<PAGE>
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, 1999 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.
<TABLE>
<CAPTION>
Class Outstanding at May 7, 1999
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<S> <C>
Common Stock, par value 9,567,292
$.001 per share
</TABLE>
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998 1
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 2
Consolidated Statement of Changes in
Shareholders' Equity (Deficit) -
Three Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 3. Defaults upon Senior Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
Revenue $ 2,826 $ 2,764
Cost of revenue 2,227 2,137
----------- -----------
Income from clinic operations 599 627
Operating expenses:
Salaries and benefits 166 332
General and administrative 97 233
Depreciation and amortization 94 32
----------- -----------
Total operating expenses 357 597
Income from operations 242 30
Interest income (expense), net 2 (69)
----------- -----------
Income (loss) before income tax provision 244 (39)
Income tax provision (182) (162)
----------- -----------
Income (loss) from continuing operations before
discontinued operations 62 (201)
Discontinued operations:
Income (loss) from operations of discontinued managed care
and electrical supply division 225 (1,002)
(Loss) on disposal of electrical supply division -- (591)
----------- -----------
Income (loss) from discontinued operations 225 (1,593)
Cumulative effect of change in accounting principle -- (970)
----------- -----------
Net income (loss) $ 287 $ (2,764)
Income (loss) per share - basic and diluted:
Income (loss) from continuing operations $ .01 $ (.02)
Income (loss) from discontinued operations .02 (.17)
Cumulative effect of change in accounting principle -- (.10)
----------- -----------
Income (loss) per share $ .03 $ (.29)
Weighted average number of common shares outstanding-
basic and diluted 9,567,292 9,397,292
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 754 $ 909
Accounts receivable, net of allowance
for doubtful accounts of $ 81,000
and $54,000 at March 31, 1999 and
December 31, 1998, respectively 492 471
Inventories 109 117
Prepaid expenses and other current assets 370 164
------- -------
Total current assets 1,725 1,661
Property and equipment, net 652 603
Deferred tax asset 577 577
Intangible assets, net 2,291 2,079
Other assets 77 72
------- -------
TOTAL $ 5,322 $ 4,992
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 679 $ 852
Accrued expenses 1,452 1,085
Deferred revenue 591 689
Notes payable and accrued interest payable 1,359 1,359
Net liabilities of discontinued operations 928 981
------- -------
Total current liabilities 5,009 4,966
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.001;
authorized shares 100,000,000;
shares issued 9,567,292 at
March 31, 1999 and December 31, 1998 10 10
Additional paid-in-capital 8,253 8,253
Accumulated deficit (7,950) (8,237)
------- -------
Total shareholders' equity 313 26
------- -------
TOTAL $ 5,322 $ 4,992
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF
SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Number of Common Additional Accumulated Shareholders'
Shares Stock Paid-in Capital Deficit Equity (Deficit)
--------- ------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 9,397,292 $ 10 $ 8,083 $ (9,147) $ (1,054)
Net loss -- -- -- (2,764) (2,764)
--------- ------- -------- --------- --------
Balance, March 31, 1998 9,397,292 $ 10 $ 8,083 $ (11,911) $ (3,818)
Balance, December 31, 1998 9,597,292 $ 10 $ 8,253 $ (8,237) $ 26
Net income -- -- -- 287 287
--------- ------- -------- --------- --------
Balance, March 31, 1999 9,597,292 $ 10 $ 8,253 $ (7,950) $ 313
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 287 $(2,764)
Adjustments to reconcile net income
(loss) to net cash used in
continuing operating activities:
Depreciation and amortization 94 32
Cumulative effect of change in
accounting principle -- 970
Increase in intangibles and other assets (263) (55)
Increase (decrease) in net liabilities
of discontinued operations (53) 1,178
Other changes, net (124) (294)
------- -------
Net cash used in continuing operating
activities (59) (933)
Capital expenditures (96) --
Proceeds from loan payables -- 82
------- -------
Decrease in cash and cash equivalents (155) (851)
Cash and cash equivalents, beginning of year 909 1,421
------- -------
Cash and cash equivalents, end of the period $ 754 $ 570
</TABLE>
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 ended March 31, 1999 and 1998 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, 1998
Annual Report on Form-10K.
The results of operations for the three month period ended March 31, 1999 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. SUPPLEMENTARY SCHEDULE
<TABLE>
<CAPTION>
1999 1998
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(in thousands)
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<S> <C> <C>
Cash paid during the first three months for:
Interest $ -- $ 69
Income taxes 31 162
</TABLE>
<PAGE>
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
The working capital of the Company as of March 31, 1999 and December 31,
1998 was a deficit of $3.3 million.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents as of March 31,
1999 was $754,000 as compared to $909,000 at December 31, 1998.
ACCOUNTS RECEIVABLE, NET. Accounts receivable as of March 31, 1999 was
$492,000 as compared to $471,000 as of December 31, 1998. These amounts are
net of allowance for doubtful accounts of $81,000 and $54,000, respectively
at March 31, 1999 and December 31, 1998. Days sales outstanding is
approximately 16 days as of March 31, 1999 and December 31, 1998.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1999 IN COMPARISON
WITH FIRST QUARTER OF 1998
REVENUE. Total revenue of the Company for both of the three month periods
ending March 31, 1999 and 1998 was $2.8 million. Total patient and dental visits
for the three months ended March 31, 1999 were 5,061 and 1,010, respectively, as
compared to 5,403 and 1,090, respectively, for the three months ended March 31,
1998, a decrease of 342 patient visits and 80 dental visits or a decrease of
6.3% and 7.3%, respectively. These decreases were offset by an increase of
approximately 3% in the average patient per diem charged for medical and
dental services in 1999.
