10-Q 1 a2039504z10-q.txt FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ____________ Commission file number 000-22653 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Florida -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 65-0353816 ------------ (IRS Employer Identification No.) 32 NASSAU STREET, SECOND FLOOR, PRINCETON, NEW JERSEY 08542 ------------------------------------------------------------- (Address of principal executive offices) 609-924-1001 -------------- (Issuer's telephone number) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of December 31, 2000 the registrant had issued and outstanding 12,675,369 shares of common stock. Transitional Small Business Disclosure Format (check one); Yes [ ] No [X] Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of December 31, 2000................................................. 2 Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2000 and 1999 (unaudited)...................... 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2000 and 1999 (unaudited)...................... 4 Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended December 31, 2000 (unaudited).................... 6 Notes to the Financial Statements.......................................... 7 Item 2. Management's Discussion and Analysis or Plan of Operations..................................................... 15 Part II. OTHER INFORMATION Signatures................................................................. 18

COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000

See notes to the condensed consolidated financial statements. 2 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to the condensed consolidated financial statements. 3 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS

See notes to the condensed consolidated financial statements. 4 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

See notes to the condensed consolidated financial statements. 5 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 2000

See notes to the condensed consolidated financial statements. 6 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NATURE OF BUSINESS Comprehensive Medical Diagnostics Group, Inc. ("Medical Diagnostics") was incorporated in Florida on August 17, 1992. Prior to June 30, 2000 its financial statements included the continuing operations of its wholly owned subsidiaries, Industrial Fabrication & Repair, Inc. ("IFR") and PeopleFirst Staffing LLC ("PeopleFirst"). On September 7, 1999 Medical Diagnostics and PeopleFirst consummated certain transactions pursuant to a Share Exchange Agreement whereby PeopleFirst became an 80% subsidiary of Medical Diagnostics. The Exchange was treated for accounting purposes as a "purchase business combination" and a "reverse acquisition" effective as of September 1, 1999 in which Medical Diagnostics was the legal acquirer and PeopleFirst was the accounting acquirer. On April 29, 2000 Medical Diagnostics discontinued the operations of IFR and on June 29, 2000 discontinued the administrative services operations and commenced a liquidation of the remaining assets and liabilities of PeopleFirst (see DISCONTINUED OPERATIONS). As further explained below (see BUSINESS ACQUISITIONS), as a result of the acquisitions discussed therein, Medical Diagnostics has changed its focus and strategy to concentrate on becoming a provider of medical treatment, diagnostic testing and ancillary services to the long-term healthcare business sector and the medical community at large. UNAUDITED FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of Comprehensive Medical Diagnostics Group, Inc. and its subsidiaries (collectively, the "Company") as of December 31, 2000 and their results of operations, changes in stockholders' equity and cash flows for the six months ended December 31, 2000 and 1999. Certain terms used herein are defined in the audited consolidated financial statements of the Company as of June 30, 2000 and for the years ended June 30, 2000 and 1999 (the "Audited Financial Statements") included in the Company's Annual Report on Form 10-KSB (the "Form 10KSB") for the year ended June 30, 2000 that was previously filed with the United States Securities and Exchange Commission (the "SEC"). Pursuant to rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these consolidated financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Audited Financial Statements and the other information also included in the Form 10-KSB. The results of the Company's operations for the six months ended December 31, 2000 and 1999 are not necessarily indicative of the results of operations for the full year ending June 30, 2001. BUSINESS ACQUISITIONS Cardiovascular Laboratories Holding, Inc. As of July 27, 2000 the Company, through its wholly owned subsidiary, Cardiovascular Laboratories Holding, Inc. ("CLH") acquired the assets and assumed the liabilities of Cardiovascular, LLC ("CLI") which, on May 31, 2000 acquired the assets (including inventory, equipment, machinery, and contractual and other rights and certain accounts receivable) and assumed certain liabilities of Cardiovascular Laboratories, Inc. of PA ("CLP"). The transaction between CLI and CLP closed in escrow, which escrow was maintained after the closing between CLH and CLI, pending the assignment and assumption of certain equipment leases and financing contracts by CLH. 7 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As consideration for the acquisition of CLI, CLH assumed CLI's obligations under a seller note to CLP to pay $684,000 over a period of three years subject to reduction should certain monthly revenue levels not be attained and also assumed CLI's obligations under certain leases, financing agreements and trade obligations. CLH specializes in the provision of non-invasive cardiovascular imaging and the turnkey management of fixed sight vascular and ecocardiographic ultrasound laboratories. Comprehensive Medical Group, Ltd. As of July 25, 2000, the Company entered into an Agreement and Plan of Reorganization with The Comprehensive Medical Group, Ltd ("CMG"). The Company issued 3,000,000 shares of its Series A Convertible Preferred Stock to CMG's shareholders in exchange for all issued and outstanding stock of CMG. CMG intends to provide health and wellness management services for employee assistance programs, human resource departments and labor unions; and to design and operate a kiosk based point of purchase medical marketing program called "The Wellness Shop"; and to design and operate a website called "Leaseonlife.com" to provide interactive health and wellness analysis, treatment content and management tools. Diagnostic Management Group Holdings, Inc. As of August 2, 2000, the Company through its wholly owned subsidiary, Diagnostic Management Group Holdings, Inc. ("DMG") acquired the assets of CAT, a New York limited liability company. The purchase price for CAT's assets was $1,100,000 in cash and 2,500,000 shares of the Company's Series A Convertible Preferred Stock. DMG acquired all inventory equipment, machinery, contractual and other rights, and certain accounts receivable, also assuming certain equipment leases and trade payables. DMG manages the operation of a medical diagnostic cardiological and neurological testing services and tele-medicine of CAT - ECG PC, a New York professional corporation. DISCONTINUED OPERATIONS On April 1, 2000 the Company discontinued its manufacturing operations by agreeing to sell IFR back to its previous owner in exchange for 3,325 shares of the Company's common stock with a fair value of approximately $64,941 (or $19.53 per share). The shares reacquired have been reflected as treasury stock in the accompanying condensed consolidated balance sheet. On June 29, 2000, the Board of Directors, and a majority of the stockholders of the Company approved the adoption of a plan to effectively (i) discontinue the administrative services operations of PeopleFirst through the return of the right to operate its business to its previous owners in exchange for their agreement to relieve the Company of all obligations arising from such operations and (ii) liquidate the remaining assets and liabilities of PeopleFirst. Accordingly, the results of the Company's manufacturing and administrative services operations are reported, and as to 1999 reclassified, as a loss from discontinued operations in the accompanying condensed consolidated statement of operations. 8 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Revenue and loss from discontinued operations was as follows:

PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following Operating equipment $1,434,941 Website and kiosk software and equipment 133,598 Office equipment 18,754 Vehicles 10,467 ---------- Subtotal 1,597,760 Less accumulated depreciation and amortization (158,296) ---------- Total $1,439,464 ==========

Depreciation expense charged to operations for the six month period ended December 31, 2000 amounted to $127,599. GOODWILL During the six month period ended December 31, 2000 the Company acquired substantially all of the assets of CAT and CLI subject to the assumption of certain indebtedness; as well as all of the issued and outstanding stock of CMG. The excess cost over net book value of assets acquired as a result of these acquisitions aggregated $3,916,475 and is comprised as follows: CLI Assumption of a non-interest bearing seller note of $684,000 payable originally over a 36 month period (extended to a 48 month period effective October, 2000) and subject to adjustment if certain future monthly revenue levels are not attained, after a present value discount of 10% $ 510,710 Assumption of liabilities in excess of net book value of assets acquired 267,945 Capitalized costs and fees incidental to the transaction 70,151 ---------- Subtotal $ 848,806 ---------- CAT Cash $1,100,000 Issuance of 2,500,000 shares of the Company's Series A Convertible Preferred Stock with an estimated fair value of $.375 per share at the time of issuance 937,500 Capitalized costs and fees incidental to the transaction 15,311 Less: Amount allocable to fair market in excess of net book value of property and equipment acquired (750,000) ---------- Subtotal $1,302,811 ----------

9 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CMG Issuance of 3,000,000 shares of the Company's Series A Convertible Preferred Stock with an estimated fair value of $.375 per share at time of issuance $1,125,000 Assumption of liabilities in excess of net book value of assets acquired 634,858 Capitalized costs and fees incidental to the transaction 5,000 ---------- Subtotal 1,764,858 ---------- Total $3,916,475 ==========

The Company is amortizing goodwill over a 40 year period. Amortization for the six months ended December 31, 2000 amounts to $48,506. The following unaudited pro forma information shows the results of operations for the six months ended December 31, 2000 and 1999 as though the acquisitions described at BUSINESS ACQUISITIONS and dispositions described at DISCONTINUED OPERATIONS had been consummated on July 1, 1999:

NOTES PAYABLE DEMAND The Company through its subsidiary, CLH agreed to assume certain demand loan obligations of CLP. Pursuant thereto, there are outstanding advances under a loan commitment which permits borrowings as determined by a percentage of CLH's qualifying accounts receivable, up to a maximum limitation of $1,000,000. Such borrowings bear interest at the lenders defined prime rate plus 2.25%. Repayments under the loan are via a lock box agreement which provides for the receipt and processing of accounts receivable. The outstanding balance under this financing arrangement was $257,935 at December 31, 2000. ACQUISITION INDEBTEDNESS Acquisition indebtedness is comprised of the following: Non-interest bearing seller note payable in the original principal amount of $684,000 incurred upon the acquisition of CLI's net assets and payable originally over a 36 month period (extended to a 48 month period effective October, 2000) without interest and subject to adjustment if certain future monthly revenue levels are not attained, after a 10% present value discount $510,710 Remaining cash consideration due incidental to the acquisition of CAT's net assets 150,000 Amounts due CAT sellers consisting of uncollected and unremitted accounts receivable existing on the transaction date 28,984 -------- Total 689,694 Less current portion 246,279 -------- $443,415 ========

10 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The aggregate amount of future principal repayments at December 31, 2000 is as follows:

LONG TERM DEBT The Company, through its subsidiary CLH, has agreed to assume certain long-term debt of CLP which, at December 31, 2000 consists of the following: Term loan payable in monthly installments of $2,075, including interest at 13.7% through October 16, 2001 $ 24,943 Term loan payable in monthly installments of $1,908, including interest at 9.0% through June 1, 2001 14,810 Equipment loan payable in monthly installments of $557, including interest at 10.0% through May 27, 2003 15,747 Equipment loan payable in monthly installments of $13,640, including interest at 10.675% through September 29, 2002 248,896 --------- 304,396 Less current portion (181,746) --------- Long-term debt $ 122,650 =========

The loans are secured by liens on equipment and accounts receivable of CLH. The aggregate amount of future principal repayments at December 31, 2000 is as follows:

11 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS PROMISSORY NOTES PAYABLE On October 6, 2000 the Company borrowed $350,000 from a group of lenders. This obligation has subsequently been repaid with interest at 10%. The Company, through its subsidiary CLH has agreed to assume three promissory notes payable made March 30, 1998 totaling $125,000. The notes have an interest rate of 7% per annum which is payable quarterly. The principal balances of the notes were initially due March 30, 1999 but have been extended through July 2002. In accordance with the terms of the notes the interest rate on the outstanding principal balances was increased to the default rate of 11% per annum as of April 1, 1999. The notes are secured by a second security interest in the accounts receivable of CLH and are subordinated to advances of up to $1,000,000 under a demand note payable loan commitment. The outstanding principal balances as of December 31, 2000 totaled $125,000. CAPITALIZED LEASE OBLIGATIONS The Company through it's subsidiary CLH, agreed to assume obligations under the provisions of three long-term leases entered into in 1999. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The leases expire between May 20, 2004 and January 31, 2005. The leased property under capital leases as of September 30, 2000 were acquired at the pre-acquisition amortized costs of $340,274, and have accumulated amortization of $14,132 and a net book value of $326,142. Amortization of the lease property is included in depreciation expenses. The future minimum lease payments under capital lease and the net present value of the future minimum lease payments at December 31, 2000 are as follows: Total minimum lease payments $439,417 Amount representing interest 85,232 -------- Present value of net minimum Lease payments 354,185 Current portion 74,866 -------- Long-term capital lease obligation $279,319 ========

