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SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
/x/ Preliminary Information Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
/ / Definitive Information Statement
FIRST MEDICAL GROUP, INC.
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(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
/x/No fee required
/ /Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
-----------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
-----------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------
(5) Total fee paid:
-----------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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FIRST MEDICAL GROUP, INC.
1055 Washington Boulevard, Stamford, CT 06901
(203) 327-0900
INFORMATION STATEMENT
INTRODUCTION
This Information Statement is being furnished by First Medical Group, Inc., a
Delaware corporation, to holders of shares of its common stock, par value $.001.
On ____________, 2000, the holders of approximately 52% of our outstanding
common stock, consented to the sale to AMCMC Acquisition Corp., a British Virgin
Islands corporation, of substantially all of our assets, consisting of all of
the shares of ten companies owned by us directly or through one of our
wholly-owned subsidiaries, pursuant to an Asset Purchase Agreement, dated as of
January 31, 2000, by and between First Medical Group, Inc. and AMCMC Acquisition
Corp. The consideration to be paid by AMCMC Acquisition Corp. under the Asset
Purchase Agreement is equal to a cash payment of $700,000 and an assumption of
$1,249,617 of First Medical Group's liabilities (as at December 31, 1999) and
the surrender of 5,754,760 shares of our stock valued as of January 31, 2000 at
$.125 per share or an aggregate of $719,345. AMCMC Acquisition Corp. is
controlled indirectly by Mr. Dennis A. Sokol, our Chairman of the Board and
Chief Executive Officer and other current shareholders of First Medical Group.
The shares surrendered in the proposed sale will be those owned by shareholders
having a direct or indirect interest in AMCMC Acquisition Corp. In a separate
transaction, Crasvitsa, Ltd., a British Virgin Islands corporation, will assume
liabilities as at December 31, 1999 in the amount of $934,384 for notes payable
and accrued interest. After the proposed sale in completed, we will be left with
cash assets of approximately $700,000, and liabilities of $451,155.
This Information Statement is first being mailed to stockholders on or about
February 14, 2000, and it is accompanied by a Form 10-K annual report for the
fiscal year ended December 31, 1998 and the 10-Q quarterly report for the
quarter ended September 30, 1999 attached hereto and incorporated herein as
Annex C and Annex D, respectively.
THIS IS AN INFORMATION STATEMENT.
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE NOT REQUESTED TO SEND US A PROXY.
THE PROPOSED SALE IS CONDITIONED UPON, AMONG OTHER THINGS, THE SECURING OF ALL
NECESSARY APPROVALS AND CONSENTS. THERE CAN BE NO ASSURANCE THAT THE CONDITIONS
TO THE PROPOSED SALE WILL BE SATISFIED OR WAIVED AND THAT THE PROPOSED SALE WILL
BE CONSUMMATED. SEE "THE ASSET PURCHASE AGREEMENT--CONDITIONS."
Since the proposed sale involves a sale of assets, all the remaining
shareholders will retain their equity interest in First Medical Group, Inc.
following the consummation of the sale, and First Medical Group, Inc. will have
received the proceeds from the proposed sale. See "The Proposed Sale--Use of
Proceeds; Conduct of Business Following the Proposed Sale."
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THE INFORMATION CONTAINED REGARDING AMCMC ACQUISITION CORP. AND CRASVITSA LTD."
HAS BEEN SUPPLIED BY AMCMC ACQUISITION CORP. AND CRASVITSA LTD. WE HAVE NOT
AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT AND, IF GIVEN OR MADE, YOU
MUST NOT RELY UPON SUCH INFORMATION OR REPRESENTATION AS HAVING BEEN AUTHORIZED
BY US OR ANY OTHER PERSON.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance with the Exchange
Act we file reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). You may inspect and copy the
reports, proxy statements and other information filed by us with the Commission
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and as well as the Commission's
Regional Offices. You may also call the Commission at 1-800-SEC-0330 for more
information about the public reference room, how to obtain copies of documents
by mail or how to access documents electronically on the Commission's Web site
at (http://www.sec.gov).
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INTRODUCTION..................................................................i
AVAILABLE INFORMATION........................................................ii
SUMMARY.......................................................................1
The Stockholder Consent.....................................................
The Company.................................................................
The Proposed Sale...........................................................
THE STOCKHOLDER CONSENT........................................................
THE PROPOSED SALE..............................................................
Background of the Proposed Sale.............................................
Approval by the Board of Directors..........................................
Approval of the Special Committee; Reasons for the Proposed Sale............
Opinion of the Advisor......................................................
Certain Tax Consequences....................................................
Use of Proceeds; Conduct of Business Following the Proposed Sale............
Interests of Certain Persons in the Proposed Sale...........................
Accounting Treatment........................................................
Dissenters' Appraisal Rights................................................
THE ASSET PURCHASE AGREEMENT...................................................
Assets to be Sold and Liabilities to be Assumed.............................
Purchase Price..............................................................
Representations and Warranties and Certain Covenants........................
Employment and Employee Benefit Plans.......................................
Conditions..................................................................
Termination.................................................................
Indemnification.............................................................
ASSUMPTION BY CRASVITSA LTD. OF THE LEHIGH NOTES...............................
PRO FORMA FINANCIAL INFORMATION................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................
MARKET PRICE DATA..............................................................
ANNEXES
A. Fairness Opinion of the Advisor...........................................
B. Asset Purchase Agreement..................................................
C. Form 10-K Annual Report for fiscal year ended December 31, 1998...........
D. Form 10-Q Annual Report for fiscal quarter ended September 30, 1999.......
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained in this Information
Statement and the attached Annexes. Unless otherwise defined, capitalized terms
used in this summary have the meanings ascribed to them elsewhere in this
Information Statement. You are urged to read this Information Statement and the
Annexes in their entirety.
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THE STOCKHOLDER CONSENT
STOCKHOLDER VOTES WILL NOT BE SOLICITED. The General Corporation Law of
Delaware allows us to sell all, or substantially all, of our assets as
authorized by a resolution adopted by the holders of the majority of our
outstanding stock entitle to vote thereon. Dennis A. Sokol, SAJH Partners,
Generale de Sante and Elena Korchagina, who together own approximately 52%
of our stock, intend to consent in writing to the adoption of the Asset
Purchase Agreement and therefore, no vote of any other stockholder is
necessary and stockholder votes are not being solicited. See "The
Stockholder Consent."
THE COMPANY
FIRST MEDICAL GROUP, INC. We own and operate medical clinics in Eastern
Europe. Through our subsidiary management company, American Medical Centers
Management Company, Ltd. ("AMC"), we own and operate outpatient and
ancillary healthcare facilities modeled after the American healthcare
system. AMC's healthcare facilities are currently structured as "A," "B,"
or "C" type facilities. The "C" type facility is a full service outpatient
primary care center with those services provided as listed below, dependent
upon both market and demand. The "B" type clinic is similar to a "C" model
but with increased diagnostics, inpatient care facilities and between ten
to fifteen overnight medical beds. The "A" type facility provides both
inpatient and outpatient care with 50 to 300 medical beds.
Our services include but are not limited to: trauma and emergency care,
general practice, family practice, full diagnostics, radiology, pharmacy,
dentistry, pathology, psychiatry and most specialty groups such as
cardiology, pediatrics, oncology, gynecology, orthopedics, and dermatology.
We strive to deliver a comprehensive range of medical services to meet the
specific needs of our clients in each of our unique markets. We employ
American board certified doctors, nurses, and ancillary personnel.
Nationals are also employed after being fully credentialed.
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SUMMARY, CONTINUED
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Through our subsidiaries, we currently operate five "C" locations in
Moscow, Russia; St. Petersburg, Russia; Kiev, Ukraine; Prague in the Czech
Republic; and Warsaw, Poland.
THE PROPOSED SALE
BACKGROUND OF THE PROPOSED SALE. Our business is derived primarily from
the operations of our subsidiaries in Russia and the Ukraine, and lending
institutions are reluctant to invest in these markets because of economic
conditions. Plans to build two "A" facilities in Moscow and Warsaw and two
additional "B" facilities have been cancelled because of our inability to
obtain the necessary financing. Likewise, our plans calling for additional
upgrades of current facilities in Eastern Europe and Middle Asia, and
expansion to the Middle East, Latin America, and the Pacific Basin have
been tabled because management has determined that it is unlikely that we
will be able to obtain the needed financing.
Our sole remaining construction project is a "B" facility which is
completing construction in Moscow, Russia which is scheduled to open in the
1st quarter of 2000. We have been unable to obtain financing for completion
of construction of our Moscow facility, and we have therefore been required
to expend our own cash and working capital and borrow from shareholders and
related parties. These loans have been necessary to obtain operating funds
before our cash reserves were depleted.
To date, we remain unable to obtain the necessary financing to support our
remaining construction project, and we have expended our own capital to the
extent that we no longer have sufficient cash on hand to sustain and
continue our operations. In addition, anticipated losses for the quarter
ending December 31, 1999, as projected, will eliminate our net
stockholders' equity. Our Chairman of the Board and Chief Executive
Officer, Mr. Dennis Sokol loaned us $300,000 in late 1999. In addition,
Mr.. Sokol recently exercised, at $.125 per share, warrants for the
purchase of 1,500,000 shares of our common stock in consideration of (i)
his assumption of accounts payable of First Medical Group aggregating
$125,000, and (ii) payment to First Medical Group of $62,500 in cash. The
Board of Directors has therefore found it to be in the best interest of
First Medical Group to complete the proposed sale as soon as practicable.
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SUMMARY, CONTINUED
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THE PROPOSED SALE, CONTINUED
INDEPENDENT SPECIAL COMMITTEE. The Board of Directors believes that the
proposed sale is in the best interests of First Medical Group, Inc.,
and has approved the proposed sale. The Board of Directors' approval of
the proposed sale is based upon a number of factors described in this
Information Statement, including the recommendation of the Independent
Special Committee and the Advisor. Mr. Dennis A. Sokol, Chairman of the
Board and Chief Executive Officer, controls a company which owns the
majority of AMCMC Acquisition Corp. Since Mr. Sokol therefore has a
direct interest in the proposed sale, the Board created an Independent
Special Committee to review and approve any actions to be taken by us
regarding the proposed sale in order to make an objective determination
that the sale is in the best interest of First Medical Group. See "The
Proposed Sale -- Approval by the Special Committee; Reasons for the
Proposed Sale" and "The Proposed Sale--Interests of Certain Persons in
the Proposed Sale."
THE ADVISOR. The Special Committee appointed Mercer Capital Management,
Inc. of Memphis, Tennessee as the Advisor in assessing the fairness of
the consideration, from a financial point of view, to First Medical
Group of the proposed sale of substantially all of our operating assets
to AMCMC, and to render an opinion as to the fairness from a financial
point of view of the consideration to be received by us pursuant to the
Asset Purchase Agreement. After reviewing the fairness opinion of the
Advisor, the Special Committee approved proceeding with the proposed
sale. See "The Proposed Sale -- Approval by the Board of Directors, --
Approval of the Special Committee; Reasons for the Proposed Sale, --
Opinion of the Advisor," and the Opinion of the Advisor at Annex A.
CERTAIN TAX CONSEQUENCES. The proposed sale will be a taxable
transaction to us for United States Federal income tax purposes.
However, because of net operating loss carry-forwards, we anticipate
that there will be no taxes due as a result of the proposed sale. See
"The Proposed Sale --- Certain Tax Consequences."
USE OF PROCEEDS; CONDUCT OF BUSINESS FOLLOWING THE PROPOSED SALE. The
proceeds from the proposed sale will be used to repay outstanding
indebtedness of First Medical Group in the amount of $450,000
representing accrued liabilities and accounts payable, and the balance
of the
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SUMMARY, CONTINUED
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proceeds will be used by us as working capital to sustain us until a
strategic partner or other investor is identified. Following the
proposed sale, we will have no income-generating assets, but will have
continued operating expenses. After the sale, we intend to work with
qualified financial and management advisors to identify and secure a
strategic partner or other investor for First Medical Group in an
effort to maximize value for the shareholders of First Medical Group.
See "The Proposed Sale-- Use of Proceeds; Conduct of Business Following
the Proposed Sale."
INTERESTS OF CERTAIN PERSONS IN THE PROPOSED SALE. The major
stockholders of AMCMC Acquisition Corp. are The Falcon Group, Inc., a
Cayman Islands company, Generale de Sante, a European company, and Ms.
Elena Korchagina, a private individual. The Falcon Group, Inc. owns 82%
of the stock of AMCMC Acquisition Corp., and is owned by the family of
Mr. Dennis A. Sokol. Mr. Sokol is presently Chief Executive Officer and
Chairman of the Board of First Medical Group. Mr. Sokol, together with
SAJH Partners, of which Mr. Sokol is a general partner, own 32.6% of
our common stock. Generale de Sante owns 15% of AMCMC Acquisition Corp
and 18.5% of our common stock. Ms. Korchagina owns 3% of AMCMC
Acquisition Corp and .9% of our common stock. At the closing of the
proposed sale, Mr. Sokol will resign all his positions with us and
surrender all of his direct or indirect interest in First Medical
Group, including his outstanding stock and all of the outstanding stock
of SAJH Partners, along with any options and warrants for the
acquisition of our common stock. Likewise, at the closing of the sale,
Generale de Sante and Ms. Korchagina will surrender for cancellation
their shares of stock. See "The Proposed Sale -- Interests of Certain
Persons in the Proposed Sale"
As part of the proposed sale, Crasvitsa Ltd., a British Virgin Islands
company controlled by Mr. Sokol, will assume notes payable by First
Medical Group in the principal amount of $390,000 and accrued interest,
which equaled $934,384 as of December 31,1999. See "The Proposed Sale
-- Interests of Certain Persons in the Proposed Sale" and "Assumption
by Crasvitsa Ltd. of the Lehigh Notes."
DISSENTERS' APPRAISAL RIGHTS. The General Corporation Law of Delaware
does not provide dissenters' appraisal
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SUMMARY, CONTINUED
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rights to stockholders in the event of a sale of assets. See "The
Proposed Sale -- Dissenters' Appraisal Rights."
THE ASSET PURCHASE AGREEMENT
ASSETS TO BE SOLD AND LIABILITIES TO BE ASSUMED. We have agreed to sell
to AMCMC Acquisition Corp. substantially all of our assets and
intellectual property, which constitute all of our business relating to
our international division consisting of the stock of ten of our
directly or indirectly wholly-owned subsidiaries. Pursuant to the Asset
Purchase Agreement, AMCMC Acquisition Corp. will assume and thereafter
be responsible for paying and satisfying certain of the Company's
liabilities. Assumed liabilities as at December 31, 1999 will total
$1,249,617 ( taking into consideration the accounts payable assumed on
exercise by Mr. Sokol of warrants for the purchase of 1 million shares
of our stock), consisting of $149,567 in accounts payable, $433,550 in
liabilities relating to discontinued operations and $666,500 in notes
payable to certain shareholders and related parties. See "The Asset
Purchase Agreement -- Assets to be Sold and Liabilities to be Assumed"
and the Asset Purchase Agreement at Annex B.
As part of the proposed sale, Crasvitsa Ltd., a British Virgin Islands
company controlled by Mr. Sokol, will assume a notes payable by First
Medical Group in the principal amount of $390,000 and accrued interest
which equaled $934,384 as of December 31, 1999. See "Assumption by
Crasvitsa Ltd. of the Lehigh Notes."
PURCHASE PRICE. The Asset Purchase Agreement provides for consideration
to be delivered to us at the closing of $700,000 in cash (after
reducing the $1,000,000 purchase price by $300,000 to be repaid to Mr.
Sokol), the surrender of 5,754,760 shares of stock held by Mr. Sokol,
SAJH Partners, General de Sante and Elena Korchagina having a value as
at January 31, 2000 of $.125 per share or an aggregate of $719,345 and
assumption of $1,249,617 in liabilities. First Medical Group will be
left with cash in the amount of approximately $700,000, and
liabilities totaling $451,155.
CONDITIONS TO THE PROPOSED SALE. The obligations of First Medical Group
to consummate the proposed sale are subject to the satisfaction or
waiver of certain conditions customary to a transaction of this nature,
including, among others, the occurrence of certain events described in
"The Asset Purchase Agreement-Conditions."
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SUMMARY, CONTINUED
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TERMINATION. The Asset Purchase Agreement may be terminated and
abandoned at any time prior to the Closing Date under certain
circumstances upon written notice by either AMCMC or First Medical
Group, or by mutual written consent of AMCMC and First Medical Group.
See "The Asset Purchase Agreement--Termination."
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THE STOCKHOLDER CONSENT
Section 271 of the General Corporation Law of Delaware permits a Delaware
corporation to sell all, or substantially all, of its assets as its Board of
Directors deems expedient and in the best interests of the Company, when and as
authorized by a resolution adopted by the holders of a majority of the
outstanding stock of the Company entitled to vote thereon. Dennis A. Sokol, SAJH
Partners, Generale de Sante, and Elena Korchagina together own approximately
[52]% of our outstanding common stock. In order to satisfy a condition to the
closing of the Asset Purchase Agreement, these majority shareholders intend to
consent in writing to the adoption of the Asset Purchase Agreement pursuant to
Section 271 of the General Corporation Law of Delaware. Accordingly, no vote oF
any other stockholder is necessary and stockholder votes are not being solicited
THE PROPOSED SALE
BACKGROUND OF THE PROPOSED SALE
Our inability to borrow money to sustain a construction project in Moscow that
is nearing completion has resulted in severe cash flow difficulties for First
Medical Group, and it is because of these difficulties that the Board of
Directors has determined that it is in our best interest to proceed with the
proposed sale as quickly as possible. Our business is derived primarily from the
operations of our subsidiaries in Russia and the Ukraine. Currently, lending
institutions are reluctant to invest in these markets because of economic
conditions and we have therefore been unable to obtain financing for expansion
or construction.
AMC's healthcare facilities are currently structured as "A," "B," or "C" type
facilities. The "C" type facility is a full service outpatient primary care
center with those services provided as listed below, dependent upon both market
and demand. The "B" type clinic is similar to a "C" model but with increased
diagnostics, inpatient care facilities and between ten to fifteen overnight
medical beds. The "A" type facility provides both inpatient and outpatient care
with 50 to 300 medical beds. We currently operate five "C" locations in Moscow,
Russia; St. Petersburg, Russia; Kiev, Ukraine; Prague in the Czech Republic; and
Warsaw, Poland. Plans to build two "A" facilities in Moscow and Warsaw and two
additional "B" were cancelled because of our inability to obtain the necessary
financing. Likewise, future plans calling for additional upgrades of current
facilities in Eastern Europe and Middle Asia, and expansion to the Middle East,
Latin America, and the "Pacific Basin" have been tabled because management has
determined that it is unlikely that we will be able to obtain the needed
financing. Our sole remaining construction project is a "B" facility which is
completing construction in Moscow, Russia and which is scheduled to open in the
first quarter of 2000.
Because of our inability to obtain financing for the construction of our "B"
facility, we were required to expend virtually all of our cash and own working
capital and borrow money from our shareholders and related parties. Effective
October 1, 1999, we entered into an agreement with certain shareholders and
related parties to borrow $655,000. The agreement provides that we will repay
these borrowings on a monthly basis over a 3 year period with 9% interest per
annum.
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In exchange for providing these funds to us, we issued 1,637,500 of
warrants which may be exercised at $.25 per share of our common stock.
At a special meeting held on November 12, 1999, the Board of Directors approved
an additional borrowing of $300,000 from Mr. Dennis A. Sokol, Chairman of the
Board and Chief Executive Officer of the Company, to be repaid by us in 36 equal
monthly installments with level principal and interest at an interest rate of 9%
per annum. The Board found that the loan was necessary because our construction
project commitment was critical, making it necessary to obtain operating funds
before our cash reserves were depleted. This loan is to be repaid by reducing
the purchase price of $1,000,000 to be paid in connection with the proposed sale
by $300,000.
To date, we remain unable to obtain the necessary financing to support our
remaining construction project, and we have expended our own capital to the
extent that we no longer have sufficient cash on hand to sustain and continue
our operations. Projected revenues for the 4th quarter of 1999 are down
approximately $450,000 or 16.7% from last year. As a result, expected losses for
the quarter will eliminate our net stockholder equity, which, as of September
30, 1999, was $703,000. Recently, Mr. Sokol found it necessary to provide us
with an additional $62,500 in cash in order for us to sustain our operations
and, for such consideration, exercised warrants for the purchase of 500,000
shares of our common stock. The Board of Directors has therefore found it to be
in the best interest of First Medical Group to complete the sale as soon as
practicable.
APPROVAL BY THE BOARD OF DIRECTORS
The Board of Directors believes that the proposed sale is expedient and in the
best interests of First Medical Group and its stockholders, and has approved the
proposed sale. The Board of Directors' approval of the proposed sale is based
upon a number of factors, including the recommendation of the Independent
Special Committee and the Advisor. Mr. Dennis A. Sokol, Chairman of the Board
and Chief Executive Officer, controls a company which owns the majority of AMCMC
Acquisition Corp. Since Mr. Sokol therefore has a direct interest in the
proposed sale, the Board created an Independent Special Committee to review and
approve any actions to be taken by us regarding the proposed sale in order to
make an objective determination that the sale is in the best interest of First
Medical Group. See "The Proposed Sale -- Approval by the Special Committee;
Reasons for the Proposed Sale" and "The Proposed Sale--Interests of Certain
Persons in the Proposed Sale."
The Board and the Independent Committee considered the following factors:
1. The fact that our current cash flow situation renders continued operation of
First Medical Group impracticable, and that both the Board and the Independent
Committee recognize the need to act quickly in order to retain any shareholder
value.
2. Current industry, economic and financial market conditions relating to First
Medical Group, as well as its financial condition, assets, liabilities,
businesses and operations, both on a historical and prospective basis as
reflected in the Opinion of the Advisor. See Opinion of the Advisor at Annex A.