COST OF REVENUES. Cost of revenues for the three months ended March 31,
1999 and 1998 was $2.2 million and $ 2.1 million, respectively. Cost of revenues
as a percentage of revenue, was 79% and 77% for the three months ended March 31,
1999 and 1998, respectively.
OPERATING EXPENSES. Operating expenses for the Company were $357,000 during
the three months ended March 31, 1999 as compared to $597,000 for the three
months ended March 31, 1998. Operating expenses as a percentage of revenue was
13% for the first quarter of 1999 as compared to 22% for the first quarter of
1998. The decrease is primarily attributable to staff reductions in overhead
that occurred during the later half of 1998.
INCOME FROM OPERATIONS. Income from operations was $242,000 for the
three months ended March 31, 1999 as compared to $30,000 for the three months
ended March 31, 1998. The increase relates primarily to the reduction of
corporate overhead expenses that occurred in the latter half of 1998.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The income from discontinued
operations for the three months ended March 31, 1999 was $225,000 as compared to
a loss of $ 1.6 million for the three months ended March 31, 1998.
<PAGE>
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 INCOME (LOSS). Net income for the three months ended March 31, 1999 was
$287,000 as compared to a net loss of $ 2.8 million in the first quarter of 1998
due to significant losses incurred in the managed care and electrical supply
business in 1998, as well as a result of the change in accounting principle
of $970,000 recorded in 1998 due to the write-off of start-up expenses that
were previously capitalized.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash of $754,000 as compared to $909,000
at December 31, 1998.
The Company believes that cash flow from existing operations will be
sufficient to satisfy its contemplated cash requirements through the second
quarter of the Year 2000. However, no assurances can be made as to the
sufficiency of the Company's cash flow to satisfy its cash requirements. The
Company's long term capital requirements beyond 1999 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 the Company's activities in the short or long term, the
Company 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 the
Company.
The Company is in default in the payment of interest (approximately
$969,000 interest was past due as of March 31, 1999) 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 is a deficit of $3.3 million. Included
in this deficit are the 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 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.
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. However, no assurances can be given that such 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.
<PAGE>
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
during the second quarter of 1999 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, 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. 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 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 a
settlement. 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. Accordingly, if this matter is
adversely determined, it could have a material adverse effect on the
Company's financial condition.
2. 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 with the sale
of stock in Dominion Healthnet, Inc. The plaintiffs claim they are entitled
to this amount based upon a buy-out agreement the plaintiffs entered into
with First Medical Corporation ( a subsidiary of the Company) when the
plaintiffs sold their interest in Dominion Healthnet, Inc., to First
Medical Corporation. The Company has retained counsel in Florida to defend
this claim. If this matter is adversely determined, it could have a
material adverse effect on the Company's financial condition.
3. In December 1998 a claim was filed against the Company by a former employee
who seeks approximately $40,000 (plus attorneys' fees) for breach of an
employment agreement. The Company does not believe that the final
resolution of this matter will have a material adverse effect on the
Company's financial condition.
4. In 1998 a claim was asserted against the Company by former consultants to
the Company alleging the Company's obligation to pay approximately $50,000
and provide further consulting contracts to the complainants. The Company
does not believe that the final resolution of this claim will have any
material adverse effect on the Company's financial condition.
<PAGE>
5. In 1998, a number of former employees of the Company and its affiliates
presented claims against the Company in State Court, Miami, Florida,
claiming in excess of $300,000 for vacation and sick pay, together with
benefits and attorneys' fees. The Company has offered to settle with the
preponderance of the plaintiffs whose claims the Company believes may have
merit. The Company has retained counsel in Florida to defend this claim.
The Company does not believe that the final resolution of this matter will
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
$969,000 interest is past due as of March 31, 1999) on the $390,000 principal
amount of 13 1/2% Notes and 14 7/8% Debentures.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
<TABLE>
<CAPTION>
EXHIBITS
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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.
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 referenced to
in Item 4(b)(1) (incorporated by reference to Exhibit 4(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 beteen the Registrant, NICO and Shawmut Bank,
N.A., as Trustee, included 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
</TABLE>
<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/ ELIAS M. NEMNOM
-----------------------------
Senior Vice President and
Chief Financial Officer
Dated: May 17, 1999
<TABLE> <S> <C>
<PAGE>
<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
QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 754
<SECURITIES> 0
<RECEIVABLES> 573
<ALLOWANCES> 54
<INVENTORY> 109
<CURRENT-ASSETS> 1,725
<PP&E> 1,512
<DEPRECIATION> 860
<TOTAL-ASSETS> 5,322
<CURRENT-LIABILITIES> 5,009
<BONDS> 390
0
0
<COMMON> 10
<OTHER-SE> 303
<TOTAL-LIABILITY-AND-EQUITY> 5,322
<SALES> 0
<TOTAL-REVENUES> 2,826
<CGS> 0
<TOTAL-COSTS> 2,227
<OTHER-EXPENSES> 357
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 244
<INCOME-TAX> 182
<INCOME-CONTINUING> 62
<DISCONTINUED> 225
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 287
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
