SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 327-0900
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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 August 14, 1998
- ----------------- ------------------------------
Common Stock, par value 9,567,292
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Six Months Ended June 30, 1998 and 1997.......................1
Consolidated Balance Sheets -
June 30, 1998 and December 31, .1997..........................2
Consolidated Statement of Changes in
Shareholder's Equity (Deficit)
Six Months Ended June 30, 1998 and 1997.......................3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997.......................4
Notes to Consolidated Financial Statements..................5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... .10
Item 3. Defaults upon Senior Securities......................... ....10
Item 5. Other Information.........................................10-11
Item 6. Exhibits and Reports on Form 8-K.............................11
<PAGE>
PART 1 - FINANCIAL INFORMATION
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Fee for service and related revenue $ 2,700,745 $2,408,585 $ 5,464,983 $ 4,422,702
Total revenue 2,700,745 $2,408,585 $ 5,464,983 4,422,702
Medical expenses 2,507,941 1,845,000 4,645,649 3,468,768
----------- ---------- ------------ -----------
Gross profit 192,804 563,585 819,334 953,934
Operating expenses:
Salaries and related benefits 74,346 329,198 406,166 427,424
General and administrative 289,808 283,174 529,806 449,697
Depreciation and amortization 8,241 63,840 15,261 94,978
----------- ---------- ------------ -----------
Total operating expenses 372,395 676,212 951,233 972,099
Operating income (loss) (179,591) (112,627) (131,899) (18,165)
Impairment loss on intangible assets -- -- (2,014,168) --
Interest income (expense),net 16,550 (50,651) (52,078) (64,951)
----------- ---------- ------------ -----------
(Loss) before taxes, write-off of debentures and (163,041) (163,278) (2,198,145) (83,116)
discontinued operations
Provision for income taxes 164,659 (45,000) 326,753 --
----------- ---------- ------------ -----------
Net (loss) before discontinued operations and (327,700) (118,278) (2,524,898) (83,116)
write-off of debentures
Write-off of debentures and accrued interest 1,218,537 -- 1,218,537 --
Discontinued operations:
(Loss) from discontinued operations (980,251) (2,244,610) (1,982,238) (2,187,432)
Gain on sale of discontinued operations 4,260,344 -- 3,669,391 --
----------- ---------- ------------ -----------
Total income (loss) from discontinued operations 3,280,093 (2,244,610) 1,687,153 (2,187,432)
Net income (loss) $ 4,170,930 $(2,362,888) $ 380,792 $(2,270,548)
(Loss) per share before write-off $ (0.03) $ (0.01) $ (0.27) $ (0.01)
and discontinued operations
Earnings (loss) per share from write-off $ 0.47 $ (0.25) $ 0.31 $ (0.24)
and discontinued operations
Earnings (loss) per share $ 0.44 $ (0.26) $ 0.04 $ (0.25)
Weighted average number of common shares
outstanding 9,448,292 9,021,400 9,422,651 9,021,400
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,981,820 $ 1,421,250
Other receivables 204,090 98,332
Due from related parties 1,171,749 1,139,760
Inventories 11,515 -
Prepaid expenses and other current assets 60,064 50,406
------------ -----------
Total current assets 3,429,238 2,709,748
Property and equipment, net 163,870 170,281
Intangible assets,net - 2,014,169
Other assets 250,648 248,386
------------ -----------
Total $ 3,843,756 $ 5,142,584
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable 311,877 278,497
Accrued expenses 854,271 1,164,093
Corporate deposits 596,383 731,372
Loans payable to banks - 3,217,812
Net liabilities pertaining to discontinued operations 2,584,154 804,531
------------ -----------
Total current liabilities 4,346,685 6,196,305
Commitments and contingencies
Shareholders' deficit:
Capital stock, par value $.001; authorized shares 9,567 9,397
100,000,000
Additional paid in capital 8,253,318 8,083,488
Retained deficit (8,765,814) (9,146,606)
------------ -----------
Total shareholders' deficit (502,929) (1,053,721)
------------ -----------
Total $ 3,843,756 $ 5,142,584
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF SHAREHOLDERS' (DEFICIT) EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) (DEFICIT)EQUITY
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 100 $ 379,685 $ 323,712 $ 703,497
Net loss -- -- (2,270,550) (2,270,550)
----------- ----------- ----------- -----------
Balance, June 30, 1997 $ 100 $ 379,685 $(1,946,838) $(1,567,053)
Balance, January 1, 1998 $ 9,397 $ 8,083,488 $(9,146,606) $(1,053,721)
Issuance of 170,000 shares 170 169,830 170,000
Net income -- -- 380,792 380,792
----------- ----------- ----------- -----------
Balance, June 30, 1998 $ 9,567 $ 8,253,318 $(8,765,814) $ (502,929)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1998 1997
---- ----
Net income (loss) $ 380,792 $(2,270,548)
Add: Depreciation and amortization 15,261 94,978
Loss on impairment of intangibles 2,014,169 --
Proceeds of loan payable to banks -- 1,700,552
Issuance of common stock 170,000 --
Increase in net liabilities relating
to discontinued operations 1,779,623 2,332,341
Less: Investment in Lehigh -- (818,651)
Repayment of loan payable to banks (3,217,812) --
Other changes in assets and liabilities (581,463) (546,929)
----------- -----------
Increase in cash and cash equivalents 560,570 491,743
Cash and cash equivalents, beginning of the year 1,421,250 124,314
----------- -----------
Cash and cash equivalents, end of the period $ 1,981,820 $ 616,057
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information for the three months and six months ended June 30,
1998 and 1997 is unaudited. The balance sheet as of December 31, 1997 and the
income statement for the three months and six months ended June 30, 1997 has
been reclassified to reflect the managed care and HallMark Electrical Supplies
Corp. ("HallMark") operations as discontinued operations. 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 and six month period ended June
30, 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 and share equivalents outstanding. For
the periods presented, there were no common stock equivalents included in the
calculation, since they would be anti-dilutive.