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3. The results of our efforts to identify alternatives with respect to the
proposed sale, including but not limited to extensive efforts to secure
financing, liquidation, "going private", the unavailability of any other
prospective purchaser and taking into consideration the availability of the
prospective buyer, it was the Board of Directors' judgment that a disposition
of our assets on terms more favorable to First Medical Group and its
stockholders than the proposed sale would not be likely
4. The proposed terms and structure of the proposed sale, including the terms of
the Asset Purchase Agreement, AMCMC Acquisition Corp.'s desire to acquire the
assets and its unwillingness to acquire First Medical Group as a whole. See "The
Asset Purchase Agreement--Indemnification."
5. Our ability to utilize the net cash proceeds received from the proposed
sale to repay indebtedness and still maintain sufficient working capital to
identify and secure a strategic partner or other investor to operate First
Medical Group and maximize value for our shareholders. See "Use of Proceeds;
Conduct of Business Following the Proposed Sale."
After the proposed sale in completed, we will be left with cash assets of
approximately $700,000 and liabilities as at December 31, 1999 of $451,155,
consisting of $312,541 in accrued liabilities, $108,614 in accounts payable, and
$30,000 in liabilities relating to discontinued operations. A material
disadvantage of the proposed sale is that First Medical Group will be divested
of all of its revenue-producing assets. However, the Board of Directors has
concluded, after due consideration of the proposed sale and alternatives to it,
that there is no practical alternative to the proposed sale that would yield
better value for the shareholders. Although revenue was generated by the assets,
continuing losses were substantial due to our inability to obtain financing for
the construction in Moscow of the "B" facility, and the resulting cash flow
crisis, and management believes that the proposed sale will serve First Medical
Group and its shareholders by retaining some shareholder value. Following the
proposed sale, net stockholder equity is anticipated to go from a deficit
position to approximately $250,000.
In view of the variety of factors considered in connection with its evaluation
of the proposed sale, the Board of Directors did not find it practicable to, and
did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determination.
APPROVAL OF THE SPECIAL COMMITTEE
On November 10, 1999, Mr. Sokol, on behalf of AMCMC Acquisition Corp., submitted
an offer to the Board of Directors of First Medical Group to purchase
substantially all of our assets. At a special meeting held on November 12, 1999,
the Board created an Independent Special Committee consisting of non-interested
directors Richard A. Berman (chairperson), Bernard Fishman and Dr. Armin
Weinberg and authorized them to consider and negotiate with our management the
terms of the proposed sale. No actions were or are to be taken by First Medical
Group in connection with the proposed sale unless reviewed and approved by the
Special Committee. The Special Committee then held a separate meeting in which
they retained Patton Boggs LLP as special counsel and appointed Mercer Capital
Management, Inc. of Memphis, Tennessee (the "Advisor") to assess the fairness to
First Medical Group of the proposed sale. On
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January 27, 2000 after reviewing the fairness opinion of the Advisor, together
with the financial condition of First Medical Group, the Special Committee
approved proceeding with the proposed sale.
OPINION OF THE ADVISOR
The Advisor was engaged by us as our independent financial advisor in assessing
the fairness of the price, from a financial point of view, to First Medical
Group of the proposed sale transaction in which we would sell substantially all
of our operating assets to the AMCMC Acquisition Corp., and to render an opinion
as to the fairness from a financial point of view of the consideration to be
received by us pursuant to the Asset Purchase Agreement. The Advisor has
delivered to the Board of Directors its opinion to the effect that, as of the
date of its opinion and subject to the assumptions made, matters considered and
limits of the review undertaken, as set forth in such opinion, the consideration
to be received by First Medical Group pursuant to the proposed sale is fair from
a financial point of view.
A copy of the opinion of the Advisor is attached to this Information Statement
as Annex A. The attached opinion sets forth the assumptions made, matters
considered, qualifications to the opinion, the scope and limitations of the
review undertaken and procedures followed by the Advisor and should be read in
its entirety. See "The Proposed Sale--Opinion of Advisor."
The following is a summary of the Advisor's opinion. In connection with
preparing its opinion the Advisor reviewed a number of documents, including:
[LIST OF DOCUMENTS AND SUMMARY OF ADVISOR'S OPINION TO BE PROVIDED]
This analysis was presented to the Board of Directors of First Medical Group.
Pursuant to the terms of the Advisor's engagement, we agreed to pay the Advisor
a fee for rendering a fairness opinion in connection with the proposed sale. The
Advisor's aggregate fee for rendering the fairness opinion in connection with
the proposed sale will be approximately $25,000.
CERTAIN TAX CONSEQUENCES.
The proposed sale will be a taxable transaction to the Company for United States
Federal income tax purposes. However, because of net operating loss
carry-forwards, the Company anticipates that there will be no taxes due as a
result of the proposed sale.
USE OF PROCEEDS; CONDUCT OF BUSINESS FOLLOWING THE PROPOSED SALE.
After the proposed sale in completed, we will be left with cash assets of
approximately $700,000 and liabilities as at December 31, 1999 of $451,155.
The proceeds from the proposed sale will be used to pay obligations of First
Medical Group, both currently due and owing, and as they come due in the
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future, and to sustain us until we can identify and secure a strategic partner
or other investor. Following the proposed sale, First Medical Group will have no
income-generating assets, but will have continued expenses of operation. The
Board of Directors believes that, with at least some cash and a net positive
stockholder equity, the Company is positioned to identify a strategic partner.
The Special Committee is evaluating several alternatives, including, without
limitation, possible business combinations and the retention of qualified
management to operate First Medical Group while seeking strategic partners or
other investors.
INTERESTS OF CERTAIN PERSONS IN THE PROPOSED SALE
The major stockholders of AMCMC Acquisition Corp. are the The Falcon Group,
Inc., a Cayman Islands company, Generale de Sante, a European company, and Ms.
Elena Korchagina, a private individual. The Falcon Group, Inc. owns 82% of the
stock of AMCMC Acquisition Corp., and is owned by the family of Mr. Dennis A.
Sokol. Mr. Sokol is presently Chief Executive Officer and Chairman of the Board
of First Medical Group. Mr. Sokol, together with SAJH Partners, of which Mr.
Sokol is a general partner, own 32.6% of our common stock. Generale de Sante is
a leading private hospital group in France which owns 15% of AMCMC Acquisition
Corp. and 18.5% of our common stock. Ms. Korchagina owns 3% of AMCMC Acquisition
Corp. and .9% of our common stock. At the closing of the proposed sale, Mr.
Sokol will resign all positions with us and surrender all of his direct or
indirect interest in First Medical Group, including his outstanding stock and
all of the outstanding stock of SAJH Partners, including any options and
warrants. Likewise, at the closing of the sale, Generale de Sante and Ms.
Korchagina will surrender for cancellation their shares of stock.
Also, at the closing of the sale Mr. George Rountree will tender his resignation
and tender for cancellation any and all stock, options or warrants that he
holds.
In a separate transaction, Crasvitsa Ltd., a British Virgin Islands company
controlled by Mr. Sokol, will assume a notes payable by First Medical Group in
the principal amount of $390,000 and accrued interest which equaled $934,384 as
of September 30,1999. See "Assumption by Crasvitsa Ltd. of the Lehigh Notes."
ACCOUNTING TREATMENT
In accordance with GAAP, the results of our business will be included in the our
results through the Closing Date. Any gain or loss on the disposition will be
recognized as of the date the proposed sale is closed.
DISSENTERS' APPRAISAL RIGHTS
Pursuant to the General Corporation Law of Delaware, holders of shares of Common
stock are not entitled to rights of appraisal in connection with a sale of
assets.
11
<PAGE>
THE ASSET PURCHASE AGREEMENT
Although we believe that the following summary describes the material terms and
conditions of the Asset Purchase Agreement, the summary is qualified in its
entirety by reference to the full text of the Asset Purchase Agreement, a copy
of which is attached as Annex B to this Information Statement and is
incorporated herein by reference. Terms which are not otherwise defined in this
summary have the meaning set forth in the Asset Purchase Agreement
ASSETS TO BE SOLD AND LIABILITIES TO BE ASSUMED
We have agreed to sell to AMCMC Acquisition Corp. substantially all of our
assets and intellectual property, which constitute our business relating to our
international operations. The following assets will be sold or transferred by us
to AMCMC Acquisition Corp. pursuant to the Asset Purchase Agreement:
(1) All of the issued and outstanding shares of common stock of American
Medical Centers Management Company, Ltd., a British Virgin Islands company,
which shares are, owned by First Medical Group International, Ltd. a
wholly-owned subsidiary of First Medical Group. American Medical Centers
Management Company in turn owns, directly or indirectly, all of the issued
and outstanding shares of the following entities:
(a) American Medical Clinics Moscow, Inc., a Cayman Islands
corporation.
(b) American Medical Clinics, Inc., a Russian joint venture
corporation, all of whose outstanding shares are owned by American Medical
Clinics Moscow, Inc.
(c) American Medical Clinics - St. Petersburg Ltd., a British
Virgin Islands corporation.
(d) American Medical Clinics - St. Petersburg Ltd., a Russian
joint venture corporation, all of whose outstanding shares are owned by said BVI
corporation.
(e) American Medical Clinics - Kiev, a Ukranian joint venture
corporation, all of whose outstanding shares are owned by said BVI corporation.
(f) American Medical Centers - Warsaw z.o.o. (Poland).
(g) American Medical Centers - Prague s.r.o. (Czechoslovakia).
(h) American Hospital of Moscow Management Company, Ltd., a
British Virgin Islands corporation.
(i) American Multiprofile Clinic, Inc. (Russia).
(2) All of our right, title and interest in and to any intellectual property
relating to American Medical Centers Management Company, Ltd. and its
subsidiaries, including, without limitation, our pending application to the
U.S. Patent and Trademark Office for trademark of "American Medical
Center", "AMC" and related logo design.
12
<PAGE>
(3) Insurance coverage carried as of the Closing Date by us with respect to all
of the acquired assets and the assumed liabilities, as in effect on the
Closing Date.
(4) All of our right, title and interest in and to the furniture and fixtures
listed on Schedule 1 of the Asset Purchase Agreement at Annex B.
Pursuant to the Asset Purchase Agreement, AMCMC Acquisition Corp. will assume
and thereafter be responsible for paying and satisfying certain of First Medical
Group's liabilities. Assumed liabilities will include as at December 31, 1999
$149,567 in accounts payable, $433,550 in liabilities relating to discontinued
operations and $666,500 in notes payable to certain shareholders and related
parties. The notes payable to certain shareholders and related parties are as
follows:
- - $500,000 owed to American Medical Centers, Inc., an entity controlled by
Mr. Sokol;
- - $166,500 owed to the Equity Group, an investor relations firm, and other
shareholders;
At closing, and as a result of a separate agreement between Crasvitsa Ltd. and
First Medical Group, Crasvitsa will assume notes payable and accrued interest of
First Medical Group in the amount as at December 31, 1999 of $934,384. See
"Assumption by Crasvitsa Ltd. of the Lehigh Notes."
After the proposed sale in completed, we will be left with cash assets of
approximately $700,000 and liabilities as at December 31, 1999 of $451,155,
consisting of $312,541 in accrued liabilities, $106,114 in accounts payable, and
$30,000 in liabilities relating to discontinued operations.
PURCHASE PRICE
The Asset Purchase Agreement provides for consideration, to be delivered by
AMCMC Acquisition Corp. to First Medical Group at the Closing, consisting of
$700,000 in cash (after reduction of the $1,000,000 purchase price by repayment
of Mr. Sokol's loan), the surrender and cancellation of 5,754,760 shares of
stock, together with the cancellation of all outstanding options and warrants
issued to Mr. Sokol and Mr. George Rountree, who will resign as director and
officer of FMG at closing, having a value of $719,345, and $1,249,617 in
liabilities of First Medical Corp. assumed.
The closing will take place on that date and time as First Medical Group and
AMCMC Acquisition Corp. mutually agree that all conditions precedent to the
obligations of the parties under the Asset Purchase Agreement have been met. See
"--Conditions."
REPRESENTATIONS AND WARRANTIES AND CERTAIN COVENANTS
The Asset Purchase Agreement contains various customary representations and
warranties of the parties to the agreement. These include representations and
warranties by us as to our: (a) corporate organization; (b) authority; (c)
noncontravention of law; (d) broker fees; (e) title to tangible assets; (f)
financial statements; (g) events subsequent to balance sheet date; (h) legal
compliance; (i) intellectual property; (j) contracts; (k) litigation; (l)
environmental matters; (m)
13
<PAGE>
tax matters; (n) no barter receivables or obligations; (o) sufficiency of
acquired assets; and (p) disclaimer of other representations and warranties.
AMCMC Acquisition Corp.'s representations and warranties include those as to (a)
corporate organization; (b) authority, (c) absence of violation of law; and (d)
brokers and finders.
EMPLOYMENT AND EMPLOYEE BENEFIT PLANS
The majority of the employees affected by the proposed sale will no longer be
employed by FMG or our subsidiaries effective as of the close of business on the
closing date, and will maintain a level of compensation and benefits and on
other terms and conditions of employment substantially similar to each such
employee's existing arrangements with us. First Medical Group is presently not
party to any employee benefit plans.
CONDITIONS
The obligations of First Medical Group to consummate the proposed sale are
subject to the following conditions:
(i) the representations and warranties set of AMCMC Acquisition
Corp. set forth in the Asset Purchase Agreement are true and correct as
of the closing date;
(ii) AMCMC Acquisition Corp. shall have performed and complied with
all of its covenants through the closing;
(iii) there is no injunction, judgment, order, decree, ruling, or
charge in effect preventing consummation of any of the transactions
contemplated by the proposed sale;
(iv) AMCMC Acquisition Corp. shall have delivered a certification
that certain conditions have been complied with;
(v) Both AMCMC Acquisition Corp. and First Medical Group shall
have received any required authorizations, consents, and approvals of
governments and governmental agencies;
(vi) First Medical Group shall have received from AMCMC Acqisition
Corp. and Crasvista, Ltd. certain Assignments and Assumptions in the
prescribed form;
(vii) First Medical Group shall have received from Dennis A. Sokol a
resignation as director and officer and the Mutual Release in the
prescribed form;
(viii) AMCMC Acquisition Corp. shall have received all material
third-party consents and approvals necessary for the purchase and
transfer of the assets;
(ix) no statute, rule or regulation or order or injunction of any
court or administrative agency shall be in effect which prohibits First
Medical Group from consummating the transactions contemplated by the Asset
Purchase Agreement;
14
<PAGE>
(x) there shall not be any material action, suit or proceeding
pending or threatened that seeks to prohibit the consummation of the
transactions contemplated by the Asset Purchase Agreement; and
(xi) all actions to be taken by AMCMC Acquisition Corp. in connection
with consummation of the transactions contemplated by the Asset Purchase
Agreement and all certificates, instruments, and other documents required
to effect the transactions are satisfactory in form and substance to First
Medical Group.
The obligation of AMCMC Acquisition Corp. to consummate the proposed sale are
subject to the following conditions:
(i) the representations and warranties of First Medical Group set
forth in the Asset Purchase Agreement are true and correct as of the
closing date;
(ii) First Medical Group and its subsidiaries shall have performed
and complied with all of its covenants in the Asset Purchase Agreement
through the closing;
(iii) there shall not be any injunction, judgment, order, decree,
ruling, or charge in effect preventing consummation of any of the
transactions contemplated by the Asset Purchase Agreement;
(iv) First Medical Group shall have delivered to AMCMC Acquisition
Corp. a certificate to the effect that certain of the conditions specified
in the Asset Purchase Agreement are satisfied;
(v) First Medical Group and AMCMC Acquisition Corp. shall have
received all other necessary authorizations, consents, and approvals of
governments and governmental agencies;
(vi) AMCMC Acquisition Corp. shall have received certain Assignments
and Assumptions in the prescribed form;
(vii) AMCMC Acquisition Corp. shall have received First Medical Group
the Mutual Release in the prescribed form;
(viii) AMCMC Acquisition Corp. shall have received all material
third-party consents and approvals necessary for the purchase and
transfer of the assets;
(ix) no statute, rule or regulation or order or injunction of any
court or administrative agency shall be in effect which prohibits First
Medical Group from consummating the transactions contemplated by the Asset
Purchase Agreement;
(x) there shall not be any material action, suit or proceeding
pending or threatened that seeks to prohibit the consummation of the
transactions contemplated by the Asset Purchase Agreement;
15
<PAGE>
(xi) all actions to be taken by AMCMC Acquisition Corp. in connection
with consummation of the transactions contemplated by the Asset Purchase
Agreement and all certificates, instruments, and other documents required
to effect the transactions contemplated by the Asset Purchase Agreement
will be satisfactory in form and substance to AMCMC Acquisition Corp; and
(xii) from the time of the execution of the Asset Purchase Agreement
up to the closing, there shall not have occurred a material or adverse
change in First Medical Group or its business or financial condition.
TERMINATION
AMCMC Acquisition Corp. and First Medical Group may terminate the Asset Purchase
Agreement by mutual written consent at any time prior to the closing.
AMCMC Acquisition Corp. may terminate the Asset Purchase Agreement by giving
written notice to First Medical Group at any time prior to the closing in the
event First Medical Group has given any notice of a development causing a breach
of its representations and warranties and the development has had a material
adverse effect upon the financial condition of First Medical Group and First
Medical Group Subsidiaries, taken as a whole, or the notice from First Medical
Group relates to a breach or breaches not caused or brought about by First
Medical Group and the notice gives AMCMC Acquisition Corp. an option to
terminate even if the development does not have a material adverse effect upon
the financial condition of First Medical Group and First Medical Group
Subsidiaries, taken as a whole.
AMCMC Acquisition Corp. may terminate the Asset Purchase Agreement by giving
written notice to First Medical Group at any time prior to the closing in the
event First Medical Group has breached any material representation, warranty, or
covenant contained in the Asset Purchase Agreement in any material respect,
AMCMC Acquisition Corp. has notified First Medical Group of the breach, and the
breach has continued without cure for a period of 30 days after the notice.
First Medical Group may terminate the Asset Purchase Agreement by giving written
notice to AMCMC Acquisition Corp. at any time prior to the closing in the event
AMCMC Acquisition Corp. has breached any material representation, warranty, or
covenant contained in the Asset Purchase Agreement in any material respect,
First Medical Group has notified AMCMC Acquisition Corp. of the breach, and the
breach has continued without cure for a period of 30 days after the notice.
INDEMNIFICATION
Pursuant to the Asset Purchase Agreement, First Medical Group has agreed to
indemnify AMCMC Acquisition Corp. in the event that First Medical Group breaches
any of its representations, warranties, and covenants contained in the Asset
Purchase Agreement and AMCMC Acquisition Corp. makes a written claim for
indemnification against First Medical Group, or for adverse
16
<PAGE>
consequences to AMCMC Acquisition Corp. arising as a result of any liability of
First Medical Group which is not assumed by AMCMC Acquisition Corp.
Likewise, AMCMC Acquisition Corp. has agreed to indemnify First Medical Group in
the event AMCMC Acquisition Corp. breaches any of its representations,
warranties, and covenants contained in the Asset Purchase Agreement, and First
Medical Group makes a written claim for indemnification, or for adverse
consequences to First Medical Group arising as a result of any liability of
First Medical Group arising after the closing date which is an assumed liability
or which relates in any way to the assets acquired by AMCMC Acquisition Corp.
ASSUMPTION BY CRASVITSA LTD. OF THE LEHIGH NOTES
At closing, and as a result of a separate agreement between Crasvitsa Ltd.
and First Medical Group, Crasvitsa Ltd. will assume notes payable by FMG
having an outstanding principal value and accrued interest in the amount as
at December 31, 1999 of $934,384. Crasvitsa Ltd. is a British Virgin Islands
corporation controlled by Mr. Sokol. (See "The Proposed Sale -- Interests of
Certain Persons in the Proposed Sale.") These notes reflect indebtedness
issued in 1991 by us prior to our reorganization in 1997 as The Lehigh Group,
Inc.
We are in default in the payment of interest (approximately $544,384 interest
was past due as of December 31, 1999) and principal of $390,000 on 13 1/25
Senior Subordinated Notes due May 15, 1998 and 14 7/8% Subordinated Debentures
due October 15, 1995. We have 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).
During 1999, we reviewed the legal status of the matter to determine our
obligation to repay the Lehigh Notes and their accrued interest, given that we
have been unable to locate the holders of these notes and debentures.. In our
Form 10-Q quarterly report for the period ending September 30, 1999, we recorded
as a write-off 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. The write-off of past due accrued interest reflects our
view that this obligation is no longer a liability of First Medical Group since
the statute of limitations has expired in which a claim based upon such notes
and debentures could have been presented.
PRO FORMA FINANCIAL INFORMATION
The following tables set forth pro forma consolidated financial information
of First Medical Group for the nine months ended September 30, 1999. The
unaudited pro forma consolidated balance sheet gives pro forma effect to the
proposed sale as if such transactions had been consummated on September 30,
1999. The unaudited pro forma consolidated financial information has been
prepared on the basis that First Medical Group would have received cash
consideration of $700,000 from the proposed sale. See "The Asset Purchase
Agreement--Purchase Price."
17
<PAGE>
The unaudited pro forma adjustments are based upon available information and
certain assumptions that we believe are reasonable. The pro forma consolidated
financial information does not necessarily reflect the financial position or
results of operations of First Medical Group that actually would have resulted
had the transactions described above been consummated as of the date or for the
period indicated, or to project First Medical Group's financial position or
results of operations at any future date or for any future period. The pro forma
consolidated financial information should be read in conjunction with First
Medical Group's Financial Statements for the years ended December 31, 1998, and
for the nine months and three months ended September 30, 1999 and the Notes
thereto incorporated by reference in this Information Statement.
