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 September 30, 1999.....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 November 12, 1999
- ----------------------- --------------------------------
Common Stock, par value 9,567,292
$.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 -
Nine Months Ended September 30, 1999 and 1998............1
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998.................2
Consolidated Statements of Changes in
Nine Months Ended September 30, 1999 and 1998............3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998............4
.
Notes to Consolidated Financial Statements.............5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........7-12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings....................................13-14
Item 2. Changes in Securities and Use of Proceeds...............14
Item 3. Defaults upon Senior Securities.........................14
Item 6. Exhibits and Reports on Form 8-K.....................14-15
1
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<TABLE>
PART I - FINANCIAL INFORMATION
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue .............................................. $ 2,472 $ 2,788 $ 8,169 $ 8,253
Cost of revenue ...................................... 2,057 2,384 6,463 7,030
----------- ----------- ----------- -----------
Income from clinic operations ............. 415 404 1,706 1,223
Operating expenses:
Salaries and benefits ................................ 273 144 674 550
General and administrative ........................... 252 242 673 759
Depreciation and amortization ........................ 100 128 291 193
----------- ----------- ----------- -----------
Total operating expenses ........................ 625 514 1,638 1,502
Income (loss) from operations ....................... (210) (110) 68 (279)
Interest income (expense), net ...................... 25 (31) 45 (128)
----------- ----------- ----------- -----------
Income (loss) before income tax provision ............ (185) (141) 113 (407)
Income tax provision (credit) ........................ (179) 60 (40) 387
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before discontinued operations ....................... (6) (201) 153 (794)
Discontinued operations:
Income (loss) from operations of
discontinued managed care
and electrical supply division ...................... (180) (1) 270 (1,983)
Gain on disposal of managed care
and electrical supply division ..................... -- 977 -- 4,646
----------- ----------- ----------- -----------
Income from discontinued operations .................. (180) 976 270 2,663
Extraordinary income on write-off of
accrued interest, net of taxes of $170,000 ....... 254 -- 254 --
Cumulative effect of change in
accounting principle ................................ -- -- -- (970)
----------- ----------- ----------- -----------
Net income ........................................... $ 68 $ 775 $ 677 $ 899
Income per share - basic and diluted:
Income (loss) from continuing operations ............. $ -- $ (.02) $ .02 $ (.08)
Income from discontinued operations .................. (.02) .10 .02 .28
Extraordinary income on write-off
of accrued interest ................................ . 03 -- .03 --
Cumulative effect of change in
accounting principle ................................ -- -- -- (.10)
----------- ----------- ----------- -----------
Income per share .................................... $ .01 $ .08 $ .07 $ .10
Weighted average number of common
shares outstanding-basic and diluted ................ 9,567,292 9,567,292 9,567,292 9,454,581
</TABLE>
See accompanying notes to consolidated financial statements
1
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<TABLE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 610 $ 909
Accounts receivable, net of allowance
for doubtful accounts of $91,000
and $54,000 at September 30, 1999
and December 31, 1998, respectively .......... 533 471
Inventories .................................... 105 117
Prepaid expenses and other current assets ...... 493 164
------- -------
Total current assets .................. 1,741 1,661
Property and equipment, net ...................... 1,293 603
Deferred tax asset ............................... 549 577
Intangible assets, net ........................... 2,225 2,079
Other assets ..................................... 77 72
------- -------
TOTAL ................................. $ 5,885 $ 4,992
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ............................... $ 970 $ 852
Accrued expenses ............................... 1,328 1,085
Deferred revenue ............................... 843 689
Notes payable and accrued interest payable ..... 1,117 1,359
Net liabilities of discontinued operations ..... 506 981
------- -------
Total current liabilities ............. 4,764 4,966
Notes payable to shareholders and
related parties ............................... 418 --
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.001; authorized
shares100,000,000; shares issued 9,567,292
at September 30, 1999 and December 31, 1998 10 10
Additional paid-in-capital ..................... 8,253 8,253
Accumulated deficit ............................ (7,560) (8,237)
------- -------
Total shareholders' equity ............ 703 26
------- -------
TOTAL ................................. $ 5,885 $ 4,992
</TABLE>
See accompanying notes to consolidated financial statements.