2. DISCONTINUED OPERATIONS
On April 14 and 15, 1998 the Company through certain of its wholly owned
subsidiaries completed the sale of its Florida managed care operations. The
total sales price was approximately $6.75 million for certain assets of the
Company. The Company is also divesting its Texas and Mid-West managed care
operation. It is anticipated that these operations will be sold in July, 1998.
As a result of these transactions, the Company has reflected its managed care
operation as discontinued operations for financial statement purposes.
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 the management of the Company.
As a result of these transactions, the Company recorded a gain on the sale of
approximately $ 4.3 million and is reflected in the results of operations for
the three months ended June 30, 1998.
5.
<PAGE>
On July 8, 1998, the Company through its wholly-owned subsidiary, First Medical
Corporation, Inc. sold all of the assets of its Indiana operations and its
contracts with Humana Health Plan, Inc. ("Humana") to provide managed care to
MCO, LLC. The total sales price was $727,378. The proceeds of the sale were used
to pay off the existing loan with Devon Bank in the amount of $377,378 and
$350,000 was applied to amounts owed to Humana.
On July 16, 1998, First Medical Corporation-Texas Division, sold its assets to
Durham Physicians Group, P.A. for $90,000 to be paid in 36 equal installments
beginning July 1, 1999, bearing 8% interest per annum compounded annually. First
Medical Corporation-Texas Division and Durham Physicians Group, P.A. also
terminated their Full Service Management Agreement.
CONDENSED FINANCIAL STATEMENTS-DISCONTINUED OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS):
CONDENSED INCOME STATEMENTS
MANAGED CARE HALLMARK TOTAL
Revenues $ 15,514 $ 4,090 $ 19,604
Medical Cost/Cost
of Sales 15,289 2,850 18,139
------ ----- ------
Gross Profit 225 1,240 1,465
Income (loss) from
discontinued operations $ (2085) $ 103 $ (1982)
CONDENSED BALANCE SHEET
MANAGED CARE
Current assets $ 10,403
Other assets 327
---
Total 10,730
Current liabilities 13,314
Net liabilities pertaining
to discontinued operations $ (2,584)
6.
<PAGE>
3. WRITE-OFF OF DEBENTURES AND ACCRUED INTEREST
During the three months ended June 30, 1998, the Company elected to record the
write-off of the 13 1/2% Senior Subordinated Debenture notes and 14 7/8%
Subordinated Debentures aggregating $390,000 and the related accrued interest
payable of $ 828,537. These notes were not surrendered to the Company in
connection with the The Lehigh Group Inc. financial restructuring that was
consummated in 1991. Included in the operating results of the Company for the
three months ended June 30, 1998, is income amounting to $ 1,218,537 relating to
the write-off of these debentures and accrued interest payable.
4. SUPPLEMENTARY SCHEDULE
1998 1997
(IN THOUSANDS)
Cash paid during the six months ended
June 30, for:
Interest $ 52 $ 65
Income taxes 327 -
7.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
SECOND QUARTER OF 1998 IN COMPARISION
WITH SECOND QUARTER OF 1997
REVENUE. Total revenue of the Company for the three months ended
June 30, 1998 and 1997 was $2.7 million and $2.4 million, respectively, an
increase of 13%, due mainly to the opening of two new clinics in Eastern
Europe as well as increased patient visits in existing facilities.
MEDICAL EXPENSE. Medical expense for the three months ended June 30,
1998 and 1997 was $2.5 million and $1.8 million, respectively. Medical expense
as a percentage of revenue, was 93% and 75% for the three months ended June
31, 1998 and 1997, respectively.
OPERATING EXPENSES. Operating expenses for the Company were $ 372,000
during the three months ended June 30, 1998 as compared to $676,000 in 1997.
Operating expenses as a percent of revenue were 14% and 28%, respectively, in
1998 and 1997.
WRITE-OFF OF DEBENTURES AND ACCRUED INTEREST PAYABLE. The write-off of
debentures and accrued interest payable during the three months ended June 30,
1998 was $ 1,218, 537.