18
<PAGE>
FIRST MEDICAL GROUP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Unaudited
Historical Adjustments to Pro Forma
September 30, 1999 Record Sale as Adjusted
------------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $610 $ (258) (1) $1,352
1,000 (1)
Accounts receivable 533 (533) (1) --
Inventories 105 (105) (1) --
Prepaid expenses and other current assets 493 (493) (1) --
------ ------- -------
Total current assets 1,741 (389) 1,352
Property and equipment 1,293 (1,293) (1) --
Deferred tax asset 549 (549) (3) --
Intangible assets 2,225 (2,225) (1) --
Other assets 77 (77) (1) --
------ ------- -------
TOTAL $5,885 $(4,533) $ 1,352
====== ======= =======
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable $ 970 $ (921) (1) $ 49
Accrued expenses 1,328 (1,083) (1) 245
Deferred revenue 843 (843) (1) --
Notes payable and accrued interest 1,117 (1117) (1) --
Net liabilities of discontinued operations 506 (476) (1) 30
------ ------- -------
Total current liabilities 4,764 (4,440) 324
Notes payable (long-term portion) 418 (418) (1) --
Stockholders' equity:
Common stock 10 (4) (1) 6
Additional paid in capital 8,253 (527) (1) 7,726
Accumulated deficit (7,560) 856 (1) (6,704)
------ ------- -------
Total shareholders' equity 703 325 1,028
TOTAL $5,885 $(4,533) $ 1,352
====== ======= =======
</TABLE>
19
<PAGE>
FIRST MEDICAL GROUP, INC.
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Unaudited Historical
Nine Months Ended Adjustments to Pro Forma
September 30, 1999 Record Sale as Adjusted
------------------ ----------- -----------
<S> <C> <C> <C>
Revenue $8,169 $(8,169) $ --
Cost of revenue 6,463 (6,463) --
------ ------- -------
Income from clinic operations 1,706 (1,706) --
Operating expenses:
Salaries and benefits 674 (584) 90 (2)
General and administration 673 (560) 113 (2)
Depreciation and amortization 291 (291) --
------ ------- -------
Total operating expenses 1,638 (1,435) 203
Income (loss) from operations 68 (271) (203)
Interest income 45 (45) --
------ ------- -------
Income before income tax provision 113 (316) (203)
Income tax (credit) (40) 40 --
------ ------- -------
Income (loss) from continuing operations $ 153 $ (356) $ (203)
Earnings (loss) per share-basic and diluted $ 0.02 $ (0.06) $(0.04)
</TABLE>
20
<PAGE>
FIRST MEDICAL GROUP, INC.
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
Year Ended Adjustments to Pro Forma
December 31, 1998 Record Sale as Adjusted
----------------- ----------- -----------
<S> <C> <C> <C>
Revenue $10,947 $(10,947) $ --
Cost of revenue 9,260 (9,260) --
------- -------- -------
Income from clinic operations 1,687 (1,687) --
Operating expenses:
Salaries and benefits 905 (785) 120 (2)
General and administration 1,019 (869) 150 (2)
Depreciation and amortization 227 (227) --
------ ------- -------
Total operating expenses 2,151 (1,881) 270
Income (loss) from operations (464) 194 (270)
Interest expense (167) 167 --
------ ------- -------
Income before income tax (credit) (631) 361 (270)
Income tax (credit) (473) 473 --
------ ------- -------
Loss from continuing operations $ (158) $ (112) $ (270)
Loss per share-basic and diluted $ (0.01) $ (0.04) $(0.05)
</TABLE>
First Medical Group, Inc.
Notes to Pro Forma Balance Sheet
As of September 30, 1999 and Notes to the Pro Forma
Consolidated Income Statement for the Nine Months
Ended September 30, 1999 and the Year Ended December 31, 1998
(1) Adjustment to reflect the sale of substantially all of the assets of the
Company, assumption of certain liabilities of the Company and the
surrendering of approximately 5.8 million shares of the Company for $4.1
million. The bid price of the Company's stock on September 30, 1999 was
$.125 per share.
(2) Reflects estimated administrative expenses that will continue in the
Company.
(3) To write off deferred tax asset because of the utilization of the tax
benefit due to the sale of all of the Company's income generating
operations.
21
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth to date the total number of shares of common
stock beneficially owned, and the percent so owned, by each our directors, by
each person known to us to be the beneficial owner of more than 5% of the
outstanding common stock. The number of shares owned are those "beneficially
owned," as determined under the rules of the Commission, and such information is
not necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which a person has
sole or shared voting power or investment power and any shares of common stock
which the person has the right to acquire within 60 days through the exercise of
any option, warrant or right, through conversion of any security, or pursuant to
the automatic termination of power of attorney or revocation of trust,
discretionary account or similar arrangement.
<TABLE>
<CAPTION>
Name of Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1) of Class
------------------- ------------------------ --------
<S> <C> <C>
Generale De Sante 2,047,860 18.50%
International PLC
4 Cornwall Terrace
London, NW 1 4QP
England
SAJH Partners 1,595,021(2) 14.41%
1055 Washington Bvld
Stamford, CT 06901
Dennis A. Sokol 2,012,644(3) 18.19%
1055 Washington Blvd
Stamford, CT 06901
</TABLE>
- -------------------
(1) Except as otherwise indicated, each of the persons listed above has
sole voting and investment power with respect to all shares shown in
the table as beneficially owned by such person.
(2) Dennis Sokol is the Managing Partner of SAJH Partners and has a 1%
partnership interest in the partnership and consequently could be
deemed under Rule 13D-3 of the Exchange Act to have beneficial
ownership of such shares. Mr. Sokol disclaims ownership of all such
shares other than as a result of his 1% partnership interest.
(3) Assumes exercise of 1,500,000 warrants to purchase shares of common
stock of First Medical Group.
22
<PAGE>
The following table indicates the number of shares of common stock beneficially
owned to date by (i) each director of First Medical Group, and (ii) all
directors and executive officers of First Medical Group as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------------ ------------------------ ----------------
<S> <C> <C>
Dennis A. Sokol (1) 2,012,644 18.19%
Richard Berman (2) 60,000 *
George Rountree(3) 60,250 *
All executive officers
and directors as a group (4)
(6 persons) 1,615,482 14.6
</TABLE>
- -------------------------
* Less than 1%
Except as otherwise indicated, each person listed above has sole voting and
investment power with respect to all shares shown in the table.
(1) See notes 2 and 3 of the table under the caption "Security Ownership of
Certain Beneficial Owners" above.
(2) Includes 50,000 options to purchase shares of our common stock which
are immediately exercisable.
(3) Includes 6,250 options to purchase shares of our common stock which
are immediately exercisable.
(4) Includes 25,000 options to purchase shares of our common
stock which are immediately exercisable and held by Mr. Nemnom.
MARKET PRICE DATA
The following table sets forth high and low trade prices of the shares of our
common stock for each quarterly fiscal period of 1999 and 1998, based on
information received from IDD Information Services, Tradeline-Registered
Trademark-. As of _________, 2000, the number of known beneficial owners of our
common stock was _____, and the number of record holders was _____.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1999
- ----
First Quarter 13/16 1/8
Second Quarter 5/8 1/8
Third Quarter 13/16 1/8
Fourth Quarter 13/16 5/64
1998
- ----
First Quarter 3 23/64
Second Quarter 1 19/64 21/64
Third Quarter 1 1/32 5/32
Fourth Quarter 13/16 1/8
On 1/ __/2000 _______ ______
</TABLE>
23
<PAGE>
ANNEX A
FAIRNESS OPINION
<PAGE>
Annex B
ASSET PURCHASE AGREEMENT
BETWEEN
FIRST MEDICAL GROUP, INC.
as Seller
AND
AMCMC Acquisition Corp.
as Buyer
as of
January 31, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions.............................................................................................1
2. Basic Transaction.......................................................................................3
(a) Purchase and Sale of Assets....................................................................3
(b) Assumption of Liabilities......................................................................4
(c) Purchase Price.................................................................................4
(d) Purchase Price Adjustment......................................................................4
(e) Surrender of Stock.............................................................................4
(f) The Closing....................................................................................4
(g) Deliveries at the Closing......................................................................4
3. Representations and Warranties of Seller................................................................5
(a) Organization of Seller.........................................................................5
(b) Authorization of Transaction...................................................................5
(c) Noncontravention...............................................................................5
(e) Title to Tangible Assets.......................................................................6
(f) Financial Statements...........................................................................6
(g) Material Adverse Changes.......................................................................6
(h) Legal Compliance...............................................................................6
(i) Intellectual Property..........................................................................7
(j) Contracts......................................................................................7
(k) Litigation.....................................................................................7
(m) Environmental, Health, and Safety Matters......................................................7
(n) Tax Matters....................................................................................8
(o) No Barter Receivables or Obligations...........................................................8
(p) Sufficiency of Acquired Assets.................................................................8
(q) Disclaimer of other Representations and Warranties.............................................8
4. Representations and Warranties of Buyer.................................................................8
(a) Organization of Buyer..........................................................................8
(b) Authorization of Transaction...................................................................9
(c) Noncontravention...............................................................................9
(d) Brokers' Fees..................................................................................9
5. Pre-Closing Covenants...................................................................................9
(a) General........................................................................................9
(b) Notices and Consents...........................................................................9
(d) Conduct of the Business........................................................................9
(e) Notice of Developments........................................................................10
(f) Full Access...................................................................................10
6. Conditions to Obligation to Close......................................................................11
(a) Conditions to Obligation of Buyer.............................................................11
(b) Conditions to Obligation of Seller............................................................12
7. Termination...................................................................................13
(a) Termination of Agreement......................................................................13
(b) Effect of Termination.........................................................................13
8. Post-Closing Covenants.................................................................................14
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C> <C>
(a) General.......................................................................................14
(b) Litigation Support............................................................................14
(c) Transition....................................................................................14
(d) Covenant Not to Compete.......................................................................14
9. Remedies for Breaches of this Agreement................................................................14
(a) Survival of Representations and Warranties....................................................14
(b) Indemnification Provisions for Benefit of Buyers..............................................15
(c) Indemnification Provisions for Benefit of NSDA................................................15
(d) Matters Involving Third Parties...............................................................15
(e) Determination of Adverse Consequences.........................................................16
(f) Exclusive Remedy..............................................................................16
10. Miscellaneous..........................................................................................16
(a) Press Releases and Public Announcements.......................................................16
(c) No Third-Party Beneficiaries..................................................................17
(d) Entire Agreement..............................................................................17
(e) Succession and Assignment.....................................................................17
(f) Counterparts..................................................................................17
(g) Headings......................................................................................17
(h) Notices.......................................................................................17
(i) Governing Law.................................................................................18
(j) Amendments and Waivers........................................................................18
(k) Severability..................................................................................18
(l) Expenses......................................................................................18
(m) Construction..................................................................................18
(n) Incorporation of Exhibits, Annexes and Schedules..............................................18
(o) Bulk Transfer Laws............................................................................18
</TABLE>
Disclosure Schedule
Annex 2.1(a) List of Assets of First Medical Group, Inc. to be
Acquired by Buyer
Annex 2.3(a) List of Liabilities of First Medical Group, Inc. to
be Assumed by Buyer
Exhibit A-1 Form of Assignment and Assumption -
Acquired Assets and Assumed Liabilities
Exhibit A-2 Form of Assignment and Assumption -
Lehigh Notes
Exhibit A-3 Form of Assignment and Assumption -
American Multiprofile Clinic Note
Exhibit B Historical Financial Statements
Exhibit C Form of Mutual Release
ii
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ASSET PURCHASE AGREEMENT
Agreement entered into as of January 31, 2000, by and among AMCMC
Acquisition Corp., a British Virgin Islands corporation having an address at
1055 Washington Boulevard, Stamford, Connecticut 06901 ("BUYER"), and First
Medical Group, Inc., a Delaware corporation having an address at 1055 Washington
Boulevard, Stamford, Connecticut 06901 ("SELLER"). Buyer and Seller are referred
to collectively herein as the "PARTIES."
Pursuant to this Agreement, Buyer will purchase the Acquired Assets (as
defined herein) (and assume the Assumed Liabilities (as defined herein)) of
Seller in return for cash, and Seller will sell, transfer and convey to Buyer
the Acquired Assets (as defined herein), all upon the terms, provisions and
conditions set forth below.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
"ACQUIRED ASSETS" means the assets listed on Annex 2.1(a).
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including court costs and reasonable attorneys' fees and
expenses.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"ASSET PURCHASE AGREEMENT" has the meaning set forth in the preface
above.
"ASSUMED LIABILITIES" means the liabilities and obligations listed on
Annex 2.3(a).
"BUSINESS" means the ongoing business of owning and operating
outpatient and ancillary healthcare facilities in Eastern Europe.
"BUYER" has the meaning set forth in the preface above.
"CASH" means cash and cash equivalents (including marketable securities
and short term investments) calculated in accordance with GAAP applied on a
basis consistent with the preparation of the Financial Statements.
"CLOSING DATE" has the meaning set forth in Section 2(f) below.
"CLOSING" has the meaning set forth in Section 2(f) below.
"CODE" means the Internal Revenue Code of 1986, as amended.
<PAGE>
"CONFIDENTIAL INFORMATION" means any information concerning the
businesses and affairs of Seller that is not generally available to the public,
including but not limited to all data, reports, interpretations, forecasts,
audit reports and other records to the extent they contain information
concerning Seller. The term "Confidential Information" also shall include all
notes, analyses, compilations, studies, interpretations or other documents
prepared by Buyer or their officers, directors, employees and/or agents
(collectively, "Representatives"), which contain, reflect or are based upon in
whole or in part, the information furnished to Buyer or its Representatives by
Seller.
"DISCLOSURE SCHEDULE" has the meaning set forth in Section 3 below.
"ENVIRONMENTAL, HEALTH, AND SAFETY REQUIREMENTS" shall mean all
federal, state, local and foreign statutes, regulations, and ordinances
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, as such requirements are enacted and in effect
on or prior to the Closing Date.
"FINANCIAL STATEMENTS" has the meaning set forth in Section 3(f) below.
"FMG" means First Medical Group, Inc.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"INCOME TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Income Taxes, including
any schedule or attachment thereto.
"INCOME TAX" means any federal, state, local, or foreign income tax,
including any interest, penalty, or addition thereto, whether disputed or not.
"INDEMNIFIED PARTY" has the meaning set forth in Section 9(d) below.
"INDEMNIFYING PARTY" has the meaning set forth in Section 9(d) below.
"INTELLECTUAL PROPERTY" means all trade names, common law and other
trademarks, service marks, trade dress, certification marks, collective marks
and applications and licenses therefor, trademark registrations and
applications, service mark registrations and applications, copyrights and
copyright registrations and applications owned by Seller or Seller Subsidiaries
and used in the Business, and all rights, common law and other, registrations
and applications for the marks and trade names, owned by Seller or Seller
Subsidiaries and used in the Business.
"KNOWLEDGE" means actual knowledge without independent investigation.
"LEHIGH NOTES" means all of Seller's right, title and interest in and
to Seller's subordinated debentures acquired by reason of Seller's restructuring
in 1991, and payable on May 15, 1998 (in the principal amount of $100,000,
together with all accrued interest) and October 15, 1995 (in the principal
amount of $290,000, together with all accrued interest), respectively.
2
<PAGE>
"LOAN" means the loan in the principal amount of approximately $300,000
(together with interest thereon) made by Dennis A. Sokol to Seller through the
Closing Date. -
"MOST RECENT FINANCIAL STATEMENTS" has the meaning set forth in Section
3(f) below.
"MOST RECENT FISCAL MONTH END" has the meaning set forth in Section
3(f) below.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business of
the relevant Person consistent with its past custom and practice (including with
respect to quantity and frequency).
"OTHER AGREEMENTS" means Form of Assignment and Assumption attached
hereto as Exhibit A and Form of Trademark Assignment attached hereto as Exhibit
B.
"PARTIES" AND "PARTY" have the meaning set forth in the preface above.
"PARTY" has the meaning set forth in the preface above.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"PURCHASE PRICE ADJUSTMENT" has the meaning set forth in Section 2(d)
below.
"PURCHASE PRICE" has the meaning set forth in Section 2(c) below.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for taxes not yet due and payable, (c) purchase
money liens and liens securing rental payments under capital lease arrangements,
and (d) other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
"SELLER SUBSIDIARIES" means all of the entities set forth on Annex
2.1(a) hereto.
"THIRD PARTY CLAIM" has the meaning set forth in Section 4(d) below.
2. BASIC TRANSACTION.
(a) PURCHASE AND SALE OF ASSETS. On and subject to the terms and
conditions of this Agreement, Buyer agrees to purchase from Seller, and Seller
agrees to sell, transfer, convey, and deliver to Buyer, or cause its
subsidiaries to sell, transfer, convey and deliver to Buyer, as the case may be,
all of the Acquired Assets at the Closing for the consideration specified below
in this Section 2.
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(b) ASSUMPTION OF LIABILITIES.
(1) On and subject to the terms and conditions of this
Agreement, Buyer agrees to assume and become responsible for all of the Assumed
Liabilities at the Closing. Buyer will not assume or have any responsibility,
however, with respect to any such liabilities prior to Closing or any other
obligation or liability of Seller not included within the definition of Assumed
Liabilities.
(2) Contemporaneously, as a separate transaction, Seller has
agreed to assign and transfer at the Closing all of its right, title and
interest in and to the Lehigh Notes pursuant to an Assignment and Assumption in
the form of Exhibit A-2 hereto, and all liability attaching to said Lehigh Notes
shall be assumed by the assignee thereof.
(3) Contemporaneously, as a separate transaction, Seller will
assign to AMCMC at the Closing all of Seller's right, title and interest in and
to that certain promissory note, dated January 25, 1999, issued by American
Multiprofile Clinic, Inc. to Seller in the principal amount of $1.5 million,
pursuant to an Assignment and Assumption in the form of Exhibit A-3 hereto.
(c) PURCHASE PRICE. Buyers agree to pay to Seller at the Closing an
aggregate of $1 million (the "PURCHASE PRICE"), subject to the Purchase Price
Adjustment, by delivery of cash by wire transfer or delivery of other
immediately available funds.
(d) PURCHASE PRICE ADJUSTMENT. The Purchase Price will be reduced by
the principal and accrued interest outstanding at the time of Closing on the
Loan(s) (the "Purchase Price Adjustment").
(e) SURRENDER OF STOCK. At the Closing, (i) SAJH Partners, Dennis A.
Sokol, Cenvet, Inc. (General de Sante) and Elena Korchagina will surrender for
cancellation an aggregate of 5,754,760 shares of the common stock of FMG, being
all shares of stock of FMG owned by them collectively in Seller, and (ii) Dennis
A. Sokol will surrender for cancellation all of the issued and outstanding
options and warrants for the purchase of shares of common stock of FMG owned by
him.
(f) THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place at the offices of Patton Boggs LLP in
Washington D.C., commencing at 10:00 a.m. local time on the third business day
following the satisfaction or waiver of all conditions to the obligations of the
Parties to consummate the transactions contemplated hereby (other than
conditions with respect to actions the respective Parties will take at the
Closing itself) or such other date as the Parties may mutually determine (the
"CLOSING DATE").
(g) DELIVERIES AT THE CLOSING. At the Closing, (i) Seller will deliver
to Buyer the various certificates, instruments, and documents referred to in
Section 6(a) below; (ii) Buyer will deliver to Seller the various certificates,
instruments, and documents referred to in Section 6(b) below; (iii) Seller will
execute, acknowledge (if appropriate), and deliver to Buyer (A) assignments
(including real property, trademark and intellectual property transfer
documents) and assumptions in the forms attached hereto as Exhibit A and (B)
such other instruments of sale, transfer, conveyance, and
4
<PAGE>
assignment as Buyer and their counsel reasonably may request; (iv) Buyer will
execute, acknowledge (if appropriate), and deliver to Seller (A) an assignment
and assumption in the form attached hereto as Exhibit A and (B) such other
instruments of assumption as Seller and their counsel may reasonably request;
and (v) Buyer will deliver to Seller the consideration specified in Section 2(c)
above, subject to the provisions of Section 2(d) above, and the certificates or
other documentation representing the shares of common stock and options and
warrants for the purchase of such common stock specified in Section 2(e) above.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and
warrants to Buyers that the statements contained in this Section 3 with respect
to it are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
Section 3), except as set forth in the disclosure schedule accompanying this
Agreement and initialed by the Parties (the "DISCLOSURE SCHEDULE"). The
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 3.
(a) ORGANIZATION OF SELLER. Seller is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware.
Seller Subsidiaries are all entities duly organized, validly existing, and in
good standing under the law of their respective jurisdictions of organization.
Seller and Seller Subsidiaries have the corporate or other power to own and to
sell the Acquired Assets owned by them and to conduct the Business. Seller and
Seller Subsidiaries are all qualified to do business and are in good standing in
each jurisdiction where such qualification is required to conduct the Business
associated with the Acquired Assets, except where the failure to so qualify
would not have a material adverse effect on the Business or the Acquired Assets.
(b) AUTHORIZATION OF TRANSACTION. Seller has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and the Other Agreements and to perform its obligations hereunder.
Without limiting the generality of the foregoing, the board of directors and
shareholders of Seller has duly authorized the execution, delivery, and
performance of this Agreement by Seller. This Agreement and the Other Agreements
constitute the valid and legally binding obligation of Seller, enforceable in
accordance with its terms and conditions.
