due mainly to the opening of two new clinics in Eastern
Europe as well as increased patient visits in existing facilities.
COST OF REVENUES. Cost of revenues for the three months ended March 31,
1998 and 1997 was $2.1 million and $ 1.6 million, respectively. Cost of
revenues as a percentage of revenue, was 77% and 81% for the three months
ended March 31, 1998 and 1997, respectively. The increase in cost of
revenues is due to increased staffing levels as a result of the increase in
visits.
OPERATING EXPENSES. Operating expenses for the Company were $597,000
during
7.
the three months ended March 31, 1998 as compared to $ 296,000 in 1997.
Operating expenses as a percentage of revenue was 22% in 1998 as compared to
15% in 1997.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations for the three months ended March 31,1998 was $1.6 million as
compared to income of $57,000 for the first three months ended March 31,
1997.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. The cumulative
effect of a change in accounting principle of $ 970,000 reflected in the
consolidated statement of operations during the three months ended March 31,
1998 relates to the write-off of start-up costs of certain operations pursuant
to Statement of Position 98-5.
NET (LOSS) INCOME. Net loss for the three months ended March 31, 1998
was $2.8 million as compared to net income of $ 92,000 in the first quarter of
1997 due to the losses incurred in connection with discontinued operations as
well as the impact related to the change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had a credit facility of $2.5
million bearing interest at 1/2% above prime, of which $500,000 is guaranteed
by certain current and former members of the Company. At March 31, 1998, the
Company had drawn down $2.325 million on this facility. The expiration date
for the $2.5 million is July 31, 1998. The Company also borrowed an additional
$537,000 to purchase Lehigh stock in connection with the merger. The
expiration date for the $537,000 facility is October 1998.
The Company is in default in the payment of interest (approximately
$829,000 interest was past due as of March 31, 1998) on the $390,000 aggregate
principal amount of its 13 1/2% Senior Subordinated Notes due May 15, 1998
("13 1/2% Notes) and 14 7/8% Subordinated Debentures due October 15, 1995,
("14 7/8% Debentures") that remain outstanding and were not surrendered to the
Company in connection with its financial restructuring consummated in 1991.
The Company has been unable to locate the holders of the 13 1/2% Notes and
14 7/8% Debentures (with the exception of certain of the 14 7/8% Debentures,
which were retired during 1996).
The working capital of the Company as of March 31, 1998 is at a deficit
of $5.3 million as compared to $3.5 million as of December 31, 1997. The
increase in the deficit of $1.8 million is due mainly to the increase of net
liabilities related to discontinued operations. In addition, included in this
deficit are the notes payable and accrued interest of approximately $1.2
million as of March 31, 1998 to which the Company is unable to locate the note
holders.
YEAR 2000
The Company is aware of the issues related with the 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.
8.
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 Year 2000 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.
The Company is in the process of identifying those vendors that it
relies on to supply diagnostic test 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the quantitative and qualitative
disclosures about market risk since December 31, 1997.
9.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in minor litigation, none of which is considered by
management to be material to its business or, if adversely determined, would
have a material adverse effect on the Company's financial statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company continues to be in default in the payment of interest
(approximately $829,000 interest is past due as of March 31, 1998) on the
$390,000 principal amount of 13 1/2% Notes and 14 7/8% Debentures.
ITEM 5. OTHER INFORMATION
As reported on a Form 8-K filed on April 29, 1998, on April 14 and 15, 1998,
First Medical Group, Inc. ("FMG"), through certain of its wholly owned
subsidiaries completed the sale of its Florida operations which amounted to
the sale of all of the assets of its nine outpatient centers and its
management agreements for the South Florida multi-specialty practices. The
total sales price determined through arms-length negotiations, was
approximately $6.75 million, the proceeds of which were used to payoff an
existing loan with First Union Bank in the amount of $2,827,812, money owed
to Humana Inc. in the sum of $1,227,045 and various accounts payable and
other accrued liabilities in the amount of $1,483,541. The balance of the
proceeds will be used for general working capital requirements.
On April 17, 1998 FMG sold Hallmark Electrical Supplies Corp., ("Hallmark")
which was a wholly owned subsidiary of FMG to Salvatore J. Zizza and the
existing management of Hallmark for a total sales price of $1.9 million.
The $1.9 million represented a cash payment of $750,000 and the assumption
of $1.150 million of liabilities and Mr. Zizza's agreement not to compete.
Simultaneously with the sale of Hallmark, Mr. Zizza resigned as Executive Vice
President, Chief Financial Officer and Treasurer of FMG and its subsidiaries.
Mr. Zizza continues to serve as a director of FMG.
10.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A Form 8-K was filed on April 29, 1998 (see item 5).
EXHIBITS
3.1 Restated Certificate of Incorporation and Amendments thereto
(incorporated by reference to the Registrant's Annual Report on Form
10-K filed on April 16, 1998).
3.2 Certificate of Amendment to Restated Certificate of Incorporation dated
November 12, 1997 (incorporated by reference to the Registrant's Proxy
Statement dated October 29, 1997).
3.3 Form of Certificate of Designation of the Series A Convertible
Preferred Stock (incorporated by reference to Appendix B of the
Registrant's Proxy Statement contained in Pre-Effective Amendment
No. 5 to the Registrant's Registration Statement on Form S-1
(previously Form S-4) dated June 26, 1997).
3.4 Amended and Restated By-Laws of the Registrant, as amended to date
(incorporated by reference to Exhibit 3 (ii) to the Registrant's
Current Report on Form 8-K dated July 17, 1996).
4.1 Form of Indenture, dated as of October 15, 1985, among Registrant,
NICO, Inc. and J. Henry Schroder Bank & Trust the Registrant, as
Trustee, including therein the form of the subordinated debentures to
which such Indenture relates (incorporated by reference to Exhibit 4(a)
to the Registrant's Current Report on Form 8-K dated November 7,
1985).
4.2 Amendment to Indenture dated as of March 14, 1991 (incorporated by
reference to Exhibit (b) (2) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1990).
4.3 Indenture dated as of March 15, 1991 (the "Class B Note Indenture")
among the Registrant, NICO, the guarantors signatory thereto, and
Continental Stock Transfer and Trust the Registrant, as Trustee, to
which the 8% Class B Senior Secured Redeemable Notes due March 15, 1999
of NICO were issued together with the form of such Notes (incorporated
by reference to Exhibit 4 (i) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990).
4.4 First Supplemental Indenture dated as of May 5, 1993 between NICO and
Continental Stock Transfer & Trust the Registrant, as trustee under the
Class B Note Indenture (incorporated by reference to Exhibit 4 (h) to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993).
4.5 Form of indenture between the Registrant, NICO and Shawmut Bank, N.A.,
as Trustee, including therein the form of Senior Subordinated Note due
April 15, 1998 (incorporated by reference to Exhibit 4 (b) to Amendment
No. 2 to the Registrant's Registration Statement on Form S-2 dated May
13, 1988).
11.0 Statement re: computation of per share earnings (incorporated herein by
reference to the notes to consolidated financial statements).
27.0 Financial Data Schedule
11.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MEDICAL GROUP, INC.
By: /s/ Dennis A. Sokol
---------------------------
Dennis A. Sokol
Chief Executive Officer
and President
Dated: July 14, 1999