LOSS/INCOME FROM DISCONTINUED OPERATIONS. The loss from discontinued
operations for the three months ended June 30, 1998 was $.980 million as
compared to a loss of $2.2 million for the first three months ended June 30,
1997. The gain on sale of discontinued operations during the three months ended
June 30, 1998 was $ 4.3 million.
NET INCOME (LOSS). Net income for the three months ended June 30, 1998
was $ 4,171,000 as compared to net loss of $ 2,362,000 in the second quarter of
1997.
RESULTS OF OPERATIONS
FIRST HALF OF 1998 IN COMPARISION
WITH FIRST HALF OF 1997
REVENUE. Total revenue of the Company for the six months ended
June 30, 1998 and 1997 was $ 5.5 million and $ 4.4 million, respectively, an
increase of 25%, due mainly to the opening of two new clinics in Eastern
Europe as well as increased patient visits in existing facilities.
MEDICAL EXPENSE. Medical expense for the six months ended June 30, 1998
and 1997 was $ 4.6 million and $3.5 million, respectively. Medical expense as
a percentage of revenue, was 84% and 80% for the six months ended June 31,
1998 and 1997, respectively.
8.
<PAGE>
OPERATING EXPENSES. Operating expenses for the Company were $
951,000 during the six months ended June 30, 1998 as compared to $ 972,000 in
1997. Operating expenses as a percent of revenue were 17% and 22%, respectively,
in 1998 and 1997.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS. The Company recorded a
loss on impairment of intangible assets during the six months ended June 30,
1998 of $ 2,014,168.
WRITE-OFF OF DEBENTURES AND ACCRUED INTEREST PAYABLE. The
write-off of debentures and accrued interest payable during the six months ended
June 30, 1998 was $ 1,218, 537.
LOSS/INCOME FROM DISCONTINUED OPERATIONS. The loss from
discontinued operations for the six months ended June 30, 1998 was $ 2.0 million
as compared to a loss of $2.2 million for the six months ended June 30, 1997.
The gain on sale of discontinued operations during the six months ended June 30,
1998 was $ 4.3 million.
NET INCOME (LOSS). Net income for the six months ended June 30,
1998 was $ 381,000 as compared to net loss of $ 2,070,000 in the six months
ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash of $ 1,981,000 as compared to $
1,421,000 at December 31, 1997.
As of December 31, 1997, 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. The Company also
borrowed an additional $537,000 to purchase Lehigh stock in connection with
the merger. Proceeds from the sale of the managed care operation in April,
1998 were used to repay these facilities.
9.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in minor litigation, none of which is considered by
management to be material to its business or, if adversely determined, would
have a material adverse effect on the Company's financial condition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company continues to be in default in the payment of interest (approximately
$829,000.00 interest is past due as of June 30, 1998) on $390,000 principal
amount of 13-1/2% Notes and 14-7/8% Debentures.
ITEM 5. OTHER INFORMATION
As reported on a Form 8-K filed on April 29, 1998, on April 14 and 15, 1998
First Medical Group Inc., 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 pay off 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 First Medical Group, Inc., ("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 $1,900,000.00. The purchase price of $1,900,000.00 represented a cash
payment of $750,000.00 and the assumption of $1,150,000.00 worth of debt 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.
It On July 8, 1998, First Medical Group, Inc. through its wholly-owned
subsidiary, First Medical Corporation, sold all of the assets of its Indiana
operations and its contracts with Humana Health Plan, Inc. to provide managed
care to MCO, LLC. The total sales price was $727,378.00. The proceeds of sale
were used to pay off an existing loan with Devon Bank in the amount of $377,378
and $350,000 was applied to money owed to Humana Health Plans, Inc.
On July 16, 1998, First Medical Corporation - Texas Division, sold its assets to
Durham Physicians Group, P.A. for $90,000 to be paid in 36 equal monthly
installments beginning July 1, 1999, bearing 8% interest per annum compounded
annually. First Medical Corporation - Texas Division and Durham Physicians
Group, P.A. also terminated their Full Service Management Agreement.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8-K was filed on April 29, 1998 (see item 5).
11.
<PAGE>
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
---------------------
President
Dated August 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 10-Q FOR THE PERIOD ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> JAN-01-1998
<CASH> 1,982
<SECURITIES> 0
<RECEIVABLES> 204
<ALLOWANCES> 0
<INVENTORY> 12
<CURRENT-ASSETS> 3,429
<PP&E> 164
<DEPRECIATION> 27
<TOTAL-ASSETS> 3,844
<CURRENT-LIABILITIES> 4,347
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> (503)
<TOTAL-LIABILITY-AND-EQUITY> 3,844
<SALES> 0
<TOTAL-REVENUES> 5,465
<CGS> 0
<TOTAL-COSTS> 4,646
<OTHER-EXPENSES> 3,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,198)
<INCOME-TAX> 327
<INCOME-CONTINUING> (2,525)
<DISCONTINUED> 1,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 381
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