(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to in Section 2 above), will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Seller or Seller Subsidiaries are subject
or any provision of the Articles of Incorporation or bylaws or other constituent
documents of Seller or Seller Subsidiaries or (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or other
arrangement to which Seller or Seller Subsidiaries are a party or by which they
are bound or to which their assets are subject (or result in the imposition of
any Security Interest upon any of their assets), except where the violation,
conflict, breach, default, acceleration, termination, modification,
cancellation, failure to give notice, or Security Interest would not have a
material adverse effect on the financial condition of Seller and Seller
Subsidiaries, taken as a whole, or on the ability of the Parties to consummate
the transactions
5
<PAGE>
contemplated by this Agreement. Neither Seller nor Seller Subsidiaries are
required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement (including the assignments and assumptions referred to in Section 2
above), except where the failure to give notice, to file, or to obtain any
authorization, consent, or approval would not have a material adverse effect on
the financial condition of Seller and Seller Subsidiaries, taken as a whole, or
on the ability of the Parties to consummate the transactions contemplated by
this Agreement.
(d) BROKERS' FEES. Seller has no liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Buyer could become liable
or obligated.
(e) TITLE TO TANGIBLE ASSETS. Seller has good, valid and marketable
title to the tangible Acquired Assets which are owned by it, free and clear of
all liens, claims, encumbrances, Security Interests, options, charges and
restrictions of any kind. Upon delivery to Buyer at the Closing, good, valid and
marketable title to the tangible Acquired Assets which are owned by Seller will
pass to Buyer, free and clear of all liens, claims, encumbrances, Security
Interests, options, charges and restrictions of any kind.
(f) FINANCIAL STATEMENTS. Attached hereto as Exhibit B are the
following financial statements (collectively the "FINANCIAL STATEMENTS"): (i)
audited consolidated balance sheets for Seller, each as of December 31, 1997 and
December 31, 1998; (ii) audited consolidated statements of income, and cash
flow, each for the fiscal years ended December 31, 1996, December 31, 1997, and
December 31, 1998, for Seller; and (iii) unaudited consolidated balance sheets
and statements of income, and cash flow for Seller (the "MOST RECENT FINANCIAL
STATEMENTS" as of and for the nine months ended September 30, 1999 (the "MOST
RECENT FISCAL MONTH END"). The Financial Statements for Seller (including the
notes thereto) have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby and present fairly the
financial condition of Seller as of such dates and the results of operations of
Seller for such periods; PROVIDED, HOWEVER, that the Most Recent Financial
Statements are subject to normal year-end adjustments and lack footnotes and
other presentation items.
(g) MATERIAL ADVERSE CHANGES. Since September 30, 1999, there has not
been any material adverse change in the Business, the Acquired Assets, financial
condition, results of operations or prospects of Seller or Seller Subsidiaries.
Without limiting the generality of the foregoing, since that date neither Seller
nor Seller Subsidiaries have not engaged in any practice, taken any action, or
entered into any transaction relating to the Business that is outside of its
Ordinary Course of Business.
(h) LEGAL COMPLIANCE. Seller and Seller Subsidiaries have complied with
all applicable laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of federal, state,
local, and foreign governments (and all agencies thereof), except where the
failure to comply would not have a material adverse effect upon the financial
condition of Seller and Seller Subsidiaries, taken as a whole.
6
<PAGE>
(i) INTELLECTUAL PROPERTY. Section 3(i) of the Disclosure Schedule
accurately and completely identifies all registrations and pending applications
for the Intellectual Property that are owned by Seller and Seller Subsidiaries
and identifies each license, agreement, or other permission which Seller and
Seller Subsidiaries have granted to any third party with respect to the
Intellectual Property. Seller is not aware of any violation or infringement of
intellectual property rights relating to the Intellectual Property.
(j) CONTRACTS. Section 3(j) of the Disclosure Schedule is a complete
and accurate list of all material written contracts and other written agreements
relating to the Business to which Seller or a Seller Subsidiary is a party.
Except as set forth on Section 3(j) of the Disclosure Schedule, to the knowledge
of Seller, (i) each of the contracts or other agreements is valid, binding,
legal and enforceable in accordance with its terms; (ii) the parties thereto are
in compliance with the provisions thereof; (iii) no party is in default in the
performance, observance or fulfillment of any material, obligation, covenant or
condition contained therein; and (iv) no event not contemplated by this
Agreement has occurred which with or without the giving of notice or lapse of
time, or both, would constitute a default thereunder. Seller has delivered to
Buyer a correct and complete copy of each contract or other agreement listed in
Section 3(j) of the Disclosure Schedule (as amended to date).
(k) LITIGATION. Section 3(l) of the Disclosure Schedule sets forth each
instance in which Seller or any of Seller Subsidiaries (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a
party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction. Except as indicated on Section 3(l) of
the Disclosure Schedule, no litigation is pending or, to Seller's knowledge,
threatened against Seller that questions the validity of this Agreement, or any
action taken, or to be taken, by Seller in connection with this Agreement or
that relates to the Acquired Assets, except where such litigation would not have
a material adverse effect on the Business or the Acquired Assets. There is no
material judgment, order, injunction, decree or award outstanding (whether
rendered by a court, administrative agency or by arbitration) against Seller or
Seller Subsidiaries or by which Seller or Seller Subsidiaries are bound which
relates to any of the Acquired Assets. Seller and Seller Subsidiaries are not in
violation of any applicable federal, state or local law, rule, regulation or
ordinance, or any judgment, writ, decree, injunction, order or any other
requirement of any court, administrative agency, bureau, board, commission,
office, authority, department or other governmental body or agency relating to
the conduct of the Business or the ownership or use of the Acquired Assets,
which violation would have a material adverse effect on the Business or the
Acquired Assets, and no notice has been received by Seller or Seller
Subsidiaries alleging any such violation.
(l) ENVIRONMENTAL, HEALTH, AND SAFETY MATTERS. Other than as set forth
on Section 3(l) of the Disclosure Schedule:
(i) Seller and Seller Subsidiaries are in compliance with
Environmental, Health, and Safety Requirements, except for such
noncompliance as would not have a material adverse effect on the
financial condition of Seller and Seller Subsidiaries, taken as a
whole.
(ii) Neither Seller nor any Seller Subsidiary has received any
written notice, report or other information regarding any actual or
alleged material violation of
7
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Environmental, Health, and Safety Requirements, or any material
liabilities or potential material liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise), including any
investigatory, remedial or corrective obligations, relating to its
facilities arising under Environmental, Health, and Safety
Requirements, the subject of which would have a material adverse effect
on the financial condition of Seller and Seller Subsidiaries, taken as
a whole.
(iii) This Section 3(l) contains the sole and exclusive
representations and warranties of Seller with respect to any
environmental, health, or safety matters, including without limitation
any arising under any Environmental, Health, and Safety Requirements.
(m) TAX MATTERS. All tax returns and reports of Seller required to be
filed on or before the date hereof have been duly and timely filed on or before
such date or appropriate extensions to file such returns and reports have been
granted, and all taxes, assessments, fees and other governmental charges upon
Seller and upon the Acquired Assets which are due and payable, other than those
presently payable without penalty or interest, have been paid, except in either
case where the failure to do so would not have a material adverse effect on the
Business or the Acquired Assets. As of the date hereof, there are no tax liens
on any of the Acquired Assets, and, to the best of Seller's knowledge, there is
no basis for the assertion of any such tax liens, other than for taxes currently
due and payable.
(n) NO BARTER RECEIVABLES OR OBLIGATIONS. Except for such arrangements
as are set forth in Section 3(j) or Section 3(n) of the Disclosure Schedule,
Seller is not liable for any outstanding barter obligations with respect to the
Business.
(o) SUFFICIENCY OF ACQUIRED ASSETS. With the exception of personnel,
the Acquired Assets comprise all of the assets, properties and rights necessary
for the continued operation of the Business, consistent with past practices.
(p) DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. Except as
expressly set forth in this Section 3, Seller makes no representation or
warranty, express or implied, at law or in equity, in respect of any of its
assets (including, without limitation, the Acquired Assets), liabilities or
operations, and any such other representations or warranties are hereby
expressly disclaimed. Without limiting the generality of the foregoing, Seller
makes no representation or warranty regarding any assets other than the Acquired
Assets or any liabilities other than the Assumed Liabilities, and none shall be
implied at law or in equity.
4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller that the statements contained in this Section 4 with respect
to it are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
Section 4), except as set forth in the Disclosure Schedule. The Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 4.
(a) ORGANIZATION OF BUYER. Buyer is a corporation duly organized,
validly existing, and in good standing under the laws of the British Virgin
Islands.
8
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(b) AUTHORIZATION OF TRANSACTION. Buyer has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and the Other Agreements and to perform its obligations hereunder.
Without limiting the generality of the foregoing, the board of directors and
shareholders of Buyer has duly authorized the execution, delivery and
performance of this Agreement by Buyer. This Agreement and the Other Agreements
constitute the valid and legally binding obligation of Buyer, enforceable in
accordance with its terms and conditions.
(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to in Section 2 above), will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Buyer is subject or any provision of its
charter or bylaws or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Buyer is a party or by which it is bound or to which any of its assets is
subject. With the exception of any forms, notices or other materials that Buyer
has filed with the Federal Trade Commission or the Antitrust Division of the
United States Department of Justice pursuant to the Hart-Scott-Rodino Act, Buyer
does not need to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement (including the assignments and assumptions referred to in Section 2
above). The waiting period under the Hart-Scott-Rodino Act with respect to the
transactions contemplated by this Agreement has expired.
(d) BROKERS' FEES. Buyer has no liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which Seller could become liable or
obligated.
5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to
the period between the execution of this Agreement and the Closing.
(a) GENERAL. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6 below).
(b) NOTICES AND CONSENTS. Subject to Section 5(c) below, each of the
Parties will give any notices to, make any filings with, and use its reasonable
best efforts to obtain any authorizations, consents, and approvals of
governments and governmental agencies in connection with the matters referred to
in Section 3(c) and Section 4(c) above.
(c) CONDUCT OF THE BUSINESS. Seller covenants and agrees that:
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(i) The Business will be conducted by Seller in the ordinary
course and in the same manner as heretofore conducted;
(ii) Seller will maintain insurance on the Acquired Assets and
the Business as heretofore in effect;
(iii) Without Buyer's prior written approval, no material
contract or commitment related to the Business or the Acquired Assets
will be entered into by or on behalf of Seller or Seller Subsidiaries
outside of the Ordinary Course of Business;
(iv) Seller will use commercially reasonable efforts to
preserve intact the Acquired Assets and the existing relationships and
goodwill of the Business with its advertisers, vendors, suppliers,
customers, and other third parties involved in the Business;
(v) Seller will not create or permit to become effective any
material encumbrance on any of the Acquired Assets; and
(vi) Seller will promptly advise Buyer of the commencement or
threat against either of Seller or any Seller Subsidiary of any
material litigation relating to or affecting the Acquired Assets or the
transactions contemplated by this Agreement.
(d) NOTICE OF DEVELOPMENTS.
(i) Seller shall notify Buyer of any development causing a
breach of any of their representations and warranties in Section 3
above. If Buyer has the right to terminate this Agreement pursuant to
Section 7(a)(ii) below by reason of the development and does not
exercise that right within the period of 10 business days referred to
in Section 7(a)(ii) below, the written notice pursuant to this Section
5(e)(i) will be deemed to have amended the Disclosure Schedule, to have
qualified the representations and warranties contained in Section 3
above, and to have cured any misrepresentation or breach of warranty
that otherwise might have existed hereunder by reason of the
development.
(ii) Each Party will give prompt written notice to the other
Party of any material adverse development causing a breach of any of
its own representations and warranties in Section 3 and Section 4
above. No disclosure by any Party pursuant to this Section 5(e)(ii),
however, shall be deemed to amend or supplement the Disclosure Schedule
or to prevent or cure any misrepresentation or breach of warranty.
(f) FULL ACCESS. Subject to applicable law, Seller will give Buyer and
their counsel, financial advisors, auditors and other authorized representatives
reasonable access during business hours to the offices, properties, books and
records of Seller related to the Business and will instruct the employees,
counsel and financial advisors of Seller to cooperate with Buyer in their
investigation of Seller; provided, however, that any investigation pursuant to
this Section 5(f) shall
10
<PAGE>
be conducted on commercially reasonable prior notice and in such manner as not
to interfere unreasonably with the business of Seller.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) CONDITIONS TO OBLIGATION OF BUYER. The obligation of Buyer to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 3
above shall be true and correct in all material respects at and as of
the Closing Date;
(ii) Seller and Seller Subsidiaries shall have performed and
complied with all of its covenants hereunder in all material respects
through the Closing;
(iii) there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any of
the transactions contemplated by this Agreement;
(iv) Seller shall have delivered to Buyer a certificate to the
effect that each of the conditions specified above in
Section 6(a)(i)-(iii) is satisfied in all material respects;
(v) Seller and Buyer shall have received all authorizations,
consents, and approvals of governments and governmental agencies
referred to in Section 3(c) and Section 4(c) above;
(vi) Buyer shall have received from Seller the Assignment and
Assumption in the form of Exhibit A-1 hereto duly executed by Seller;
(vii) Buyer shall have received evidence of the execution and
delivery of the Assignment and Assumption in the form of Exhibit A-3
hereto;
(viii) Buyer shall have received from Seller the Mutual
Release in the form of Exhibit C hereto;
(ix) all actions to be taken by Seller in connection with
consummation of the transactions contemplated hereby and all
certificates, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in
form and substance to Buyer;
(x) no statute, rule, regulation, order or injunction of any
court or administrative agency shall be in effect which prohibits Buyer
from consummating the transactions contemplated hereby;
(xi) there shall not be any material action, suit or
proceeding pending or threatened that seeks to prohibit the
consummation of the transactions contemplated thereby; and
11
<PAGE>
(xii) from and after the date hereof to the Closing, there
shall not have occurred any material adverse change with respect to the
business, the assets, condition (financial or otherwise) or results of
operations of the Business. At the Closing, Seller shall deliver to
Buyer a certificate, dated as of the Closing Date, certifying as to the
foregoing matter.
Buyer may waive any condition specified in this Section 6(a) if it executes a
writing so stating at or prior to the Closing.
(b) CONDITIONS TO OBLIGATION OF SELLER. The obligation of Seller to
consummate the transactions to be performed by them in connection with the
Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 4
above shall be true and correct in all material respects at and as of
the Closing Date;
(ii) Buyer shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any of
the transactions contemplated by this Agreement;
(iv) Buyer shall have delivered to Seller a certificate to the
effect that each of the conditions specified above in Section
6(b)(i)-(iii) is satisfied in all respects;
(v) Seller and Buyer shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Section 3(c) and Section 4(c) above;
(vi) Seller shall have received (A) from Buyer the Assignment
and Assumption in the form of Exhibit A-1 hereto duly executed by Buyer
and (B) a fully executed Assignment and Assumption in the form of
Exhibit A-2 hereto;
(vii) Seller shall have received from Dennis A. Sokol a
resignation as director and officer of Seller and the Mutual Release in
the form of Exhibit C hereto;
(viii) Buyer shall have received all material third-party
consents and approvals necessary for the purchase and transfer of the
Acquired Assets from Seller to Buyer;
(ix) no statute, rule or regulation or order or injunction of
any court or administrative agency shall be in effect which prohibits
Seller from consummating the transactions contemplated hereby;
(x) there shall not be any material action, suit or proceeding
pending or threatened that seeks to prohibit the consummation of the
transactions contemplated thereby; and
12
<PAGE>
(xi) all actions to be taken by Buyer in connection with
consummation of the transactions contemplated hereby and all
certificates, instruments, and other documents required to effect the
transactions contemplated hereby will be satisfactory in form and
substance to Seller.
Seller may waive any condition specified in this Section 6(b) if it executes a
writing so stating at or prior to the Closing.
7. TERMINATION.
(a) TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
as provided below:
(i) Buyer and Seller may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(ii) Buyer may terminate this Agreement by giving written
notice to Seller at any time prior to the Closing in the event (A)
Seller has within the then previous 10 business days given Buyer any
notice pursuant to Section 5(e)(i) above and either (B) the development
that is the subject of the notice has had a material adverse effect
upon the financial condition of Seller and Seller Subsidiaries, taken
as a whole or (C) the notice from Seller relates to a breach or
breaches not caused or brought about by Seller and the notice gives
Buyer an option to terminate even if the development does not have a
material adverse effect upon the financial condition of Seller and
Seller Subsidiaries, taken as a whole.
(iii) Buyer may terminate this Agreement by giving written
notice to Seller at any time prior to the Closing (A) in the event
Seller has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, Buyer has notified
Seller of the breach, and the breach has continued without cure for a
period of 30 days after the notice of breach or (B) if the Closing
shall not have occurred on or before [June 30, 2000], by reason of the
failure of any condition precedent under Section 6(a) hereof (unless
the failure results primarily from Buyer itself breaching any
representation, warranty, or covenant contained in this Agreement); and
(iv) Seller may terminate this Agreement by giving written
notice to Buyer at any time prior to the Closing (A) in the event Buyer
have breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, Seller has
notified Buyer of the breach, and the breach has continued without cure
for a period of 30 days after the notice of breach or (B) if the
Closing shall not have occurred on or before [June 30, 2000], by
reason of the failure of any condition precedent under Section 6(b)
hereof (unless the failure results primarily from Seller themselves
breaching any representation, warranty, or covenant contained in this
Agreement).
(b) EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to Section 7(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach); PROVIDED, HOWEVER,
13
<PAGE>
that if this Agreement is terminated for any reason whatsoever, Buyer will treat
and hold as such any Confidential Information they have received from Seller,
will not use any of the Confidential Information except in connection with this
Agreement and will return to Seller all tangible embodiments (and all copies) of
the Confidential Information which are in their possession.
8. POST-CLOSING COVENANTS. The Parties agree as follows with respect to
the period following the Closing.
(a) GENERAL. In case at any time after the Closing any further action
is necessary to carry out the purposes of the Asset Purchase Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Section 9 below).
(b) LITIGATION SUPPORT. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving Seller, each of the other Parties will cooperate
with the contesting or defending Party and its counsel in the contest or
defense, make available its personnel, and provide such testimony and access to
its books and records as shall be necessary in connection with the contest or
defense, all at the sole cost and expense of the contesting or defending Party
(unless the contesting or defending Party is entitled to indemnification
therefor under Section 9 below).
(c) TRANSITION. Seller will not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associate of Seller from maintaining the same
business relationships with Buyer and their subsidiaries after the Closing as it
maintained with Seller prior to the Closing.
(d) COVENANT NOT TO COMPETE. For a period of [one (1) year] following
the date of execution of this Agreement, Seller will not engage directly or
indirectly in any activity that Buyer conducts as of the Closing Date in any
geographic area in which Buyer conducts that business as of the Closing Date. If
the final judgment of a court of competent jurisdiction declares that any term
or provision of this Section 8(d) is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
14
<PAGE>
All of the representations and warranties of Seller contained in
Section 3 shall survive the Closing and continue in full force and effect for a
period of eighteen (18) months thereafter. All of the other representations and
warranties of Buyer and Seller contained in this Agreement shall survive the
Closing and continue in full force and effect forever thereafter (subject to any
applicable statutes of limitations).
(b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF BUYER.
(i) In the event that Seller breaches any of its
representations, warranties, and covenants contained in this Agreement,
and, if there is an applicable survival period pursuant to Section 9(a)
above, provided that Buyer makes a written claim for indemnification
against Seller within such survival period, then Seller agrees to
indemnify Buyer from and against any Adverse Consequences Buyer shall
suffer through and after the date of the claim for indemnification (but
excluding any Adverse Consequences Buyer shall suffer after the end of
any applicable survival period) caused by the breach.
(ii) Seller agrees to indemnify Buyer from and against any
Adverse Consequences Buyer shall suffer caused by any liability of
Seller which is not an Assumed Liability (including any liability of
Seller that becomes a liability of Buyer under any bulk transfer law of
any jurisdiction, under any common law doctrine of de facto merger or
successor liability, or otherwise by operation of law).
(c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF SELLER.
(i) In the event Buyer breaches any of its representations,
warranties, and covenants contained in this Agreement, and, if there is
an applicable survival period pursuant to Section 9(a) above, provided
that Seller makes a written claim for indemnification against Buyer
within such survival period, then Buyer agrees to indemnify Seller from
and against the entirety of any Adverse Consequences Seller shall
suffer through and after the date of the claim for indemnification (but
excluding any Adverse Consequences Seller shall suffer after the end of
any applicable survival period) caused by the breach.
(ii) Buyer agrees to indemnify Seller from and against any
Adverse Consequences Seller shall suffer caused by any liability of
Seller arising after the Closing Date which is an Assumed Liability or
which relates in any way to the Acquired Assets.
(d) MATTERS INVOLVING THIRD PARTIES.
(i) If any third party shall notify any Party (the
"INDEMNIFIED PARTY") with respect to any matter (a "THIRD PARTY CLAIM")
which may give rise to a claim for indemnification against any other
Party (the "INDEMNIFYING PARTY") under this Section 9, then the
Indemnified Party shall promptly (and in any event within five business
days after receiving notice of the Third Party Claim) notify each
Indemnifying Party thereof in writing.
(ii) Any Indemnifying Party will have the right at any time to
assume and thereafter conduct the defense of the Third Party Claim with
counsel of its choice reasonably
15
<PAGE>
satisfactory to the Indemnified Party; PROVIDED, HOWEVER, that the
Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without
the prior written consent of the Indemnified Party (not to be withheld
unreasonably) unless the judgment or proposed settlement involves only
the payment of money damages and does not impose an injunction or other
equitable relief upon the Indemnified Party.
(iii) Unless and until an Indemnifying Party assumes the
defense of the Third Party Claim as provided in Section 3(d)(ii) above,
however, the Indemnified Party may defend against the Third Party Claim
in any manner it reasonably may deem appropriate.
(iv) In no event will the Indemnified Party consent to the
entry of any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of each of the
Indemnifying Parties (not to be withheld unreasonably).