2
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<TABLE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF
SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<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 $ 9 $ 8,084 $ (9,147) $ (1,054)
Issuance of common stock .. 170,000 1 169 -- 170
Net income ................ -- -- -- 899 899
--------- --------- --------- --------- ---------
Balance, September 30, 1998 9,567,292 $ 10 $ 8,253 $ (8,248) $ 15
========= ========= ========= ========= =========
Balance, December 31, 1998 9,567,292 $ 10 $ 8,253 $ (8,237) $ 26
Net income ................ -- -- -- 677 677
--------- --------- --------- --------- ---------
Balance, September 30, 1999 9,567,292 $ 10 $ 8,253 $ (7,560) $ 703
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<CAPTION>
Nine Months Ended September 30,
1999 1998
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 677 $ 899
Adjustments to reconcile net income
to net cash used in
continuing operating activities:
Depreciation and amortization ..................... 291 193
Extraordinary income from write-off
of accrued interest ............................. (254)
Cumulative effect of change in accounting
principle ...................................... -- 970
Noncash compensation .............................. -- 170
Decrease in due from affiliates ................... -- 1,140
Decrease in deferred tax asset .................... 28 --
Increase in intangibles and other assets .......... (263) (993)
(Decrease) increase in net liabilities
of discontinued operations ...................... (475) 550
Other changes, net ................................ (35) (49)
------- -------
Net cash (used in) provided by continuing operating
activities ..................................... (31) 2,880
Capital expenditures ............................ (868) (523)
Financing activities:
Proceeds from loans from shareholders and related
parties .................................... 600 --
Repayment of loan payables and others ........... -- (2,689)
------- -------
(Decrease) in cash and cash equivalents ........... (299) (332)
Cash and cash equivalents, beginning of year ...... 909 1,421
------- -------
Cash and cash equivalents, end of the period ...... $ 610 $ 1,089
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The financial information for the three months and nine months ended September
30, 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
Report on Form-10K.
The results of operations for the three month and nine month period ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year.
2. NOTES PAYABLE TO SHAREHOLDERS AND RELATED PARTIES
Effective October 1, 1999, the Company entered into an agreement with certain
shareholders and related parties to borrow $655,000. The agreement provides that
the Company will repay these borrowings on a monthly basis over a 3 year period
with 9% interest per annum. In exchange for providing these funds to the
Company, the Company issued 1,637,500 of warrants that may be exercised at $.25
per share for one share of common stock of the Company.
5
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3. EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by weighted average
number of common shares for the period. Dilutive 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.
4. SUPPLEMENTARY SCHEDULE
1999 1998
(in thousands)
--------------
Cash paid during the nine months
ended September 30, for:
Interest $ -- $ 37
Income taxes 134 387
6
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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 September 30, 1999, the Company had cash of
$ 610,000 as compared to $ 909,000 at December 31, 1998. The decrease in cash
and cash equivalents relates primarily to $323,000 of payments made by the
Company relating to prepaid rent and $613,000 of leasehold improvements for the
new Moscow clinic facility offset by $600,000 of proceeds received from certain
shareholders and related parties. The new facility is scheduled to open in the
fourth quarter of 1999.
PREPAID EXPENSES AND OTHER CURRENT ASSETS. Prepaid expenses and other current
assets at September 30, 1999 was $ 493,000 million as compared to $164,000 at
December 31, 1998. The increase in prepaid expenses and other current assets of
$329,000 relates mainly to prepaid rent deposits of $323,000 made by the Company
in connection with the construction of the new Moscow facility.
INTANGIBLE ASSETS. Intangible assets at September 30, 1999 was $2,225,000 as
compared to $2,079,000 at December 31, 1998. The increase relates primarily to a
non-compete agreement entered into with a former employee of the Company
amounting to approximately $258,000. This amount is being amortized over a
period of five (5) years.
