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 March 31, 1998.....Commission File Number 1-155
FIRST MEDICAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-1920670
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1055 Washington 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 May 6, 1998
----- --------------------------
Common Stock, par value 9,397,292
$.001 per share
<PAGE>
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 Statement of Changes in
Shareholder's 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.....................7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................9
Item 3. Defaults upon Senior Securities.....................................9
Item 6. Exhibits and Reports on Form 8-K....................................9
<PAGE>
PART 1 - FINANCIAL INFORMATION
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
Revenue:
Fee for service and related revenue $ 2,764,238 $ 2,014,117
----------- -----------
Total revenue 2,764,238 2,014,117
Medical expenses 2,137,708 1,623,768
----------- -----------
Gross profit 626,530 390,349
Operating expenses:
Salaries and related benefits 331,820 98,226
General and administrative 239,998 166,523
Depreciation and amortization 7,020 31,138
----------- -----------
Total operating expenses 578,838 295,887
----------- -----------
Operating income 47,692 94,462
Impairment loss on intangible assets (2,014,169) -
Interest expense, net (68,628) (14,300)
----------- -----------
(Loss) income before taxes and
discontinued operations (2,035,105) 80,162
Provision for income taxes 162,094 45,000
----------- -----------
Net (loss) income before
discontinued operations (2,197,199) 35,162
Discontinued operations:
(Loss) income from discontinued
operations (1,001,987) 57,178
Loss on sale of discontinued
operation (590,953) -
------------ -----------
Total (loss) income from discontinued
operations (1,592,940) 57,178
------------ -----------
Net (loss) income $(3,790,139) $ 92,340
============ ===========
(Loss) earnings per share before
discontinued operations $ (0.23) $ -
(Loss) earnings per share from
discontinued operations $ (0.17) $ 0.01
(Loss) earnings per share $ (0.40) $ 0.01
============ ===========
Weighted average number of common
shares outstanding 9,397,292 9,021,400
============ ===========
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 570,087 $1,421,250
Other receivables 206,069 98,332
Due from related parties 1,231,845 1,139,760
Inventories 10,629 -
Prepaid expenses and other current assets 39,290 50,406
---------- ----------
Total current assets 2,057,920 2,709,748
Property and equipment, net 162,126 170,281
Intangible assets,net - 2,014,169
Other assets 242,136 248,386
---------- ----------
Total $2,462,182 $5,142,584
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
<S> <C> <C>
Accounts payable $ 282,952 $278,497
Accrued expenses 1,143,594 1,164,093
Corporate deposits 645,198 731,372
Loans payable to banks 3,252,000 3,217,812
Net liabilities pertaining to discontinued operations 1,982,298 804,531
----------- ----------
Total current liabilities 7,306,042 6,196,305
Commitments and contingencies
Shareholders' deficit:
Capital stock, par value $.001; authorized shares 100,000,000 9,397 9,397
Additional paid in capital 8,083,488 8,083,488
Retained deficit (12,936,745) (9,146,606)
---------- ----------
Total shareholders' deficit (4,843,860) (1,053,721)
---------- ----------
---------- ----------
Total $2,462,182 $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 income - - 92,340 92,340
------- ----------- -------------- -------------
Balance, March 31, 1997 $100 $379,685 $416,052 $795,837
======= =========== ============== =============
Balance, January 1, 1998 $9,397 $8,083,488 $ (9,146,606) $ (1,053,721)
Net loss - - (3,790,139) (3,790,139)
------- ----------- -------------- -------------
Balance, March 31, 1998 $9,397 $8,083,488 $ (12,936,745) $ (4,843,860)
======= =========== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net (loss) income $ (3,790,139) $ 92,340
Add: Depreciation and amortization 7,020 31,138
Loss on impairment of intangibles 2,014,169 -
Proceeds from loan payable to banks 34,188 1,189,733
Increase in net liabilities relating
to discontinued operations 1,177,767 -
Less: Investment in Lehigh - (839,733)
Other changes in assets and liabilities (294,168) (486,313)
----------- -----------
Decrease in cash and cash equivalents (851,163) (12,835)
Cash and cash equivalents, beginning of the year 1,421,250 63,014
----------- -----------
Cash and cash equivalents, end of the period $ 570,087 $ 50,179
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
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. The balance sheet as of December 31, 1997 and the income statement
for the three months ended March 31, 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 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 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. 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.