(e) DETERMINATION OF ADVERSE CONSEQUENCES. The Parties shall make
appropriate adjustments for tax consequences in determining Adverse Consequences
for purposes of this Section 9. All indemnification payments under this Section
9 shall be deemed adjustments to the Purchase Price.
(f) EXCLUSIVE REMEDY. Buyer and Seller acknowledge and agree that the
foregoing indemnification provisions in this Section 9 shall be the exclusive
remedy of Buyer and Seller with respect to Seller and the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, Buyer acknowledges and agrees that they shall not have any remedy
after eighteen (18) months following the Closing for any breach of the
representations and warranties in Section 3(f)-(o) of this Agreement.
10. INDEMNIFICATION. Buyer agrees that it will, after the date hereof,
and to the fullest extent permitted by applicable law and the corporate
documents of Seller, provide to the directors and officers of Seller
indemnification equivalent to that provided by or available under the
Certificate of Incorporation and Bylaws of Seller or permissible to the fullest
extent permitted under Delaware Corporate law with respect to acts or omissions
occurring prior to the Closing, including without limitation the authorization
of this Agreement and the transaction contemplated hereby, for a period of six
years from the Closing Date, or in the case of claims made prior to the end of
such six year period, until such claims are finally resolved. To the extent
permitted by applicable law, Buyer shall advance expenses as incurred for legal
counsel and otherwise in connection with the foregoing indemnification.
11. MISCELLANEOUS.
(a) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of the
other Party; provided, however, that any Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing Party will use its reasonable best efforts to advise the other Party
prior to making the disclosure). At such time as Seller and Buyer have executed
this Agreement, the Parties will make a joint public announcement
16
<PAGE>
concerning the transactions contemplated herein in a form and content to be
agreed upon by Seller and Buyer. Thereafter, no Party will make any announcement
concerning such transactions without the prior written approval of the other
Party, which approval will not be unreasonably withheld or delayed nor required
in the case of any legally compelled disclosure.
(b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) ENTIRE AGREEMENT. This Agreement (including the documents referred
to herein) constitutes the entire agreement between the Parties and supersedes
any prior understandings, agreements, or representations by or between the
Parties, written or oral, to the extent they related in any way to the subject
matter hereof.
(d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to Seller: First Medical Group, Inc.
------------ 1055 Washington Boulevard
Stamford, CT 06901
Attention: Lou Nemnom, Vice President
Copy to: Patton Boggs LLP
---------- 2550 M Street, N.W.
Washington, DC 20037
Attention: John H. Vogel, Esq.
If to Buyer: AMCMC Acquisition Corp.
----------- 1055 Washington Boulevard
Stamford, CT 06901
Attention: Dennis A. Sokol
17
<PAGE>
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
(h) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the domestic laws of Delaware without giving effect to any
choice or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
(i) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by Buyer
and Seller. Seller may consent to any such amendment at any time prior to the
Closing with the prior authorization of their respective board of directors. No
waiver by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
(j) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) EXPENSES. Subject to Section 5(c), each of Buyer and Seller will
bear its own costs and expenses (including legal fees and expenses) incurred in
connection with this Agreement and the transactions contemplated hereby.
(l) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
(m) INCORPORATION OF EXHIBITS, ANNEXES AND SCHEDULES. The Exhibits,
Annexes and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(n) BULK TRANSFER LAWS. Buyer acknowledges that Seller will not comply
with the provisions of any bulk transfer laws of any jurisdiction in connection
with the transactions contemplated by this Agreement.
18
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
AMCMC ACQUISITION CORP.
/s/ George Rountree
- -----------------------------------------
By: George Rountree
Title: President
FIRST MEDICAL GROUP, INC.
/s/ Elias M. Nemnom
- -----------------------------------------
By: Elias M. Nemnom
Title: Vice President
19
<PAGE>
DISCLOSURE SCHEDULE
SECTION 3(i)-INTELLECTUAL PROPERTY.
On October 29, 1999, the Company filed with the U.S. Patent Trademark office a
trademark application for the use of the name American Medical Centers.
SECTION 3(j)-CONTRACTS.
1. Note Agreement with American Multiprofile Clinic Inc. dated January 25,
1999.
2. Severance and Release and Consulting Agreement with Vladimir Checklin and
First Medical Group, Inc. and American Medical Centers Management Company,
Ltd. dated January 1, 1999.
3. Employment Agreement between George D. Rountree and American Medical
Centers Management Company, Ltd. and First Medical Group, Inc. dated April
15, 1999.
SECTION 3(k)-LITIGATION.
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. The Company is currently discussing a proposed settlement
with the plaintiffs. Accordingly, if this matter is adversely
determined, it could have a material adverse effect on the Company's
financial condition.
2. 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. 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.
3. 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.
4. In December 1999, the Company was sued for a malpractice claim by a
patient of American Medical Clinic Moscow Inc. The Company views that
this claim is without merit and through its insurance company has
retained counsel to defend this claim.
<PAGE>
5. In January 2000, a claim was made against American Medical Centers
Management Co. Ltd. by a former employee who seeks approximately
$60,000 fees for breach of an employment contract.
6. In January 2000, a claim was made against First Medical Group, Inc. and
American Medical Centers Management Co., Ltd. by a former employee who
seeks $169,000 for breach of a severence and release and consulting
agreement.
SECTION 3(l)-ENVIRONMENTAL, HEALTH AND SAFETY MATTERS.
None. (Refer to Section 3(k) 1. above).
SECTION 3(n)-BARTER RECEIVABLES OR OBLIGATIONS.
None.
<PAGE>
Annex 2.1(a)
LIST OF ACQUIRED ASSETS
1. All of the issued and outstanding shares of common stock of American
Medical Centers Management Company, Ltd., a British Virgin Islands company
("AMCMC"), which shares are, owned by First Medical Group International,
Ltd. a wholly-owned subsidiary of Seller. AMCMC in turn owns all of the
issued and outstanding shares of the following entities:
(a) American Medical Clinics Moscow, Inc. (Cayman).
- American Medical Clinics, Inc., a Russian joint venture
corporation, all of whose outstanding shares are owned by
said Cayman corporation.
(b) American Medical Clinics - St. Petersburg Ltd. (BVI).
- American Medical Clinics - St. Petersburg Ltd., a Russian
joint venture corporation, all of whose outstanding shares
are owned by said BVI corporation.
- American Medical Clinics - Kiev, a Ukranian joint venture
corporation, all of whose outstanding shares are owned by
said BVI corporation.
(c) American Medical Centers - Warsaw z.o.o. (Poland).
(d) American Medical Centers - Prague s.r.o. (Czechoslovakia).
(e) American Hospital of Moscow Management Company, Ltd. (BVI).
(f) American Multi-Profile Clinic, Inc. (Russia).
2. All of Seller's right, title and interest in and to any intellectual
property relating to AMCMC and the Seller Subsidiaries, including, without
limitation, Seller's pending applications for trademark of "American
Medical Center", "AMC" and related logo design.
3. Insurance coverage carried as of the Closing Date by Seller with respect to
all of the Acquired Assets and the Assumed Liabilities, as in effect on the
Closing Date.
4. All of Seller's right, title and interest in and to the furniture and
fixtures listed on Schedule 1 hereto.
<PAGE>
Annex 2.3(a)
ASSUMED LIABILITIES
1. All liabilities of AMCMC reflected on the books of AMCMC as at the
Closing.
2. All liabilities of Seller which are identified both in the first and
third columns of the attached Schedule 1; provided, however, that the
values of said liabilities to be assumed by Buyer will be as of the
Closing Date.
3. All liability resulting or arising from the claims and/or litigation
described in items 3-6 on the "Disclosure Schedule" to this Agreement.
<PAGE>
FMG/AMCMC TRANSACTION
SCHEDULE OF LIABILITIES (EST)
12/31/99
(ASSUMES 1.0 MILLION SHARE WARRANT CONVERSION
IN EXCHANGE FOR ASSUMPTION OF $125,000 OF LIABILITIES)
<TABLE>
<CAPTION>
Liabilities retained Liabilities assumed
by FMG in transaction Total
------ -------------- -----
<S> <C> <C> <C>
FMG ACCRUED LIABILITIES
Audit accrual-1999 $ 103,000 $ -- $ 103,000
Lehigh tax 20,541 20,541
US Income tax (1998) 59,000 59,000
Bruno settlement 55,000 55,000
Environmental suit-reserve estimate 75,000 -- 75,000
----------- ----------- -----------
312,541 -- 312,541
LEHIGH NOTES PAYABLE
Lehigh notes 390,000 390,000
Lehigh notes-accrued interest -- 544,384 544,384
----------- ----------- -----------
-- 934,384 934,384
FMG ACCOUNTS PAYABLE (12/31/99)
Arthur Andersen 48,000 48,000
American Stock 2,038 2,038
Broad & Cassel (Shapo firm) 12,555 12,555
Cummings & Lockwood 16,877 16,877
McGrane & Nosich 8,888 8,888
NYC Dept of Tax (Lehigh) 4,267 4,267
Shapo 22,186 22,186
Sheldon Ribotsky (1998 tax return) 8,000 8,000
Vorys 32,725 32,725
Zurick 33,333 33,333
Patton Boggs 35,789 35,000 70,789
AIG 14,754 14,754
Equity Group 7,151 7,151
Fishman Hermann 12,221 12,221
SNET 25,282 25,282
Other accounts payable -- 61,615 61,615
----------- ----------- -----------
106,114 274,567 380,681
LIABILITIES RELATING TO DISCONTINUED OPS
Continucare 200,000 200,000
Employee liability 200,000 200,000
Pasternack 113,550 113,550
Sain & Carroll (Settlement of FMG stock-non cash) 30,000 30,000
Gibbs 10,000 10,000
Durham note receivable -- (90,000) (90,000)
----------- ----------- -----------
30,000 433,550 463,550
SHAREHOLDERS NOTES PAYABLE --
Notes Payable-AMC, Inc./Sokol 500,000 500,000
Notes Payable-Equity Group 100,000 100,000
Notes Payable-Zizza 30,000 30,000
Notes Payable-Gale 25,000 25,000
Notes Payable-Sokol 300,000 -- 300,000
Notes Payable-accrued interest (Sokol/AMC, Inc.) 2,500 11,500 14,000
----------- ----------- -----------
302,500 666,500 969,000
----------- ----------- -----------
TOTAL $ 751,155 $ 2,309,001 $ 3,060,156
</TABLE>
<PAGE>
Annex C
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 001-00155
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
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Common Stock $.001 par value OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
None
- -------------------------------------------------------------------------------
(Title of Class)
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 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 by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES X NO
------ ------
Approximate aggregate market value of the voting stock held by "nonaffiliates"
of the Registrant on March 20, 1999: $xxxx.
Number of shares of Common Stock outstanding of the Registrant as of March 20,
1999: 9,567,292.
- ----------------------------
* Registrant's sole class of voting stock is its Common Stock $.001 par value,
which is listed on the OTC Bulletin Board. The determination of market value of
such Common Stock has been based solely on the closing price per share of such
stock on the OTC Bulletin Board on the date indicated. In making this
computation, all shares known to be owned by directors and executive officers of
the Registrant and all shares known to be owned by person holding in excess of
5% of the Registrant's Common Stock have been deemed held by "affiliates" of the
Registrant. Nothing herein shall affect the right of the Registrant to deny that
any such directors, executive officers or more than 5% stockholder is an
"affiliate."
<PAGE>
PART I
------
ITEM 1. BUSINESS
GENERAL
First Medical Group, Inc. ("FMG or the Company") owns and operates medical
clinics in Eastern Europe. The Company previously conducted its operations in
three divisions: (a) a physician practice management division which provides
physician management services including the operation of clinic facilities and
management services to medical groups, (b) an international division which
manages medical centers in Eastern Europe and (c) an electrical supply
distribution business for the construction industry. The Company was formed as a
result of a merger between The Lehigh Group, Inc. ("Lehigh") and First Medical
Corporation in July 1997. Subsequent to the merger, Lehigh changed its name to
First Medical Group, Inc. FMG is incorporated in the State of Delaware.
The Company incurred substantial losses from operations relating to its
physician practice management business ("managed care operations") in 1997 and
through the first quarter of 1998. As a result, the Company adopted a formal
plan to discontinue and dispose of its managed care operations. The decision to
dispose of these operations was based upon the view of management that such
operations would require substantial additional capital to sustain operating
losses that would be continued to be incurred by the Company. The Florida
managed care operation was sold in April 1998 and the Indiana and Texas managed
care operations were sold in July 1998.
The Company also adopted a formal plan to divest its electrical supply business
("Hallmark"). The decision to dispose of Hallmark was based upon an assessment
by management that the business did not meet the Company's operating strategy
for development and expansion of its international healthcare operations.
For financial reporting purposes, the Company has reflected the managed care and
electrical supply business as discontinued operations.
The Company believes that it is well-positioned to develop and expand its
international business in existing as well as new markets.
The Company, through its management company, American Medical Centers Management
Company, Ltd. ("AMC"), owns and operates outpatient and ancillary healthcare
facilities modeled after the American healthcare system. AMC's healthcare
facilities are currently structured as "A," "B," or "C" type facilities. The "C"
type facility is a full service outpatient primary care center with those
services provided as listed below, dependent upon both market and demand. The
"B" type clinic is similar to a "C" model but with increased diagnostics,
inpatient care facilities and between ten to fifteen overnight medical beds. The
"A" type facility provides both inpatient and outpatient care with 50 to 300
medical beds. The company currently operates five "C" locations in Moscow,
Russia; St. Petersburg, Russia; Kiev, Ukraine; Prague in the Czech Republic; and
Warsaw, Poland. In addition three "B" facilities are under construction in those
markets which are expected to be completed in the third quarter of 1999, and the
company is in the process of opening one additional "C" facility in Middle Asia
which is scheduled to open in the fourth quarter of 1999. Further, two "A"
facilities are under construction in Moscow and Warsaw and are expected to be
completed in the year 2001. Future plans call for additional upgrades of current
facilities in Eastern Europe and Middle Asia, and expansion to the Middle East,
Latin America, and The Pacific Basin. AMC clinics also supply Western-trained
emergency physicians in remote sites in St. Petersburg and Warsaw.
The Company's services include but are not limited to: trauma and emergency
care, general practice, family practice, full diagnostics, radiology, pharmacy,
dentistry, pathology, psychiatry and most specialty groups such as cardiology,
pediatrics, oncology, gynecology, orthopedics, and dermatology. The Company
strives to deliver a comprehensive range of medical services to meet the
specific needs of its clients in each of its unique markets. The Company employs
American board certified doctors, nurses, and ancillary personnel. Nationals are
also employed after being fully credentialed.
2
<PAGE>
CUSTOMERS
Eighty percent of the company's client base is represented by two specific
groups, expatriates and local employees of multinational corporations (to
include management) and nationals (referred to as those persons or groups of
local citizens that desire, appreciate and demand the American health care
delivery system both in outpatient and inpatient care). Tourists, students,
diplomats, and non-resident members that frequently travel to those markets
represent the remainder of this client base. The patient mix changes based on
season and market.
Revenues of the company are primarily derived from fee-for-service charges and
annual non-refundable membership fees charged to corporations, families, and
individuals. A variety of diverse membership plans are available and can be
tailored to meet the unique needs of the corporate clients. Local nationals now
account for fifteen to twenty-five percent of revenue, depending upon the
healthcare facility's location.
Corporations are required to pay an annual membership fee, as well as advance
deposits when requesting third party billing (insurance). Membership plans offer
a wide range of benefits including 24-hour emergency access, monthly medical
newsletters, special discounts on services, and reciprocal membership at all AMC
locations. The Company also offers the patient benefit of insurance processing
for members only. AMC corporate memberships include over five hundred
international companies.
In 1998, in order to meet the changing needs of corporate clients and to provide
to potential clients expanded access to American-style healthcare, AMC developed
and implemented a variety of comprehensive managed care plans. These plans range
from individual and family plans to corporate plans covering up to 2000 persons.
QUALITY ASSURANCE
The company believes that its affiliations with partner hospitals is a valuable
asset. Since 1992, the company has been affiliated with Baylor College of
Medicine in Houston, Texas ("Baylor"), to provide quality assurance,
tele-medicine, consultation, and credentialing. Baylor also conducts the
majority of the recruiting function for AMC medical personnel worldwide. In
1999, AMC, in conjunction with Baylor, has made application for acceptance by
the International Joint commission, part of the American Hospital Joint
accreditation commission and anticipates this process will take place over the
coming year.
NEW DEVELOPMENTS
In 1998 AMC, in conjunction with Baylor College of Medicine and City of
Moscow (Moscow Citi), signed an agreement for the development of New American
Hospital of Moscow and the Baylor Medical School Annex. The Annex is
scheduled to be completed and opened by August 1, 1999.
Also in 1998, the company signed a long-term lease with an option to buy the
new American Medical Center "B" facility in Warsaw due to be completed by the
third quarter of 1999.
On January 1, 1999 George Rountree, President and Chief Executive Officer of the
American Hospital of Istanbul (Koc Foundation), the American Medical Center of
Istanbul and the American Italian Hospital of Istanbul, joined the board of FMG.
On April 15, 1999, Mr. Rountree will become Chief Executive Officer of AMC and
President and Chief Operating Officer of the Company, in addition to his current
responsibilities.
MAJOR STRATEGY
The major strategy of AMC is to continue with its plan in developing new centers
throughout Eastern Europe, Mid-Asia, Middle East, Latin America, and the Pacific
Basin. The company believes that in order to support its plan it will be
necessary to seek additional capital.
COMPETITION
The company has relatively little competition in its current market area.
3
<PAGE>
DISCONTINUED OPERATIONS
In 1998 the company adopted a plan to discontinue and dispose of all of its
non-core businesses and allow all assets to be deployed into the successful AMC
operations. Consistent with that plan, the company sold the following
businesses:
1. On April 1, 1998 the Company sold its Florida managed care businesses for a
sale price of $6.75 million. Proceeds of the sale were used for the
continued development of AMC, as well as to retire existing bank debt.
2. On April 17,1998 the Company sold its electrical supply business for
consideration of $1.9 million.
3. On July 8, 1998 the Company sold its Indiana Managed care operations for
consideration of cash and reduction of debt in the amount of $527,000.
4. On July 16, 1998 the Company sold its Texas managed care business for
consideration of $90,000, in the form of a note payable bearing interest at
8% starting July 1999.
With these transactions, the Company has prepared, reorganized, and positioned
itself to support the development and growth of AMC's worldwide operations.
SUBSIDIARIES
The Company maintains the following subsidiaries:
First Medical Corporation, a Delaware corporation
First Medical Group International, Ltd. , a British Virgin Island
corporation
American Medical Centers Management Company, Ltd., a British Virgin
Island corporation
American Medical Clinics Moscow, Inc., a Cayman Island corporation
American Medical Center-St. Petersburg Ltd. , a British Virgin Island
corporation
American Medical Centers Sp. z.o.o., a Poland corporation
American Medical Centers s.r.o., a Czech Republic corporation
EMPLOYEES
As of March 1, 1999, the Company had approximately 222 full-time
employees.
The Company complies with local contract requirements in the respective
geographic locations of particular jobs with respect to wages, fringe benefits
and working conditions.
ITEM 2. PROPERTIES
FMG's principal executive office is located at 1055 Washington
Boulevard, Stamford, Connecticut 06901, and its telephone number is (203)
327-0900.
FMG leases approximately 2,400 square feet in Stamford, Connecticut.
Such lease is on a month-to-month term, at an annual rent of $51,000.
FMG, through its various subsidiaries, currently leases one location in
Poland with monthly rent of $2,400, two locations in Russia with monthly rents
of $11,000 and $30,000, respectively, one location in the Czech Republic with a
monthly rent of $4,500 and one location in the Ukraine with a monthly rent of
$5,000.
The Company believes that all of its facilities are adequate for the
business in which it is engaged.
4
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
FMG is involved in various legal proceedings incidental to its
business, and in the opinion of the Company, no individual item of litigation or
group of similar items of litigation, taking into account the insurance coverage
available to FMG, is likely to have a material adverse effect on FMG's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is currently listed on the over-the-counter bulletin
board ("OTCBB"). On March 31, 1999, there were approximately 70 holders of
record of the Common Stock (excluding shares held in "nominee" or "street"
name).
The following table reflects the range of the reported high and low
closing prices of Common Stock on the NYSE for the calendar quarters indicated.
The information in the table and in the following paragraph has been adjusted to
reflect retroactively all applicable stock splits and stock dividends but not
the Reverse Split, except for the fourth quarter for the period commencing
November 13, 1997 through December 31, 1997.
The prices below reflect trading of the Common Stock on the NYSE
through November 12, 1997. Subsequent to the delisting of the Common Stock from
the NYSE, the prices below for the period from November 13, 1997 through the
date hereof reflect trading of the Common Stock on the OTCBB.
<TABLE>
<CAPTION>
1997:
<S> <C> <C>
First Quarter $ 1/4 $ 13/32
Second Quarter 14/32 1/8
Third Quarter 15/32 3/32
Fourth Quarter from October 1,
1997 through November 12, 1997 1/4 1/8
Fourth Quarter from November 13,
1997 through December 31, 1997 4-1/4 1-1/4
1998:
First Quarter $ 3 $ 23/64
Second Quarter 1 19/64 21/64
Third Quarter 1 1/32 9/64
Fourth Quarter 1 3/16 1/8
1999:
First Quarter $ 13/16 $ 1/8
</TABLE>
The Company did not pay any dividends in 1997 or 1998.