NOTES PAYABLE AND ACCRUED INTEREST PAYABLE. Notes payable and accrued interest
payable at September 30, 1999 was $1,117,000 as compared to $1,359,000 at
December 31, 1998, a decrease of $242,000. The decrease is attributable to the
write-off of accrued interest of $254,000 (net of taxes of $170,000) relating to
the 13 1/2% Notes and 14 7/8% Debentures due to the expiration of the statute of
limitation on the past due amounts outstanding. This amount is offset by
approximately $182,000 of current maturities on the notes payable to
shareholders and related parties.
NET LIABILITIES OF DISCONTINUED OPERATIONS. Net liabilities of discontinued
operations at September 30, 1999 was $506,000 as compared to $981,000 at
December 31, 1998. The decrease in net liabilities is due to the settlement of
certain claims relating to discontinued operations which occurred during the
first nine months of 1999.
7
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NOTES PAYABLE TO SHAREHOLDERS AND RELATED PARTIES. Notes payable to shareholders
and related parties as September 30, 1999 was $600,000 of which $ 182,000 is
classified in the balance sheet as a current liability. Effective October 1,
1999, the Company entered into an agreement with certain shareholders and
related parties to loan $655,000 to the Company. The Company is required to
repay this amount over a 36 month period with 9% interest per annum. In exchange
for these loans, the Company issued 1,637,500 of warrants that may be exercised
at $.25 per share for one share of common stock of the Company.
Results of Operations
- ---------------------
Third Quarter of 1999 in Comparison
with Third Quarter of 1998
REVENUE. Total revenue of the Company for the three months ended
September 30, 1999 and 1998 was $2.5 million and $2.8 million, respectively, a
decrease of 11.3%. Patient and dental visits for the three months ended
September 30, 1999 were 4,613 and 1,033 respectively, as compared to 5,170 and
1,018 for the three months ended September 30, 1998. This represents a decrease
of 557 patient visits or 10.8% and an increase of 15 dental visits or 1.5% for
the third quarter of 1999 as compared to the third quarter of 1998. This
decrease is primarily attributable to the Company's outdated facility in
Moscow, Russia. As a result, the Company is in the process of constructing a
new inpatient and outpatient facility in Moscow.
COST OF REVENUES. Cost of revenues for the three months ended September
30, 1999 and 1998 was $2.1 million and $ 2.4 million, respectively. Cost of
revenues as a percentage of revenue, was 83.2% and 85.5% for the three months
ended September 30, 1999 and 1998, respectively. The decrease relates to a
reduction of staffing levels as a result of the decrease in the number of
visits.
OPERATING EXPENSES. Operating expenses for the Company were $625,000
during the three months ended September 30, 1999 as compared to $ 514,000 in
1998. Operating expenses as a percentage of revenue was 25.3% in 1999 as
compared to 18.4% in 1998. Included in operating expenses for the three months
ended September 30, 1999 was approximately $33,000 of additional salary expense
incurred in connection with the construction of the new facility and $13,000 of
additional amortization expense relating to the amortization of the non-compete
agreement.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations for the three months ended September 30, 1999 was $180,000 as
compared to income of $ 976,000 for the three months ended September 30, 1998.
Included in income from discontinued operations for the three months ended
September 30, 1998 was a gain of $ 977,000 resulting from the sale of the
Indiana and Texas managed care operations.
8
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EXTRAORDINARY INCOME ON WRITE-OFF OF ACCRUED INTEREST. The Company has
reflected the write-off of past due accrued interest of $254,000, net of taxes
of $170,000, on the 13 1/2% Senior Subordinated Notes and 14 7/8% Subordinated
Debentures as extraordinary income in the consolidated statement of operations
for the three months ended September 30, 1999. The past due interest relates to
notes and debentures that remained 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 these notes and debentures. The
write-off of the past due accrued interest reflects the Company's view that this
obligation is no longer a liability of the Company since the statute of
limitations has expired in which a claim based upon such notes and debentures
could have been presented.