5
<PAGE>
CONDENSED FINANCIAL STATEMENTS-DISCONTINUED OPERATIONS
(IN THOUSANDS):
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENTS
MANAGED CARE HALLMARK TOTAL
------------ -------- -----
<S> <C> <C> <C>
Revenues $ 15,442 $ 4,090 $ 19,532
Medical Cost/Cost
of Sales 14,978 2,850 17,828
------ ----- ------
Gross Profit 464 1,240 1,704
Income (loss) from
discontinued operations $ (1,061) $ 59 $ (1002)
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
MANAGED CARE HALLMARK TOTAL
------------ -------- -----
<S> <C> <C> <C>
Current assets $ 10,355 $ 8,901 $19,256
Other assets 3,228 139 3,367
----- ---------- -----
Total 13,583 9,040 22,623
Current liabilities 15,914 3,015 18,929
Other liabilities 443 5,233 5,676
------ ---------- -------
Net liabilities pertaining
to discontinued operations $ (2,774) $ 792 $(1,982)
</TABLE>
3. SUPPLEMENTARY SCHEDULE
1998 1997
(IN THOUSANDS)
Cash paid during the three months for:
Interest $ 69 $ 27
Income taxes 162 -
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
FIRST QUARTER OF 1998 IN COMPARISON
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 40%, 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 March 31,
1998 and 1997 was $2.1 million and $1.6 million, respectively. Medical expense
as a percentage of revenue, was 77% and 81% for the three months ended March
31, 1998 and 1997, respectively.
OPERATING EXPENSES. Operating expenses for the Company were $2,593,000
during the three months ended March 31, 1998 as compared to $296,000 in 1997.
Operating expenses in 1998 includes a loss on the impairment of intangibles of
$2,014,000. Operating expenses for the three months ended March 31, 1998,
excluding the loss on impairment of intangibles was $579,000 or 21% of revenue
as compared to 15% in 1997.
LOSS/INCOME FROM DISCONTINUED OPERATIONS. The 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.
NET (LOSS) INCOME. Net loss for the three months ended March 31, 1998 was
$3,790,000 as compared to net income of $ 92,000 in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash of $570,000 as compared to $1.4
million at December 31, 1997.
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
7
<PAGE>
connection with the merger. The expiration date for the $537,000 facility is
October, 1998. Proceeds from the sale of the managed care operation in April,
1998 were used to repay these facilities.
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).
8
<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 March 31, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8-K was filed on April 29, 1998 (see item 5).
9
<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
-----------------------
Dennis A. Sokol
Chief Executive Officer
and President
Dated: June 19, 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 NARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-31-1998
<PERIOD-END> JAN-01-1998
<CASH> 570
<SECURITIES> 0
<RECEIVABLES> 206
<ALLOWANCES> 0
<INVENTORY> 10
<CURRENT-ASSETS> 2,057
<PP&E> 162
<DEPRECIATION> 36
<TOTAL-ASSETS> 2,462
<CURRENT-LIABILITIES> 7,306
<BONDS> 390
0
0
<COMMON> 9,397
<OTHER-SE> (4,843)
<TOTAL-LIABILITY-AND-EQUITY> 2,462
<SALES> 0
<TOTAL-REVENUES> 2,764
<CGS> 0
<TOTAL-COSTS> 2,138
<OTHER-EXPENSES> 2,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,966)
<INCOME-TAX> (2,035)
<INCOME-CONTINUING> (162)
<DISCONTINUED> (1,592)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,790)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