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIRST MEDICAL GROUP, INC. & SUBSIDIARIES
Selected Financial Information
(in Thousands, Except For Per Share Data)
STATEMENT OF OPERATING DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1994(1)(2) 1995(1)(2) 1996(1)(2) 1997(1) 1998(1)
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue -- -- $ 6,660 $ 9,019 $ 10,947
Cost of revenues -- -- 5,370 7,134 9,260
---------- ---------- ---------- --------- ---------
Gross profit -- -- 1,290 1,885 1,687
Operating expenses:
Salaries and related benefits . -- -- 391 700 905
Other operating expenses -- -- 1,532 1,256 1,247
Impairment loss from
intangibles -- -- -- 1,024 --
---------- ---------- ---------- --------- ---------
Total operating expenses -- -- 1,923 2,980 2,152
---------- ---------- ---------- --------- ---------
Loss from operations -- -- (633) (1,095) (465)
Other expenses (income) -- -- 55 198 167
---------- ---------- ---------- --------- ---------
Loss before income taxes and
cumulative effect of accounting
change -- -- (688) (1,293) (632)
Income tax provision (benefit) (3) -- -- -- (63) (473)
---------- ---------- ---------- --------- ---------
Net (loss) before discontinued
operations and cumulative effect
of accounting change -- -- (688) (1,230) (159)
Income (loss) from
discontinued operations net of
income tax provision of $518,000 $ 818 $ (364) 1,011 (8,240) 2,008
Cumulative effect of change in
accounting principle net of
income tax benefit of $29,099 -- -- -- -- (940)
---------- ---------- ---------- --------- ---------
Net income (loss) $ 818 $ (364) $ 323 $ (9,470) $ 909
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Net income (loss) per
share before income
(loss) from discontinued
operations and cumulative
effect of accounting principle -- -- $ (.07) $ (.13) $ (.01)
Cumulative effect per share of
change in accounting principle (.10)
Income (loss) per
share from discontinued
operations $ .09 $ (.04) .11 (.90) .21
---------- ---------- ---------- --------- ---------
Net income (loss) $ .09 $ (.04) $ .04 $ (1.03) $ .10
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Pro forma fully diluted weighted
average number of FMG shares
currently outstanding (3) 9,021 9,021 9,021 9,202 9,496
Cash dividends as declared $ 117 $ 38 $ -- $ -- $ --
Balance Sheet Data
Working capital $ 972 $ 227 $ (899) $ (3,487) $ (3,305)
Total assets 972 227 2,335 5,143 4,992
Current liabilities -- -- 1,257 6,196 4,966
Stockholders' equity 972 227 703 (1,054) 26
Book value per share-fully diluted $ .11 $ .03 $ .08 $ (.11) $ --
</TABLE>
6
<PAGE>
- -------------------
(1) The financial statements of the Company for the years ended December
31, 1994, 1995, 1996, 1997 and 1998 have been reclassified to reflect
the managed care and electrical supply business as discontinued
operations for financial reporting purposes.
(2) The selected financial data for the years ended December 31,1994 and
1995 has been derived from the audited combined financial statements of
MedExec, Inc. and subsidiaries; SPI Managed Care, Inc., and SPI Managed
Care of Hillsborough County, Inc. (collectively, "MedExec"). The data
for 1996 has been derived from the 1996 consolidated financial
statements of FMC.
(3) The amount of FMC stock issued and outstanding has been adjusted to
reflect the exchange of 10,000 shares for 11,276,750 shares of the
Lehigh Group, plus the conversion of the Preferred Stock and the
1-for-30 reverse stock split.
On July 9, 1997 at a Special Meeting (the "Special Meeting") of
stockholders of the Lehigh Group, Inc. ("Lehigh"), the stockholders of
Lehigh approved the merger (the "Merger") pursuant to the terms of the
Agreement and Plan of Merger dated as of October 29,1996 (the "Merger
Agreement") among Lehigh, First Medical Corporation ("FMC") and Lehigh
Management Corp., a wholly-owned subsidiary of Lehigh ("Merger Sub").
On the same day, Merger Sub was merged with and into FMC and each
outstanding share of common stock of FMC (the "FMC Common Stock"), was
exchanged for (i) 1,127.675 shares of Lehigh's Common Stock, par value
$.001 per share ("Lehigh Common Stock"), and (ii) 103.7461 shares of
Lehigh's Series A Convertible Preferred Stock, par value $.001 per
share (the "Lehigh Preferred Stock"), each of which is convertible into
250 shares of Lehigh Common Stock and has a like number of votes per
share, voting together with the Lehigh Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Management's Discussion and Analysis
of Financial Condition and Results of Operations may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Further description of the risks and uncertainties to the business are included
in detail in Item 1 of this Form 10-K.
The following discussion should be read in conjunction with the consolidated
financial statements, including the notes thereto, contained elsewhere in this
10-K.
The Company incurred substantial losses from operations relating to its
physician practice management business ("managed care operations") in 1997 and
through the first quarter of 1998. As a result, the Company adopted a formal
plan to discontinue and dispose of its managed care operations. The decision to
dispose of these operations was based upon the view of management that such
operations would require substantial additional capital to sustain operating
losses that would be continued to be incurred by the Company. The Florida
managed care operation was sold in April 1998 and the Indiana and Texas managed
care operations were sold in July 1998.
The Company also adopted a formal plan to divest its electrical supply business
("Hallmark"). The decision to dispose of Hallmark was based upon an assessment
by management that the business did not meet the Company's operating strategy
for development and expansion of its international healthcare operations.
7
<PAGE>
RESULTS OF OPERATIONS - FMG
- ---------------------------
YEAR ENDED DECEMBER 31, 1998
COMPARED WITH YEAR ENDED
DECEMBER 31, 1997
REVENUE. Revenue for the years ended December 31, 1998 and 1997 were
$10.9 million and $ 9.0 million, an increase of $1.9 million or 21% due to the
opening of two new clinics in Eastern Europe in late 1996 as well as increased
patient visits. Total patient and dental visits in 1998 were 21,605 and 4,333,
respectively, as compared to 18,805 and 3,246 in 1997, an increase of 14.9% and
33.5%, respectively.
COST OF REVENUE. Cost of revenue for the years ended December 31, 1998
and 1997 were $9.3 million and $7.1 million, respectively. Cost of revenue as a
percent of revenues were 85% and 79% for the year ended December 31, 1998 and
1997, respectively. The increase was related to increased staffing levels as a
result of the increase in visits.
OPERATING EXPENSES. Operating expenses for the years ended December
31, 1998 and 1997 were $2.2 million as compared to $3.0 million. Included in
operating expenses in 1997 was a write-off of $1.0 million relating to the
Lehigh merger. As a percent of revenues, operating expenses, excluding this
write-off of intangibles in 1997 were 20% and 22% in 1998 and 1997,
respectively.
The cumulative effect of a change in accounting principle of $940,454
relates to the write-off of start-up costs of the Warsaw operation pursuant to
the Accounting Standards Executive Board Statement of Position 98-5.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations for the year ended December 31, 1998 was $2.0 million as compared to
a loss of $8.4 million for the year ended December 31, 1997. In 1998, the
Company recorded a gain on the sale of discontinued operations of $4.1 million.
INCOME TAX BENEFIT. Income tax benefit for the year ended December 31,
1998 was $473,000 as compared to a tax benefit of $63,000 for the year ended
December 31, 1997. During 1998, the Company recorded a deferred tax asset of
$577,000 due to the likelihood that the deferred asset would be realized in the
near future.
NET INCOME (LOSS). Net income for the year ended December 31, 1998 was
$909,000 as compared to a loss of $(9.5) million for the year ended December 31,
1997. The increase in net income relates to those factors noted above.
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH YEAR ENDED
DECEMBER 31, 1996
REVENUE. Total revenue of FMG for the twelve months ended December 31,
1997 and 1996 were $9.0 million and $6.7 million, respectively, an increase of
$1.3 million, or 19%. The increase is attributable to the opening of two new
clinics in Eastern Europe in late 1996 as well as increased patient visits.
COST OF REVENUE. Cost of revenue for the years ended December 31, 1997
and 1996 were $7.1 million and $5.4 million, respectively. Cost of revenue as a
percent of revenues for the years ended December 31, 1997 and 1996 were 79% and
81%, respectively. The increase relates to the increase in staff as well as the
increase in the number of clinics.
OPERATING EXPENSES. Operating expenses for the years ended December 31,
1997 and 1996 were $3.0 million and $1.9 million, respectively. Included in
operating expenses for the year ended December 31, 1997 was a write-off of
intangibles of $1.0 million. Included in operating expenses for the year ended
December 31, 1996 were preopening and development costs of $829,000 relating to
the two new clinics.
8
<PAGE>
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations for the year ended December 31, 1997 was $(8.2) million as compared
to income of $1.0 million for the year ended December 31, 1996.
INCOME TAX. Income tax benefit for the year ended December 31, 1997 was
$63,000.
NET (LOSS) INCOME. Net loss for the twelve months ended December 31,
1997 was $(9.5) million compared to net income of $.3 million for the same
period in 1996. The decrease in net income relates to those factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1998 was $909,000 as compared
to $1,421,000 at December 31, 1997. During 1998, the Company divested its
managed care and electrical supply operations. These divestitures resulted in a
gain recorded on the sales of discontinued operations of $4.7 million. The
proceeds from these sales were used to repay the existing bank loans ($3.6
million), repay Humana on certain outstanding obligations ($1.35 million), fund
operating losses on discontinued operations and settlement of certain
obligations with former employees and shareholders of the Company ($2.1
million).
Cash and cash equivalents at December 31, 1997 was $1,421,000 as
compared to $124,000 at December 31, 1996.
Net cash provided by operating activities was $92,000 for the year
ended December 31, 1998. Net cash used in investing activities was $6.6 million
which related mainly to capital expenditures. Net cash provided by financing
activities was $(2.9) million which related primarily to the repayment of the
Company bank debt. Cash used in discontinued operations for the year ended
December 31, 1998 was $(4.4) million.
As of December 31, 1998, the Company had no outstanding lines of
credit.
The Company believes that cash flow from existing operations will be
sufficient to satisfy its contemplated cash requirements through the first
quarter of the Year 2000. The Company's long term capital requirements beyond
1998 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 FMG's activities in the short or long
term, FMG 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
FMG.
The Company is in default in the payment of interest (approximately
$968,400 interest was past due as of December 31, 1998) on the $390,000
aggregate principal amount of its 13 1/25 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 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 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. Should such systems not be 2000 year 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.
9
<PAGE>
The Company is in the process of identifying those vendors that it
relies on to supply diagnostic tests results relating to patient testing and to
a small group of third-party payors. The Company intends to send inquires to
these vendors and third party payors to ascertain compliance.
Based upon the information currently available, the Company believes
that its risk associated with problems arising from year 2000 issues is not
significant. However, because of the many uncertainties associated with year
2000 issues, and because the Company's assessment is necessarily based upon
information from third-party payors and suppliers, there can be no assurance
that the Company's assessment is correct or as to the materiality or effect of
any failure of such assessment to be correct. The Company will continue with its
review process as described above and make modifications as deemed necessary
under the circumstances.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, the Accounting Standards Executive Board issued the
Statement of Position 98-5 ("the SOP"), Reporting on the Costs of Start-Up
Activities. The SOP requires that costs of start-up activities and
organization costs to be expensed as incurred. Prior to 1998, the Company
incurred $940,454, net of income tax benefit of $29,099 as cost related to
its start-up operations. The Company has reflected this amount in the
consolidated statement of income for the year ended December 31, 1998 as a
cumulative effect of a change in accounting principle as required by the SOP.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial
statements. The Company's consolidated financial statements are required to
include comprehensive income disclosures beginning with the first quarter of
fiscal year 1998. Restatement of prior period information are to be made for
comparative purposes. Effective January 1, 1998, the Company adopted this
pronouncement. The Company believes that the adoption of this pronouncement
did not have a material effect on the Company's results of operations or
financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the way
public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenue. The
Company has adopted SFAS No. 131 as of January 1, 1998. The Company believes
that the adoption of SFAS No. 131 will not have a material effect on the
Company's results of operations or financial condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company currently does not use derivatives and therefore
believes that this new pronouncement will not have a material effect on its
results of operations or financial condition.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's operations
over the past three years.
IMPACT OF EUROPEAN ECONOMY
Over recent years, Russia has undergone substantial political, economic
and social change. As an emerging market, Russia does not possess a
well-developed business infrastructure which generally exists in a more mature
free market economy. As a result, operations carried out in Russia involve
significant risks, which are not typically associated with those in developed
markets. Instability in market reform could subject the Group or its investments
to unpredictable changes in the basic business infrastructure under which they
currently carry out their operations. Uncertainties regarding the political,
economic, legal, tax or regulatory environment, including the potential for
adverse changes in any of these factors, could significantly affect the Group's
ability to operate commercially. It is not possible to estimate what changes may
occur or the resulting effect of any such changes on the Company's financial
condition or future results of operations.
10
<PAGE>
It is not clear what action the Russian government will take as a
result of the current economic situation. Further, it is not possible to
determine the future effect a continuation of the economic crisis may have on
the Group's liquidity and earnings, including the effect on transactions with
the Company's suppliers. While the ultimate outcome of this matter cannot
presently be determined, management believes that this situation will not have a
material adverse impact on the financial condition of the Company. As a result,
the financial statements do not include any adjustments that may result from
these uncertainties. Related effects, if any, will be reported in the financial
statements as they become known and estimable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Note 2(k) of the financial statements
attached hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-14 and page S-1 of this Form 10-K, which are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information regarding the dismissal of BDO Seidman, LLP ("BDO") as its
certifying accountant in December 1998 and engagement of Arthur Anderson, LLP as
its new certifying accountants is incorporated by reference to FMG's Form 8-K
filed with the Securities and Exchange Commission on December 9, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table set forth below sets forth information with respect to the
directors and executive officers of the Company. Dennis A. Sokol, Elliot H.
Cole, Richard Berman and George Rountree are currently directors of the Company
and will serve as directors until the next annual meeting of stockholders of the
Company (or until their respective successors are duly elected and qualified or
until their earlier death, resignation or removal).
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
- ---- --- ----------------
<S> <C> <C>
Dennis A. Sokol 53 Chairman of the Board, Chief Executive
Officer and Director of the Company and
Chairman of the Board and Chief Executive
Officer of FMC
Elias M. Nemnom 48 Senior Vice President and Chief Financial
Officer of the Company
Elliot H. Cole 65 Vice Chairman of the Board and Director of
the Company
Richard Berman 53 Director of the Company
George Rountree 62 Director of the Company
</TABLE>
Mr. Sokol has been a Director and Chairman of the Board and Chief
Executive Officer of the Company since the Merger, which was consummated on July
9, 1997. Mr. Sokol has served as the Chairman of the Board and Chief Executive
Officer of FMC since its formation in January 1996. Prior to the formation of
FMC, Mr. Sokol was Chairman of AMC, Inc. Prior to January 1995, Mr. Sokol served
as the Chairman of the Board and Chief Executive Officer of Hospital Corporation
International, Plc., the former international division of Hospital Corporation
of America, Inc., which entity owned and operated hospitals and primary care
facilities in the United Kingdom, Central
11
<PAGE>
and Eastern Europe, the Middle East and Pacific Rim, and American Medical
Clinics, Ltd. In all, Mr. Sokol has over thirty years experience in the
medical services industry.
Mr. Nemnom has been the Chief Financial Officer of the Company since
December 1998. He had previously been the Chief Financial Officer of FMC from
May 1996 until the merger in July 1997. Prior to joining FMC, from March 1995 to
April 1996, Mr. Nemnom served as the Chief Financial Officer of MedE America
Corporation, an electronic data interchange company. From December 1985 to
January 1995, Mr. Nemnom served as the Chief Financial Officer of Medserv
Corporation. Before joining Medserv, Mr. Nemnom was a Senior Manager at Deloitte
& Touche for over ten years specializing in the healthcare industry. Mr. Nemnom
is a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants, the New York State Society of Certified Public
Accountants and the Healthcare Financial Management Association.
Mr. Cole has been a Director of the Company since July 1997 and has
served as the Co-Vice Chairman of FMC's Board of Directors since its formation
in January 1996. Mr. Cole is a senior partner in the law firm of Patton Boggs
LLP, Washington, D.C., a firm of approximately 250 lawyers. Mr. Cole has
practiced corporation law and has been engaged in Federal matters for more than
thirty-five years. Mr. Cole has served as a trustee of Boston University since
1977 as well as being a member of numerous corporate and not-for-profit boards.
Mr. Berman has been a Director of the Company since August 1997. Since
1995, Mr. Berman has been the President of Manhattanville College. From 1991 to
1994 he was employed by Howe-Lewis International, initially as President of
North America division and subsequently as President and Chief Executive
Officer. He also is a director of HCIA, Inc., Health Insurance Plan of Greater
New York and the Independent College Fund and a member of the Special Advisory
Panel on Empire Blue Cross/Blue Shield and the New York State Council on Health
Care. He has served on the Board of Directors for Lillian Vernon since 1997.
Mr. Rountree has been a Director of the Company since December 1998.
Mr. Rountree has been Chief Executive Officer of American Hospital of Istanbul
since 1991 and prior to that he was Chief Operating Officer. From 1987 to 1990,
Mr. Rountree was Project Manager of the International Hospital in Istanbul,
Turkey and President of Multi-Care Health Corporation and Quadrus International
from 1979 to 1990. Prior to 1979 Mr. Rountree was an Administrator at the
Methodist Hospital in Houston, Texas. Mr. Rountree is a fellow of the American
College of Healthcare Executives.
All directors will serve until the annual meeting of stockholders of
the Company and until their respective successors are duly elected and
qualified or until their earlier death, resignation or removal. Officers are
elected annually by the Board of Directors and serve at the discretion
thereof.
12
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation awarded to,
earned by or paid to the Chief Executive Officer and the other most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 ("Named Executive Officers") for services rendered in
all capacities to the Company during each of the years ended December 31, 1998,
1997 and 1996:
Summary Compensation Table
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Long Term
Compensation Awards
Securities Underlying
Other Annual Options (Number of All Other
Name And Principal Position Year Salary Bonus Compensation (1) Shares) Compensation
- --------------------------- ---- ------ ----- ---------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Dennis Sokol (3) 1998 $300,000 0 0 500,000 $47,781(2)
1997 $296,800 0 0 0 $57,980(2)
1996 $267,200 0 0 0 $29,790(2)
Robert Bruno (4) 1998 $120,000 0 0 0 $8,400(5)
1997 $120,000 $7,200(5)
1996 $120,000 $7,200(5)
</TABLE>
- ------------------------------
(1) As to each individual named, the aggregate amount of personal benefits
not included in the Summary Compensation Table does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported
for the named executive officer.
(2) Represents premiums paid by the Company with respect to term life
insurance for the benefit of the Named Executive Officer or the
Company, health insurance benefits and auto allowance.
(3) During 1998, 1997 and 1996, Mr. Sokol was employed by FMC as a result
of the reorganization among MedExec Inc., American Medical Clinics,
Inc. and FMC.
(4) Mr. Bruno became employed with the Company in 1983. As of
October 1, 1998, Mr. Bruno was no longer employed by the Company.
(5) Represents auto allowance paid by Company to the Named Executive
Officer.
COMPENSATION OF DIRECTORS
Executive directors receive no compensation; however, each
non-executive director is entitled to receive annually shares of Common Stock
with a fair market value of $10,000. During 1998, the non-executive directors
each received 10,000 shares of the Company's Common Stock.
OPTIONS
In 1998 525,000 options were granted to the executive officers of the
Company named in the Summary Compensation Table or to other employees of the
Company. Additionally, non-executive officer directors were granted on aggregate
425,000 stock options in 1998. In July 1997, the Board of Directors established
a Stock Option Plan (the "Stock Option Plan") and the Incentive Compensation
Plan (the "Incentive Compensation Plan").
<TABLE>
<CAPTION>
Potential Realizable
Value
At Assumed Annualized
Rates of Stock Price
Appreciation for
Individual Grants OPTION TERM(1)
----------- ------------ ---------------- -------------- ------------- ----------------------
% of Total
Options
Number of Granted to Exercisable
Date of Options Employees in Price Per Expiration
Name Grant(2) Granted Fiscal Year Share Date 5% 10%
---- -------- ------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis J. Sokol 12/17/98 500,000 95% $0.120 12/31/02
</TABLE>
13
<PAGE>
(1) "Potential Realized Value" is disclosed in response to the SEC's rules which
require such disclosure for illustration purposes and is based on the
difference between the potential market value of shares issuable upon
exercise of such options and the exercise price of such options. The values
disclosed are not intended to be, and should not be interpreted by
stockholders as, representations or projections of future value of the
Common Stock or of the stock price.
No options were exercised by the executive officers of the Company
named in the Summary Compensation Table during the fiscal year ended December
31, 1998. The following table sets forth the number and dollar value of options
held by such persons on December 31, 1998, none of which were "in the money" at
December 31, 1998.
AGGREGATED OPTION EXERCISES IN
1998 AND YEAR-END OPTIONS
Number of Unexercised Options and Warrants at
YEAR-END
<TABLE>
<CAPTION>
NAME Exercisable Unexercisable
- ---- ----------- -------------
<S> <C> <C>
Dennis Sokol 500,000 --
Robert Bruno 8,333 --
</TABLE>
THE STOCK OPTION PLAN
The purpose of the Stock Option Plan is to advance the Company's
interests by providing additional incentive to attract and retain in the employ
of the Company and its subsidiaries, qualified and competent persons to provide
management services, to encourage the sense of proprietorship and to stimulate
the active interest of such persons in the development and financial success of
the Company and its subsidiaries. The Stock Option Plan provides for the grant
of incentive stock options and nonqualified stock options within the meaning of
Section 422 of the Internal revenue Code of 1986, as amended (the "Code"), as
well as stock appreciation rights ("Rights") with respect to stock options and
restricted stock ("Restricted Stock") awards.