NET INCOME. Net income for the three months ended September 30, 1999 was
$68,000 as compared to $ 775,000 in the third quarter of 1998 due to the factors
noted above.
Results of Operations
- ---------------------
First Nine Months of 1999 in Comparision
with First Nine Months of 1998
REVENUE. Total revenue of the Company for the nine months ended
September 30, 1999 and 1998 was $8.2 million and $8.3 million, respectively, a
decrease of 1%. Patient and dental visits for the nine months ended September
30, 1999 were 14,606 and 3,165 respectively, as compared to 16,187 and 3,262 for
the nine months ended September 30, 1998. This represents a decrease of 1,581
patient visits or 9.8% and 97 dental visits or 3.0%, for the first nine months
of 1999 as compared to the first nine months of 1998. This decrease is primarily
attributable to the Company's outdated facility in Moscow, Russia. As a result,
the Company is in the process of constructing a new inpatient and outpatient
facility in Moscow. Included in revenues for the nine months ended September 30,
1999 was $232,000 relating to reimbursement of legal fees and other expenses
paid on behalf of the Hospital Corporation International, Ltd. and American
Medical Centers, Inc. litigation.
COST OF REVENUES. Cost of revenues for the nine months ended September
30, 1999 and 1998 was $6.5 million and $7.0 million, respectively. Cost of
revenues as a percentage of revenue, was 79.1% and 85.2% for the nine months
ended September 30, 1999 and 1998, respectively. The decrease relates to a
reduction of staffing levels as a result of the decrease in the number of
visits.
OPERATING EXPENSES. Operating expenses for the Company were $1,638,000
during the nine months ended September 30, 1999 as compared to $ 1,502,000 in
1998. Operating expenses as a percentage of revenue was 20.1% and 18.2%,
respectively, in 1999 and 1998.Included in operating expenses in 1999 is
approximately $75,000 of additional salary expense incurred in connection with
the construction of the new facility and $39,000 of additional amortization
expense relating to the amortization of the non-compete agreement.
9
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INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations
for the nine months ended September 30, 1999 was $270,000 as compared to $2.7
million for the nine months ended September 30, 1998. The income from
discontinued operations for the nine months ended September 30, 1999 relates
primarily to the settlement of certain claims relating to discontinued
operations. Included in income from discontinued operations for the nine months
ended September 30, 1998 was a net gain of $2.7 million resulting from the sale
of the Company's managed care and electrical supply business.
EXTRAORDINARY INCOME ON WRITE-OFF OF ACCRUED INTEREST. The Company has
reflected the write-off of past due accrued interest of $254,000, net of taxes
of $170,000, on the 13 1/2% Senior Subordinated Notes and 14 7/8% Subordinated
Debentures as extraordinary income in the consolidated statement of operations
for the three months ended September 30, 1999. The past due interest relates to
notes and debentures that remained 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 these notes and debentures. The
write-off of the past due accrued interest reflects the Company's view that this
obligation is no longer a liability of the Company since the statute of
limitations has expired in which a claim based upon such notes and debentures
could have been presented.
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 nine months ended September 30,
1998 relates to the write-off of start-up costs of certain operations pursuant
to Statement of Position 98-5.
NET INCOME. Net income for the nine months ended September 30, 1999 was
$ 677,000 as compared to $899,000 for the nine months ended September 30, 1998
due primarily to the factors noted above.
Liquidity and Capital Resources
- -------------------------------
The working capital of the Company as of September 30, 1999 is at a
deficit of $3.0 million as compared to $3.3 million as of December 31, 1998.