The Stock Option Plan, which is administered by the Compensation
Committee of the Board of Directors of the Company (but can also be administered
directly by the Board of Directors), currently authorizes the issuance of a
maximum of 500,000 shares of Common Stock (on a post Reverse Split basis), which
may be newly issued shares or previously issued shares held by any subsidiary of
the Company. If any award under the Stock Option Plan terminates, expires
unexercised or is cancelled, the shares of Common Stock that would otherwise
have been issuable pursuant thereto will be available for issuance pursuant to
the grant of new awards.
The purchase price of each share of Common Stock purchasable under an
incentive option granted under the Stock Option Plan is to be determined by the
Compensation Committee at the time of grant, but is to not be less than 100% of
the fair market value of a share of Common Stock on the date the option is
granted; PROVIDED, HOWEVER, that with respect to an optionee who, at the time
such incentive option is granted, owns more than 10% of the total combined
voting power of all classes of stock of the Company or of any of its
subsidiaries, the purchase price per share is to be at least 110% of the fair
market value per share on the date of grant. The term of each option is to be
fixed by the Compensation Committee, but no option is to be exercisable more
than five years after the date such option is granted.
The aggregate fair market value, determined as of the date the
incentive option is granted, of shares of Common Stock for which incentive
options are exercisable for the first time to any optionee during any calendar
year under the Stock Option Plan (and/or any other stock options plans of the
Company or any of its subsidiaries) shall not exceed $100,000. The aggregate
number of shares of Common Stock subject to options granted under the Stock
Option Plan granted during any calendar year to any one director is not to
exceed that number of shares as equals ten percent of the outstanding shares of
the Company for which options may be granted under the Stock Option Plan.
14
<PAGE>
The Compensation Committee shall have the authority to grant Rights
with respect to all or some of the shares of Common Stock covered by any option,
which Rights may be granted together with or subsequent to the grant of the
option. Rights entitle the holder to cash equal to the difference between an
Offer Price Per Share (as defined in the Stock Option Plan) and the exercise
price of the related option if shares of Common Stock representing 20 percent or
more of the aggregate votes of the Common Stock voting together as a single
class. If a Right is exercised, the related Option is terminated, and if an
option terminates or is exercised, the corresponding Right terminates.
In addition, the Compensation Committee shall have the authority to
award Restricted Stock which entitles the recipient to acquire, at no cost or
for a purchase price determined by the Compensation Committee, shares of Common
Stock subject to such restrictions and conditions as the Compensation Committee
may determine at the time of grant. Conditions may be based on continuing
employment and/or achievement of pre-established performance goals and
objectives. A recipient of Restricted Stock shall have the rights of a
stockholder with respect to the voting of the Restricted Stock, subject to such
other conditions contained in the written instrument evidencing the Restricted
Stock. However, generally Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of, and, generally,
upon the termination of the recipient's employment with the Company, the Company
shall have the right, at the discretion of the Compensation Committee, to
repurchase such Restricted Stock at its purchase price. Nonetheless, once the
pre-established performance goals, objectives and other conditions have been
attained, such shares of Restricted Stock shall no longer be Restricted Stock
and shall be deemed "vested" and will be freely transferable.
The Board of Directors may amend, suspend or terminate the Stock Option
Plan, except that no amendment may be adopted that would impair the rights of
any optionee without his consent. Further, no amendment may be adopted which,
without the approval of the stockholders of the Company, would (i) materially
increase the number of shares issuable under the Stock Option Plan, except as
provided in itself, (ii) materially increase the benefits accruing to optionees
under the Stock Option Plan, (iii) materially modify the eligibility
requirements for participation in the Stock Option Plan, (iv) decrease the
exercise price of an incentive option to less than 100% of the fair market value
per share of Common Stock on the date of grant or the exercise price of a
nonqualified option to less than 80% of the fair market value per share of
Common Stock on the date of grant, or (v) extend the term of any option beyond
that provided for in the Stock Option Plan.
The Compensation Committee may amend the terms of any option previously
granted, prospectively or retroactively, but no such amendment may impair the
rights of any option without his consent. The Compensation Committee may also
substitute new options for previously granted options, including options granted
under other plans applicable to the participant and previously granted options
having higher option prices, upon such terms as it may deem appropriate.
The number of shares of Common Stock available under the Stock Option
Plan and the terms of any option or other award granted thereunder are subject
to adjustment in the event of a merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the shares of Common Stock, if the Compensation Committee determines
that such event equitably requires such an adjustment.
As of March 1, 1999, there were no options outstanding under the Stock
Option Plan and no Restricted Stock had been awarded.
INCENTIVE COMPENSATION PLAN
The purpose of the Incentive Compensation Plan is to advance the
Company's interests by providing additional incentives to those key employees of
the Company who contribute the most to the growth and profitability of the
Company and to encourage such key employees to continue as employees by making
their compensation competitive with compensation opportunities in competing
businesses and industries.
The Incentive Compensation Plan, which is administered by the
Compensation Committee of the Board of Directors (but can also be administered
directly by the Board of Directors), authorizes the Compensation Committee to
determine by March 15 of each year which key employees will be eligible in such
year for incentive compensation pursuant to the Incentive Compensation Plan (the
"Participants") and to establish targets for such
15
<PAGE>
fiscal year for the Company's earnings per share. If the targets are achieved
then each Participant will receive (i) a cash bonus equal to 10% of his base
salary for such year, (ii) an amount of Common Stock (the "Stock Bonus")
determined by dividing 30% of his base salary by (50%) of the average of the
high and low closing prices for the Common Stock during such year (or, if lower,
50% of the closing sales price on the last trading day of such year), and (iii)
a cash payment sufficient to satisfy such participant's income tax liability
with respect to his Stock Bonus. There is no maximum number of shares of Common
Stock, which may be awarded under the Incentive Compensation Plan.
The Compensation Committee may amend the Incentive Compensation Plan,
except that no amendment may be adopted that would impair the rights of any
Participant with respect to the year in which such amendment had been adopted.
The Plan shall terminate on December 31, 2002 except for the delivery
of shares of Common Stock and/or cash due to Participants with respect to such
year.
If, prior to the end of any Fiscal Year, a Participant's employment
terminates on account of (i) death, (ii) retirement, (iii) total and permanent
disability, or (iv) the Company's termination of the Participant without cause,
the Participant will nonetheless remain eligible to receive amounts under the
Incentive Compensation Plan for such year if the Participant shall have been an
active, full-time employee for a period of at least two years preceding such
termination. In all other cases, the Participant will be ineligible.
As of December 31, 1998, no bonuses or stock have been awarded under
the Incentive Compensation Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information on March 12, 1999 (except as
otherwise noted below) with respect to each person (including any "group", as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) known to the Company to be the beneficial owner of more than 5% of the
Common Stock of the Company.
<TABLE>
<CAPTION>
Name of Address Amount and Nature of Percent
Of Beneficial Owner Beneficial Ownership (1) Of Class
------------------- ------------------------ --------
<S> <C> <C>
General De Sante 2,047,860 21.40%
International PLC
4 Cornwall Terrace
London, NW 1 4QP
England
SAJH Partners 1,595,021(2) 16.67%
1055 Washington Blvd.
Stamford, CT 06901
Dennis A. Sokol 982,644 (3) 10.27%
1055 Washington Blvd.
Stamford, CT 06901
</TABLE>
- ------------------------
(1) Except as otherwise indicated, each of the person listed above has sole
voting and investment power with respect to all shares shown in the
table as beneficially owned by such person.
(2) Dennis Sokol is the Managing Partner of SAJH Partners and has a 1%
partnership interest in the partnership and consequently could be
deemed under Rule 13D-3 of the Exchange Act to have beneficial
ownership of such shares. Mr. Sokol disclaims ownership of all such
shares other than as a result of his 1% partnership interest.
(3) Includes 500,000 options to purchase shares of Common Stock of the
Company which are immediately exercisable.
16
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the number of shares of Common Stock beneficially
owned on March 12, 1999 by (i) each director of the Company, (ii) each of the
executive officers named in the Summary Compensation Table set forth above and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name Of Beneficial Owner Beneficial Ownership (1) Percent Of Class
- ------------------------ ------------------------ ----------------
<S> <C> <C>
Dennis A. Sokol (2) 982,644 10.27%
Elliot H. Cole (3) 531,165 5.55%
Richard Berman (4) 60,000 *
Robert A. Bruno (5) 10,423 *
All executive officers
and directors as a group (6)
(6 persons) 1,615,482 16.89%
</TABLE>
- -------------------------
* Less than 1%
(1) Except as otherwise indicated, each person listed above has sole voting
and investment power with respect to all shares shown in the table.
(2) See notes 2 and 3 of the table under the caption "Security Ownership of
Certain Beneficial Owners" above.
(3) Includes 200,000 options to purchase shares of Common Stock of the
Company which are immediately exercisable.
(4) Includes 50,000 options to purchase shares of Common Stock of the
Company which are immediately exercisable.
(5) As of October 1, 1998, Mr. Bruno was no longer employed by the Company.
(6) Includes 25,000 and 6,250 options to purchase shares of Common Stock of
the Company which are immediately exercisable and held by Messrs.
Nemnom and Rountree, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FMC and Dennis A. Sokol, the Chairman of the Board, Chief Executive
Officer and Director of the Company and Chairman of the Board and Chief
Executive Officer of FMC, have an oral agreement whereby FMC has agreed to pay
Mr. Sokol an annual salary of $300,000 per year for his services as FMC's
Chairman of the Board and Chief Executive Officer. In addition, at the
discretion of the Compensation Committee of the Board of FMC, Mr. Sokol may be
awarded an annual bonus. Mr. Sokol is also a shareholder of American Medical
Clinics, which is a plaintiff in the following lawsuit:
HOSPITAL CORPORATION INTERNATIONAL, LTD. AND AMERICAN MEDICAL CENTERS, INC. VS.
PEPSICO INC., Case Number 94CVS 888 Superior Court, Craven County, North
Carolina
On January 1, 1996, American Medical Clinics, Inc. ("AMC, Inc.")
shareholders and MedExec shareholders entered into a Reorganization Agreement to
form First Medical Corporation ("FMC"). As part of the Agreement, the AMC, Inc.
shareholders did not assign its interest to include any recovery from the
Litigation other than as stated below.
In this lawsuit instituted by Hospital Corporation International, Ltd.
and American Medical Centers Inc. against Pepsico Inc., and certain other
parties about which AMC, Inc. has fully informed the FMC (the "Litigation"), FMC
agreed to pay the ongoing legal fees and other expenses connected with the
Litigation. If the Litigation is settled or otherwise brought to a successful
conclusion, the proceeds of such settlement or other successful conclusion of
the Litigation (the "Proceeds") will be shared as follows: (a) AMC, Inc. and FMC
will first be reimbursed in full for their respective legal fees and expenses
incurred in connection with the Litigation (the "Fees") or a pro rata share of
the Fees incurred by each of them if the Proceeds are insufficient to reimburse
AMC, Inc. and FMC for the Fees in full; and (b) the balance of the Proceeds will
be shared on a proportionate basis between FMC and the former shareholders of
AMC, Inc. The portion to be paid to FMC shall be a fraction, the numerator of
which will be the amount of the Fees paid by FMC and the denominator of which
will be the net Proceeds remaining after the reimbursement of the fees pursuant
to subparagraph (a) above. The former shareholders of AMC, Inc. will receive the
balance of the Proceeds.
17
<PAGE>
The Company and Elliot H. Cole, the Vice Chairman of the Board and
Director of the Company, have an oral agreement whereby the Company has agreed
to pay Mr. Cole a consulting fee of $60,000 per year for his services as the
Company's Vice Chairman of the Board. Mr. Cole is a member of the law firm
Patton Boggs, LLP which renders legal services to the Company and is
representing the Plaintiff in the aforementioned Litigation discussed in this
Item 13.
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 management of the Company.
Pursuant to a reorganization agreement, effective July 1, 1998, the
American Medical Clinics Management Company, Ltd., a wholly-owned subsidiary
of First Medical Group International, Ltd., which in turn is a wholly-owned
subsidiary of the Company, acquired the stock of American Medical Clinics
Moscow, Inc. and American Medical Clinics-St. Petersburg Ltd. ("AMC-CIS").
The shareholders of AMC-CIS are shareholders of the Company. The total
consideration was approximately $1.3 million and represents accounts payable
to AMCMC by AMC-CIS. Prior to the reorganization agreement, AMCMC had a
management service agreement whereby AMC-CIS would provide medical services
to AMCMC customers.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
a. (1) Financial Statements
--------------------
The following financial statements are Included in Part II,
Item 8 of this Annual Report on Form 10-K:
The First Medical Group, Inc. ("FMG")
Report of Independent Public
Accountants as of December 31, 1998, 1997 and 1996 F-1
Consolidated Balance Sheet, December 31, 1998 and 1997 F-2
Consolidated Statement of Operations,
Years Ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Changes in
Shareholders' Equity (Deficit), Years
Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial
Statements for Years Ended December 31, 1998, 1997 and 1996 F-6 - F-14
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
a. (2) SCHEDULE
--------
The following schedule for the Years Ended December 31, 1998
and 1997 are submitted herewith:
Schedule II - Valuation and Qualifying
Accounts S-1
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
a. (3) EXHIBITS
--------
The Exhibits to this Annual Report on Form 10-K are listed in
the Exhibit Index annexed hereto and incorporated by
reference.
(b) REPORTS ON FORM 8-K
-------------------
There was no Form 8-K filed during the last quarter covered by
this report.
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Dennis A. Sokol Chairman of the Board of Directors, April 23, 1999
- ------------------- President and Chief Executive Officer
Dennis A. Sokol
/s/ Elias M. Nemnom Senior Vice President and April 23, 1999
- ------------------- Chief Financial Officer
Elias M. Nemnom
/s/ Elliot H. Cole Director and Vice Chairman April 23, 1999
- ------------------ of the Board
Elliot H. Cole
/s/ Richard Berman Director April 23, 1999
- -------------------
Richard Berman
/s/ George Rountree Director April 23, 1999
- -------------------
George Rountree
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Medical Group, Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of First Medical Group, Inc. (formerly
known as First Medical Corporation) for the year ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of First Medical Group, Inc. (formerly known as First Medical
Corporation) for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Miami, Florida
March 25, 1997, except as to
Note 2(i) which is as of
November 12, 1997
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
First Medical Group, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheet of First Medical
Group, Inc. as of December 31, 1997, and the related consolidated statements
of operations, shareholder's deficit and cash flows for the year then ended.
We have also audited the schedule listed in the accompanying index for the
same period. These financial statements have been restated to reflect the
discontinued operations described in Note 3. These financial statements and
schedule are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Medical Group, Inc., at December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also in our opinion, the
schedule presents fairly, in all material respects, the information set forth
therein for the year ended December 31, 1997.
New York, New York /s/ BDO Seidman, LLP
March 27, 1998, except for Note 3
which is as of July 16, 1998
<PAGE>
Report of Independent Public Accountants
To the Shareholders of First Medical Group, Inc.:
We have audited the accompanying consolidated balance sheet of First Medical
Group, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Medical Group, Inc.
and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for
organization cost in accordance with Statement of Position 98-5, "Reporting
on the Cost of Start-up Activities."
/s/ ARTHUR ANDERSEN LLP
New York, New York
April 9, 1999
F-1
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 909,064 $1,421,250
Accounts receivable, net of allowance for doubtful accounts of
$53,696 and $877 at December 31, 1998 and 1997, respectively 470,458 98,332
Inventories 116,984 -
Due from related parties - 1,139,760
Prepaid expenses and other current assets 163,996 50,406
------------ ------------
Total current assets 1,660,502 2,709,748
Property and equipment, net 603,433 170,281
Deferred tax asset 577,000 -
Intangible assets, net 2,079,369 2,014,170
Other assets 71,487 248,385
------------ ------------
$ 4,991,791 $ 5,142,584
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 852,237 $ 278,497
Accrued expenses 1,085,402 383,172
Deferred revenue 689,404 731,372
Notes payable to banks and others 1,358,444 3,998,733
Net liabilities of discontinued operations 980,750 804,531
------------ ------------
Total current liabilities 4,966,237 6,196,305
Commitments and contingencies
Shareholders' equity (deficit):
Capital stock, par value $.001; authorized shares 100,000,000; shares issued
9,567,292 and 9,397,292 at December 31, 1998
and 1997, respectively 9,567 9,397
Additional paid-in capital 8,253,318 8,083,488
Accumulated deficit (8,237,331) (9,146,606)
------------ ------------
Total shareholders' equity (deficit) 25,554 (1,053,721)
------------ ------------
$ 4,991,791 $ 5,142,584
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 10,947,463 $ 9,019,156 $ 6,660,210
Cost of Revenues 9,260,360 7,134,408 5,370,624
------------- ------------- -------------
Gross Profit 1,687,103 1,884,748 1,289,586
Operating expenses:
Salaries and related benefits 904,685 700,220 390,403
General and administrative 1,019,597 1,040,582 1,397,970
Impairment loss on intangibles -- 1,024,337 --
Depreciation and amortization 226,992 215,338 133,877
------------- ------------- -------------
Loss from operations (464,171) (1,095,729) (632,664)
Interest expense, net (167,170) (196,887) (55,523)
------------- ------------- -------------
Loss before (benefit) for income taxes (631,341) (1,292,616) (688,187)
Income tax benefit (473,000) (62,736) --
------------- ------------- -------------
Loss from continuing operations before discontinued
operations and cumulative effect to change in
accounting principle (158,341) (1,229,880) (688,187)
Discontinued operations:
Income (loss) from operations of discontinued managed care
and electrical supply division (2,129,943) (8,240,438) 1,011,899
Gain on disposal of managed care and electrical
supply division 4,138,013 -- --
------------- ------------- -------------
Income (loss) from discontinued operations, net of
taxes of $518,000 in 1998 2,008,070 (8,240,438) 1,011,899
Cumulative effect of change in accounting principle,
net of tax benefit of $29,099 (940,454) -- --
------------- ------------- -------------
Net income (loss) $ 909,275 $ (9,470,318) $ 323,712
------------- ------------- -------------
------------- ------------- -------------
Income (loss) per share - basic and diluted
Loss from continuing operations $ (.01) $ (.13) $ (.07)
Cumulative effect of change in accounting principle (.10) -- --
Net income (loss) from discontinued operations .21 (.90) .11
------------- ------------- -------------
Net income (loss) $ .10 $ (1.03) $ .04
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares outstanding - 9,495,566 9,202,117 9,021,400
basic and diluted ------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION> Retained
Number Earnings Total
of Additional Accumulated Shareholder
Shares Common Stock Paid-in Capital (Deficit) Equity (Deficit)
------ ------------ --------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,500 $ 1,500 $ 1,200 $ 224,595 $ 227,295
FMC Corporate transaction 8,500 (1,400) 225,995 (224,595) --
Capital contribution to AMCD -- -- 152,490 -- 152,490
Net income -- -- -- 323,712 323,712
--------- -------- ---------- ------------ -----------
Balance, December 31, 1996 10,000 100 379,685 323,712 703,497
Merger with Lehigh (recapitalization) 9,387,292 9,297 2,538,803 -- 2,548,100
Capital contribution from GDS -- -- 5,000,000 -- 5,000,000
Capital contribution to AMCD -- -- 165,000 -- 165,000
Net loss -- -- -- (9,470,318) (9,470,318)
--------- -------- ---------- ------------ -----------
Balance, December 31, 1997 9,397,292 9,397 8,083,488 (9,146,606) (1,053,721)
Issuance of common stock 170,000 170 169,830 -- 170,000
Net income -- -- -- 909,275 909,275
--------- -------- ---------- ------------ -----------
Balance, December 31, 1998 9,567,292 $ 9,567 $8,253,318 $(8,237,331) $ 25,554
--------- -------- ---------- ------------ -----------
--------- -------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 909,275 $(9,470,318) $ 323,712
Adjustments to reconcile net income (loss) to
net cash provided by (used in) continuing
operating activities:
(Income) loss from discontinued operations (2,008,070) 8,240,438 (1,011,899)
Depreciation and amortization 226,992 215,338 133,877
Deferred taxes (577,000) -- --
Minority interest -- -- (338,077)
Impairment loss from intangibles -- 1,024,337 --
Non-cash compensation expenses 170,000 -- --
Cumulative effect of change in accounting principle 940,454 -- --
(Increase) decrease in assets, net of acquisitions:
Accounts receivable 44,695 (92,522) (5,810)
Due from related parties, net (125,702) (977,431) (162,329)
Inventories 5,677 -- --
Prepaid expenses and other current assets 21,777 98,274 (65,222)
Intangibles and other assets (15,589) (451,308) (1,320,275)
Increase (decrease) in liabilities, net of acquisitions:
Accounts payable and other accrued expenses 661,859 1,255,616 186,974
Deferred revenues (162,417) (75,104) 806,476
------------- ------------- ------------
Net cash provided by (used in) continuing operating
activities 91,951 (232,680) (1,452,573)
------------- ------------- ------------
Cash flows from investing activities:
Capital expenditures (134,872) (170,764) (37,887)
Organizational costs -- (386,975) (414,841)
Cash acquired in acquisitions 174,255 731,667 --
Net proceeds from sale of discontinued operations 6,590,000 -- --
------------- ------------- ------------
Net cash provided by (used in) investing activities of
continuing operations 6,629,383 173,928 (452,728)
------------- ------------- ------------
Cash flow from financing activities:
Proceeds from loans payable to banks -- 13,882,098 800,000
Repayments of loans payable to banks (2,827,812) (10,025,277) (250,000)
Proceeds from payable to stockholders -- 136,597 374,596
Capital contribution from GDS -- 4,511,512
Contribution to capital of AMCD -- -- 152,490
------------- ------------- ------------
Net cash provided by (used in) financing activities of
continuing operations (2,827,812) 8,504,930 1,077,086
------------- ------------- ------------
Cash provided by (used in) discontinued operations (4,405,708) (7,149,242) 952,529
------------- ------------- ------------
(Decrease) Increase in cash and cash equivalents (512,186) 1,296,936 124,314
Cash and cash equivalents, beginning of the year 1,421,250 124,314 --
------------- ------------- -----------
Cash and cash equivalents, end of the year $ 909,064 $ 1,421,250 $ 124,314
------------- ------------- ------------
------------- ------------- ------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 27,263 $ 115,166 $ 48,748
Cash paid for income taxes 325,384 69,914 33,291
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 and 1996
1. ORGANIZATION AND OPERATION
First Medical Group, Inc. ("FMG" or the "Company") owns and operates medical
clinic centers in Eastern Europe. The medical centers provide healthcare
services to expatriates and other local nationals. The medical clinic centers
are located in Moscow and St. Petersburg, Russia; Kiev, Ukraine; Prague, Czech
Republic and Warsaw, Poland.