Cash and cash equivalents at September 30, 1999 was $610,000 as compared to
$909,000 at December 31, 1998, a decrease of $299,000. The decrease in cash
results from capital expenditures of $868,000 primarily for the new Moscow
facility and $31,000 of cash flow used in operations, offset by $600,000 of
borrowings from shareholders and related parties. Included in the working
capital deficit as of September 30, 1999 are the notes payable and accrued
interest of approximately $ 934,000 of which the Company is unable to locate the
note holders.
10
<PAGE>
The Company is in default on the payment of interest (approximately
$544,000 interest was past due as of September 30, 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 Company has determined that $254,000, net of taxes of
$170,000 of the past due accrued interest is no longer an obligation of the
Company since the statute of limitations has expired in which a claim based upon
such notes and debentures could have been presented. Accordingly, the Company
has written off this amount and has reflected it as extraordinary income in the
consolidated statement of operations in the three months and nine months ended
September 30, 1999.
As of September 30, 1999, the Company does not have any existing lines
of credit. In order to complete the new Moscow facility, the Company intends to
obtain additional financing from certain of its shareholders.
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. This could cause those systems to process and record
information incorrectly or possibly fail to function in the year 2000.
The Company primarily uses general business applications on a PC-based
system 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
installing a new billing and scheduling system for its clinic operations. Such
system is Year 2000 compliant.
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 has sent inquires to these
vendors and third-party payors to ascertain compliance and has obtain assurances
from certain of these vendors that they are Year 2000 compliant. However,
certain vendors did not reply or cannot provide Year 2000 compliant services and
as a result the Company may need to locate alternative sources for goods and
services.
The Company believes that the most reasonably likely worse case scenario
with respect to the Year 2000 issues is the possibility that medical equipment
and systems used to diagnosis patients will result in the Company experiencing
difficulty in providing proper treatment to patients. In addition, the Company
also deals with numerous client customers and insurance companies and such Year
2000 issues may result in delays in payment to the Company for services rendered
which could adversely affect the Company's results of operations and liquidity.
11
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The Company believes that it is taking reasonable and adequate measures
to address Year 2000 issues. However, there can be no assurance that the
Company's information systems, medical equipment and other systems will be Year
2000 compliant by December 31, 1999, or that suppliers and third-party insurance
payors are, or will be Year 2000 compliant, or that the cost required to address
the Year 2000 issue will not have a material adverse effect on the Company's
business, financial condition or results of operations. The Company's clinic
operations are located in Eastern European countries. To the extent that the
Year 2000 problems affect the Company's ability to provide adequate patient
care, the Company may cease providing such services to patients. In addition,
failures of the banking system, basic utility providers, telecommunication
providers and other services as a result of Year 2000 problems, could have a
material adverse effect on the ability of the Company to conduct its business.
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.
12
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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
Company disputes that it is such successor-in-interest. 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 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 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. In
September 1999, the Company reached an agreement with the plaintiffs to
settle this claim for $165,000.
3. 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 claimants.
Subsequent to September 30, 1999, the Company and the claimants have
reached an agreement in principal pursuant to which this claim will be
withdrawn in exchange for the issuance to the claimants of 300,000
shares of the Company's common stock.
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4. 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 settled with the majority
of the plaintiffs for approximately $30,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective October 1, 1999, the Company entered into an agreement with certain
shareholders and related parties to borrow $655,000. The agreement provides that
the Company will repay these borrowings on a monthly basis over a 3 year period
with 9% interest per annum. In exchange for providing these funds to the
Company, the Company issued 1,637,500 of warrants that may be exercised at $.25
per share for one share of common stock of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company continues to be in default in the payment of interest (approximately
$544,000 interest is past due as of September 30, 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 September 30, 1999.
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
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).
14
<PAGE>
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).
10.0 Employment Agreement, dated as of April 1, 1999, by and between American
Medical Centers Management Company, Ltd. and George D. Rountree
(incorporated herein by reference to Exhibit 10.0 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
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
15
<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
-------------------------
Elias M. Nemnom
Senior Vice President and
Chief Financial Officer
Dated: November 15, 1999
16
<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
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000058526
<NAME> First Medical Group, Inc.
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