The consolidated financial statements include the accounts of FMG and its
wholly-owned subsidiaries: First Medical Corporation ("FMC"); First Medical
Group International, Ltd.; American Medical Clinics Management Company, Inc.
("AMCMC"); American Medical Clinics Management Company, Ltd. ("AMCMC BVI"),
American Medical Clinics Development Corporation, Limited ("AMCD") and
MedExec Inc. and subsidiaries ("MedExec"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Over recent years, Russia has undergone substantial political, economic and
social change. As an emerging market, Russia does not possess a
well-developed business infrastructure which generally exists in a more
mature free market economy. As a result, operations carried out in Russia
involve significant risks, which are not typically associated with those in
developed markets. Instability in market reform could subject the Company or
its investments to unpredictable changes in the basic business infrastructure
under which they currently carry out their operations. Uncertainties
regarding the political, economic, legal, tax or regulatory environment,
including the potential for adverse changes in any of these factors, could
significantly affect the Company's ability to operate commercially. It is not
possible to estimate what changes may occur or the resulting effect of any
such changes on the Company's financial condition or future results of
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(b) Discontinued Operations
The consolidated financial statements of the Company reflect the
results of operations of the Company's Physician practice management
and electrical supply divisions as discontinued operations for
financial reporting purposes.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits. For purposes of
the consolidated financial statement, the Company considers all highly
liquid debt instruments with original maturities of three months or
less to be cash equivalents.
(d) Accounts Receivable
Accounts receivable consist of amounts due the Company from insurance
companies and individuals for services rendered. Accounts receivable
are carried at net realizable value.
(e) Inventories
Inventories consist of medical and pharmacy supplies held for resale.
Inventories are stated at the lower of cost or market using the
first-in, first out basis to determine cost.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the
estimated useful lives ranging between 5 and 10 years. Amortization
of leasehold improvements is provided over the term of each
respective lease or the life of the asset, whichever is shorter.
(g) Intangible Assets
F-6
<PAGE>
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized over the expected periods to be
benefited, ranging between 15 and 25 years. In accordance with
Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", the Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation.
The amount of impairment, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability
of goodwill will be impacted if estimated future operating cash flows
are not achieved.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method
as required by Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets are measured using enacted rates to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(i) Earning Per Share
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standard No. 128, "Earnings
Per Share." Accordingly, basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise of stock
options and other stock equivalents. On July 9, 1997 the Company
merged with the Lehigh Group, Inc. As a result of this merger and
the conversion of Preferred Stock and the 1-for-30 reverse stock
split on November 12, 1997, the Company had shares outstanding of
9,021,400 resulting in a net earnings per share of $.04 in 1996.
(j) Revenue Recognition
Fee-for-service revenue is reported at the estimated net realizable
amount from patients and third-party payors as services are rendered.
Fee-for-service revenues are derived from medical services rendered to
patients and annual membership fees charged to individuals, families
and corporate members. Membership fees are non-refundable and are
recognized as revenue over a year period. Corporate members are also
required to make an advance deposit based upon plan type, number of
employees and dependents. The advance deposits are initially recorded
as deferred income and then as revenue when services are provided. As
the advance deposits are utilized, additional advance deposits are
required to be made by corporate members.
(k) Fair Value of Financial Instruments
The carrying amount of financial instruments including cash and cash
equivalents, account receivables, prepaid expenses and other current
assets, accounts payable and accrued expenses, corporate deposits and
notes payable approximate fair market value as of December 31, 1998
because of the short term maturities of these instruments.
(l) Foreign Currency
The financial statements of the Company's foreign subsidiaries are
translated from their functional currency into the US dollar
functional currency for consolidation and reporting purposes.
Year-end rates of exchange are used to translate assets and
liabilities and revenue and expense are translated at average
monthly exchange rates prevailing during the year. The effect
of translation adjustments does not have a material effect on the
financial statements.
F-7
<PAGE>
(m) Change in Accounting Principle
Prior to 1998, the Company capitalized certain costs relating to
start-up operations. Pursuant to Statement of Position 98-5, Reporting
on the Costs of Start-Up Activities (the "SOP"), the Company recorded
$940,454, net of tax benefit of $29,099 as the cumulative effect of
the change in accounting principle relating to the write-off of such
start-up costs. This amount is reflected in the consolidated
statement of operations for the year ended December 31, 1998.
(n) Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
financial statements. The Company's consolidated financial
statements are required to include comprehensive income disclosures
beginning with the first quarter of fiscal year 1998. Restatement of
prior period information are to be made for comparative purposes. The
adoption of this pronouncement did not have a material effect on the
Company's results of operations or financial condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes
the way public companies report information about operating
segments. SFAS No. 131, which is based on the management approach to
segment reporting, establishes requirements to report selected
segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material
countries in which the entity holds assets and reports revenue.
Effective January 1, 1998 the Company adopted SFAS No. 131. The
adoption of SFAS No. 131 did not have a material effect on the
Company's results of operations or financial condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. The Company currently does not use derivatives and
therefore believes that this new pronouncement will not have a
material effect on its results of operations or financial condition.
3. DISCONTINUED OPERATIONS
In April 1998, the Company's Board of Directors adopted a formal plan
to discontinue its physician practice management division (the "PPM
Division") and Hallmark Electrical Supplies Corp. (the "Electrical
Supply Division"). Accordingly, this business has been accounted for
as discontinued operations and the accompanying consolidated financial
statements presented herein have been restated to report separately
the net assets, net liabilities, operating results and net cash flows
of these discontinued operations. The operations of the Electrical
Supply Division ceased in April 1998; the operations of the PPM
Division ceased in July 1998. The Company sold the net assets of
both the PPM Division and Electrical Supply Division for aggregate
gross proceeds of $9.5 million, which resulted in a net gain on the
sales of approximately $4.1 million. The results of operations of the
PPM Division and Electrical Supply Division are included in the
consolidated statements of income under "Discontinued Operations".
The income tax provision of $518,000 is net of an income tax benefit
of approximately $1,186,000 recognized as a result of a decrease in
the prior year valuation allowance.
Summarized financial information for the discontinued operations is
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue $19,632 $70,456 $46,354
------- ------- -------
------- ------- -------
Net (loss) income $2,008 ($8,240) $1,012
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Current assets - $18,386
Other assets 90 4,016
------ -------
Total assets - 22,402
------ -------
Total Noncurrent Liabilities (1,071) (23,207)
------ -------
Net liabilities of discontinued operations $(981) $(805)
------ -------
------ -------
</TABLE>
4. ACQUISITION
Effective July 1, 1998, AMCMC BVI acquired the stock of American
Medical Clinics Moscow, Inc. and American Medical Center-St. Petersburg
Ltd. ("AMC-CIS"). The transaction was accounted for under the purchase
method of accounting. The total purchase consideration was
approximately $1.3 million and represented money owed to AMCMC by
AMC-CIS. The excess of the purchase consideration over the fair value
of net assets of AMC-CIS amounted to $848,108 and is being amortized
on a straight-line basis over
F-8
<PAGE>
25 years. Prior to the acquisition, AMCMC had a management service
agreement with AMC-CIS whereby AMC-CIS would provide medical services
to AMCMC customers. As a result of the management agreement
arrangement, in accordance with EITF 97-2, "Application of APB
Opinion No. 16, Business Combinations," and FASB Statement No. 94,
"Consolidation of All Majority-Owned Subsidiaries, to Physicians'
Practice Entities and Certain Other Entities with Contractual
Management Arrangements" ("EITF 97-2"), the Company has historically
consolidated the results of operations of AMC-CIS. Consequently, the
Company's December 31, 1998 statement of operations reflect AMC-CIS'
results of operations for the twelve-months ended December 31, 1998.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Medical, computer and office equipment $ 940,150 $176,016
Leasehold improvements 476,016 22,572
---------- ----------
1,416,166 198,588
Less: Accumulated depreciation and amortization (812,733) (28,307)
---------- ----------
Property and equipment, net $ 603,433 $170,281
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense was $110,012, $26,931 and $11,439
for 1998, 1997, and 1996, respectively.
6. INTANGIBLE ASSETS, NET
Intangible assets net December 31, 1998 and 1997 consist of :
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Goodwill $ 1,868,383 $1,020,275
Organization costs - 830,658
Other 480,005 480,005
------------- ------------
2,348,388 2,330,938
Less: Accumulated amortization (269,019) (316,768)
------------- ------------
Intangible assets, net $ 2,079,369 $ 2,014,170
------------- ------------
------------- ------------
</TABLE>
Amortization expense was $116,980, $188,406 and $122,438 for 1998, 1997
and 1996, respectively.
The Company continually reevaluates the propriety of the carrying
amount of goodwill as well as the amortization period to determine
whether current events and circumstances warrant adjustments to the
carrying value and estimates of useful lives. As of December 31, 1998,
the Company believed that no significant impairment of goodwill have
occurred and that no reduction of the amortization periods is
warranted.
As discussed in Note 2, in accordance with Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), the
Company wrote-off, net of tax benefit of $29,099, organization costs
of $940,454. In accordance with SOP 98-5 the write-off has been
accounted for as a cumulative change in accounting principle in the
accompanying December 31, 1998 statement of operations.
The Company recorded a $3.9 million impairment loss in 1997 resulting
from the Company's merger with The Lehigh Group, Inc. in 1997, of
which $2.9 million is included in discontinued operations.
F-9
<PAGE>
7. NOTES PAYABLE TO BANKS AND OTHERS
Notes payable to banks and others at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Subordinated Debentures - 14-7/8% interest rate $ 290,000 $ 290,000
Senior Subordinated Notes - 13-1/2% interest rate 100,000 100,000
Accrued Interest 968,444 780,921
Secured term loan for $537,812 bore interest at 1/2% above Prime
(9.0% at December 31, 1997): The loan was secured by all shares of FMG
common stock issued to FMC. Principal payments were made monthly with
the balance due on October 1998. The $537,812 drawn under this loan was
used to purchase Lehigh's stock in connection with the merger -- 537,812
Line of credit for $2,500,000 bore interest at 1/2% above prime
(9.0% at December 31,1997). The line was secured by all of the assets of
FMC and $500,000 is guaranteed by certain current and former officers
of FMC. The amounts drawn under this line of credit were used primarily
for working capital requirements -- 2,290,000
----------- ------------
$1,358,444 $3,998,733
----------- ------------
----------- ------------
</TABLE>
The Company is in default in the payment of interest (approximately
$968,000 and $781,000 interest was past due as of December 31, 1998 and
1997, respectively) on the $390,000 aggregate principal amount of its
13-1/2% Senior Subordinated Debentures 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. RELATED PARTIES
As of December 31, 1998, the Company had obligations to former officers
and employees of the Company that amounted to approximately $290,000.
This obligation is included in accrued expenses.
The Company paid salaries or consulting fees to stockholders of
approximately $610,000, $1,650,000 and $1,520,000 which is included in
the consolidated statement of operations for the years ended December
31, 1998, 1997 and 1996.
At December 31, 1997, the Company had amounts outstanding from the
AMC clinics which is owned by certain current and former shareholders
of FMC, under its management agreement with AMCMC, which totaled
$1,139,760.
The Chairman of the Board of Directors, President and Chief Executive
Officer of the Company, while serving as Chairman of the Board of
Directors of American Medical Centers Inc. ("AMC") prior to AMC's
merger with MedExec and the formation of First Medical Corporation
("FMC") instituted a lawsuit, together with Hospital Corporation
International, Ltd., against Pepsico Inc. and certain other parties
(the "Litigation"). Presently, the Company, through its wholly-owned
subsidiary FMC has agreed to pay the ongoing legal fees and other
expenses connected to the Litigation. Expenses totaling approximately
$191,000 have been incurred through December 31, 1998 and have been
recorded as general and administrative expenses in the accompanying
December 31, 1998 Statement of Operations. The Company's management
estimates that additional legal fees and other related expenses
approximating $75,000 will be incurred in future periods in connection
with the Litigation. The Company's Board of the Directors will
determine the extent to which these future expenses will be borne by
the Company.
9. INCOME TAXES
The components of income/(loss) from continuing operations before
income tax for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Domestic $ (821,000)
Foreign 189,659
-----------------
Total income/(loss) before income tax
benefits, cumulative effect of changes in
accounting principle, income from
discontinued operations $ (631,341)
-----------------
-----------------
</TABLE>
F-10
<PAGE>
The income tax effects of temporary differences that give rise to
significant portions of deferred tax assets are presented as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Alternative minimum tax credit $ 59,000 $ --
Net operating loss carryforward 519,000 4,511,000
Deferred Tax Liabilities -- --
----------- ----------
Deferred tax asset/(liability) 578,000 4,511,000
Less: Valuation allowance 0 4,511,000
----------- ----------
Net deferred tax asset/(liability) $ 578,000 $ --
----------- ----------
----------- ----------
</TABLE>
Taxable income for the year ended December 31, 1998 was substantially
offset by the utilization of net operating loss carryforwards ("NOLs")
from the year ended December 31, 1997. At December 31, 1998, The
Company has NOLs of approximately $1,297,000 to offset future taxable
income, which expire in 2112.
Due to the Company's significant loss in 1997, no federal taxes have
been provided in the accompanying consolidated statement of operations.
The significant components of the income tax provision/(benefit)
attributable to continuing operations for the years ended December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current tax provision - domestic operations $ (376,000) $ 0
Deferred tax provision - domestic operations (519,000) 0
Current tax provision - foreign operations 422,000 267,291
Write off of prior year deferred tax liability 0 (112,500)
Write off of prior year income taxes payable 0 (217,527)
---------------- ---------------
Net income tax benefit $ (473,000) $ (62,736)
---------------- ---------------
---------------- ---------------
</TABLE>
The Company has not provided any U.S. deferred income taxes on foreign
earnings due to its intent to permanently reinvest those earnings.
The components of deferred income tax (benefit) are:
<TABLE>
<CAPTION>
1998
----
<S> <C>
NOL Carryforward $(519,000)
---------
Deferred Tax Benefit $(519,000)
---------
---------
</TABLE>
The difference between the actual income tax provision/(benefit) and
the income tax provision computed by applying the statutory federal
income tax rate to income from operations for the year ended December
31, 1998 is attributable to the following:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Income tax provision/(benefit) at 34% $ (215,000)
Reduction in valuation allowance (519,000)
State taxes net of federal 74,000
</TABLE>
F-11
<PAGE>
<TABLE>
<S> <C>
Foreign income taxes in excess of US Rate 127,000
Foreign income taxes of US entities 138,000
Other (78,000)
-----------------
Income tax (benefit) provision $ (473,000)
-----------------
-----------------
</TABLE>
The domestic and foreign components of the income tax
provision/(benefit) are as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Domestic $ (895,000)
Foreign 422,000
-----------------
Total $ (473,000)
-----------------
-----------------
</TABLE>
10. LEASES
The Company has several noncancelable operating leases primarily for
office space that expire throughout 2010. Future minimum lease payments
required under noncancelable operating leases at December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 1,126
2000 2,094
2001 2,097
2002 1,791
2003 1,637
Thereafter 6,377
---------
Total minimum lease payments $ 15,122
---------
---------
</TABLE>
Rental expense during 1998, 1997 and 1996 amounted to approximately
$503,000, $663,000 and $259,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
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 containing
hazardous substances or arranged with a transporter for the transport
for the disposal or treatment of such 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 this demand. 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.
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
F-12
<PAGE>
with the sale of stock in Dominion Healthnet, Inc. to the Company.
Former employees of various subsidiaries of the Company have made
claims against the Company related to monies allegedly due the former
employees for accrued vacation and unpaid sick leave. The total amount
claimed, inclusive of an asserted right to attorneys' fees,
approximates $400,000.
In December 1998 a claim was filed against the Company by a former
employee who seeks approximately $50,000 plus attorneys' fees for
breach of an employment contract.
The Company will continue to vigorously defend itself against each
of the lawsuits discussed above. In the opinion of management, the
final resolution of such matters will not have a material adverse
effect on the financial position and results of operations of the
Company.
Malpractice and Professional Liability Insurance
The Company maintains professional liability insurance on a claims-made
basis through December, 1999 including retroactive coverage for acts
occurring since inception of its operations. Incidents and claims
reported during the policy period are anticipated to be covered by the
malpractice carrier. The Company intends to keep such insurance in
force throughout the foreseeable future. At December 31, 1998, there
are no asserted claims made against the Company that were not covered
by the policy.
12. SEGMENT INFORMATION
The Company operates its medical clinics in Eastern Europe and derives
all of its revenues from that region. None of the Company's revenues
are concentrated in any customer that exceed 10% of its revenues.
13. STOCK OPTION AND INCENTIVE COMPENSATION PLANS
In July 1997 the Board of Directors established a Stock Option Plan
(the "Option Plan") and the Incentive Compensation Plan (the "Incentive
Plan").
The Option Plan provides for the grant of incentive stock options and
nonqualified stock options, as well as stock appreciation rights (the
"Rights") and restricted stock awards. The Option Plan is authorized
the issuance of up to 500,000 shares of Common Stock. No option is to
be exercisable more than five years after the date of grant. The
exercise price of an incentive stock option must be at least 100% of
the fair market value of the Company's share at the date of grant,
provided, however that with respect to an optionee who owns more than
10% of the total combined voting power of all classes of stock of the
Company or of any of its subsidiaries, the exercise price must be at
least 110% of the fair market value of the Company's share at the date
of grant. The exercise price of a nonqualified stock option shall be
determined by the Compensation Committee.
The Compensation Committee shall have the authority to grant Rights
with respect to all or some shares of Common Stock covered by any
option, which entitle the holder to cash equal to the difference
between the offer price (as will be determined by the Compensation
Committee) and the exercise price of the related option. In addition,
the Compensation Committee shall have the authority to award restricted
stock, which entitles the recipient to acquire for a purchase price to
be determined by the Compensation Committee, some shares of Common
Stock subject to restrictions and conditions as the Compensation
Committee may determine.
The Incentive Plan provides for incentive compensation to participants
in the form of cash, stock or cash and stock bonus, based on targets
established by the Compensation Committee. There is no maximum number
of shares of Common Stock, which may be awarded under the Incentive
Plan. Incentive Plan shall terminate on December 31, 2002.
At December 31, 1998 no options, stock bonus or other rights were
granted under these plans.
F-13
<PAGE>
In December 1998, the Company's Board of Directors approved to grant of
stock options to purchase up to 950,000 shares of common stock to
certain officers and directors at an exercise price of $0.125, which
was equal to the fair market value on the date of grant. These options
may not be exercised after four years from the date of grant. 725,000
options were vested at the date of the grant. 225,000 options are
exercisable ratably over a four-year period.
The Company accounts for awards granted to employees and directors
under APB No. 25, under which no compensation cost has been recognized
for stock options granted. Had compensation cost for these stock
options been determined consistent with SFAS No. 123, the Company's net
income and net income per share would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
----
<S> <C>
Net income:
As reported.............................................. $ 909,275
Pro forma................................................ 873,462
Basic and diluted income per share:
As reported.............................................. $ 0.10
Pro forma................................................ 0.09
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts as additional awards in future years
are anticipated.
Option activity for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
<S> <C> <C>
Options outstanding, December 31, 1997 -- --
Granted........................................... 950,000 0.125
Canceled.......................................... -- --
Exercised......................................... -- --
-- --
------- -------
Options outstanding, December 31, 1998 950,000 $ 0.125
------- -------
------- -------
</TABLE>
The weighed average fair value of options granted is $0.05 for the year
ended December 31, 1998. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1998: risk-free interest rate of 4.6%; expected life of 2.5 years;
expected volatility of 54% and expected dividend yield of 0%.
The following table summarizes information with respect to stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
-------------- ------------------ ------------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
$0.125 950,000 2.5 $0.125 725,000 $0.125
</TABLE>
F-14
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO OTHER
BEGINNING OF ACQUISITION OF COSTS AND CHARGES AND BALANCE AT
DECEMBER 31, DESCRIPTION YEAR AMC-CIS EXPENSES (DED'S) END OF YEAR
.................... .................... ................ ................. ............... ............. .............
<S> <C> <C> <C> <C> <C> <C>
1998 Allowance for
doubtful accounts $ 1 (30) 151 (68) 54
1997 Allowance for
doubtful accounts $ 1 - 3 (3) 1
</TABLE>
S-1
<PAGE>
ANNEX D
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
(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.
NO YES X
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
<TABLE>
<S> <C> <C>
Common Stock, par value $.001 per share 9,567,292 9,567,292
</TABLE>
<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
Shareholders' Equity
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
<PAGE>
PART I - FINANCIAL INFORMATION
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
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.
<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 $ 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.
<PAGE>
FIRST MEDICAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<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.
<PAGE>
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.
<PAGE>
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
<TABLE>
<CAPTION>
1999 1998
(in thousands)
---------------
<S> <C> <C>
Cash paid during the nine months
ended September 30, for:
Interest $ -- $ 37
Income taxes 134 387
</TABLE>
6.
<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
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.
<PAGE>
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 COMPARISION
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.
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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.
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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.
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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).
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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.
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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.