8% CONVERTIBLE NOTE PAYABLE Prior to July 14, 2000, the Company had outstanding three 8% Convertible Promissory Notes, dated March 3, 1999 in the aggregate principal amount of $819,000 ("Convertible Notes") and one 8% Promissory Note having a principal amount of $81,000 ("Non-Convertible Note"). The Company was in default as to the above notes and interest of $30,000 was due. The terms and conditions of the Convertible Notes were amended and restated in a Note Reformation Agreement dated as of July 14, 2000 and new Convertible Notes were issued reflecting a total balance of $930,000, extending the maturity date to June 30, 2003 and amending and modifying the conversion terms of the Convertible Note. Additionally, the Non- Convertible Notes was cancelled. Subsequently, the Amended and Restated Convertible Notes were sold by the note holder to a group of investors. As of December 31, 2000 certain convertible note holders exercised their conversion rights resulting in the Company's issuance of 8,167,451 common shares and thereby reducing the principal balance of the 8% Convertible Note to $676,810. 12 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PREFERRED STOCK The Company is authorized to issue 30,000,000 shares of $.0001 par value preferred stock. As of December 31, 2000 the company has issued and outstanding 5,850,000 shares of Series A Preferred Stock; such shares have voting rights equal to those of common shareholders, have priority in liquidation over common shareholders, have no stated dividend requirements and may each be converted into one common share. Incidental to the acquisition of CAT and CMG (see BUSINESS ACQUISITIONS) the Company issued 5,500,000 shares of Series A Preferred Stock which, in the opinion of management had a fair value at the time of issuance of $.375 per share. Additionally, the Company has issued 250,000 shares of Series A Preferred Stock pursuant to a long-term consulting agreement and 100,000 shares of Series A Preferred Stock as incentive compensation to an officer of the Company; such issuances, in the opinion of management, having a fair value at the time of issuance of $.375 per share. COMMON STOCK The Company is authorized to issue 50,000,000 $.001 par value common shares. Through December 31, 2000 the Company has issued 2,949,397 common shares in exchange for cash consideration of $1,748,000 and debt forgiveness of $700,000 which issuance was made pursuant to a private placement to accredited investors, which is exempt from registration under Regulation D of the Securities Act of 1933, as amended. Additionally, the Company issued 218,353 common shares and incurred fees, costs and commissions amounting to $292,809 incidental to such issuances. Through December 31, 2000 the Company has issued 8,167,451 common shares pursuant to the Company's conversion of a portion of the 8% Convertible Preferred Notes resulting in a principal reduction of $253,190. Pursuant to a certain Termination and Settlement Agreement, the Company issued 300,000 common shares in exchange for forgiveness of $425,000. The Company has entered into consultancy agreements whereby 780,000 common shares have been rendered in exchange for services to be provided through June 30, 2001. It is management's opinion that the fair value of such common shares issued is $.375 per share. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's material financial instruments for which disclosure of estimated fair value is required by certain accounting standards consisted of cash, accounts receivable, accounts payable, notes payable, acquisition indebtedness, long-term debt, capital lease obligations and it's 8% convertible note. In the opinion of management, such items other than a component of acquisition indebtedness are carried at values that approximate their fair values because of their liquidity, short-term maturities or because they bear interest rates equivalent to those currently prevailing for financial instruments with similar characteristics. Certain non-interest bearing acquisition indebtedness, in the original principle amount of $684,000, has been subjected to a 10% present value discount in the accompanying condensed consolidated balance sheet at December 31, 2000. 13 COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES As of December 31, 2000 the Company had net operating loss carryforwards of approximately $26,000,000. These net operating loss carryforwards are available to reduce future taxable income and will expire at various dates through 2021. Due to the uncertainties relating to, among other things, changes in the ownership of the Company which occurred in September of 1999 and July of 2000, as well as the disposition and acquisition of various subsidiaries, and the extent and timing of its future taxable income, the Company has offset the deferred tax assets attributable to potential benefits of approximately $7,200,000 from the utilization of those net operating loss carryforwards by an equivalent valuation allowance. Also, for the above reasons, no credit for income taxes is included in the accompanying condensed consolidated statements of operations for the six month periods ended December 31, 2000 and December 31, 1999 respectively. EARNINGS (LOSS) PER SHARE The Company presents "basic" earnings (loss) per common share and, if applicable, "diluted" earnings per common share pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" Basic earnings (loss) per common share is calculated by dividing net income or loss applicable to common stock by the weighted average number of common shares outstanding during each period. The calculation of diluted earnings per common share is similar to that of basic earnings per common share, except that: (i) the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the assumed exercise of stock options and warrants and the conversion of notes or preferred shares had been issued during the period and (ii) the numerator is adjusted to eliminate interest on convertible notes and convertible preferred dividend requirements. Diluted per share amounts have not been presented in the accompanying condensed consolidated statements of operations because the Company had a net loss for the six month periods ended December 31, 2000 and 1999, respectively and, accordingly, the effects of the assumed conversion of all of the Company's outstanding convertible notes, and the assumed exercise of all of the Company's outstanding warrants and the application of the treasury stock method, would have been anti-dilutive. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company maintains its cash balances with major financial institutions that have high credit ratings. At times, such balances may exceed Federally insured limits. The Company generally extends credit to its customers (which include third party payors), all of whom are located in the northeastern United States. Management of the Company closely monitors the extension of credit to customers while maintaining allowances for potential credit losses. During the six month periods ended December 31, 2000 and 1999, no customer accounted for more than 10% of the Company's revenues. Generally, the Company does not have a significant receivable from any single customer and, accordingly, management does not believe that the Company was exposed to any significant credit risk at December 31, 2000. OPERATING LEASE COMMITMENTS On September 1, 1999, CMG entered into a twenty-one month sublease for the period September 1, 1999 through June 30, 2001 for 4,500 square feet of office space. The rent is $4,200 per month and is not subject to further increases. On March 10, 1999, CAT entered into an amended ten year lease for the term March 10, 1999 through March 31, 2009, for 7,000 square feet of laboratory and office space. 14 Management's Discussion and Analysis or Plan of Operations The following discussion regarding the Company and its business and operations contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act 1995. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward looking statements. The Company does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by management of the Company over time means that actual events are bearing out as estimated in such forward looking statements. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this report. Overview Comprehensive Medical Diagnostics Group, Inc. ("Medical Diagnostics") was originally incorporated in Florida on August 17, 1992 as American Risk Management Group, Inc. It's name was changed to Comprehensive Medical Diagnostic Group, Inc. on August 20, 2000. The Company was originally formed to seek acquisitions or business opportunities, to the extent permitted by its assets, in various business sectors throughout the United States. Pursuant to this strategy, the Company bought and sold several businesses over the last few years. The Company has changed its focus and strategy and will concentrate on becoming a provider of medical treatment, diagnostic testing and ancillary services to the long-term health care business sector and the medical community at large. The Company will also attempt to position itself to become an internet provider of health care content and services. In order to implement its focus and strategy the Company recently completed three acquisitions as follows: Cardiovascular Laboratories Holding, Inc. As of July 27, 2000 the Company, through its wholly owned subsidiary, Cardiovascular Laboratories Holding, Inc. ("CLH") acquired the assets and assumed the liabilities of Cardiovascular, LLC ("CLI") which, on May 31, 2000 acquired the assets (including inventory, equipment, machinery, and contractual and other rights and certain accounts receivable) and assumed certain liabilities of Cardiovascular Laboratories, Inc. of PA ("CLP"). The transaction between CLI and CLP closed in escrow, which escrow was maintained after the closing between CLH and CLI, pending the assignment and assumption of certain equipment leases and financing contracts by CLH. As consideration for the acquisition of CLI, CLH assumed CLI's obligations under a seller note to CLP to pay $684,000 over a period of three years subject to reduction should certain monthly revenue levels not be attained and also assumed CLI's obligations under certain leases, financing agreements and trade obligations. CLH specializes in the provision of non-invasive cardiovascular imaging and the turnkey management of fixed sight vascular and ecocardiographic ultrasound laboratories. 15 Comprehensive Medical Group, Ltd. As of July 25, 2000, the Company entered into an Agreement and Plan of Reorganization with The Comprehensive Medical Group, Ltd. ("CMG"). The Company issued 3,000,000 shares of its Series A Convertible Preferred Stock to CMG's shareholders in exchange for all issued and outstanding stock of CMG. CMG intends to provide health and wellness management services for employee assistance programs, human resource departments and labor unions; and to design and operate a kiosk based point of purchase medical marketing program called "The Wellness Shop"; and to design and operate a website called "Leaseonlife.com" to provide interactive health and wellness analysis, treatment content and management tools. Diagnostic Management Group Holdings, Inc. As of August 2, 2000, the Company through its wholly owned subsidiary, Diagnostic Management Group Holdings, Inc. ("DMG") acquired the assets of CAT, a New York limited liability company. The purchase price for CAT's assets was $1,100,000 in cash and 2,500,000 shares of the Company's Series A Convertible Preferred Stock. DMG acquired all inventory equipment, machinery, contractual and other rights, and certain accounts receivable, also assuming certain equipment leases and trade payables. DMG manages the operation of a medical diagnostic cardiological and neurological testing services and tele- medicine of CAT - ECG PC, a New York professional corporation. Additionally the Company discontinued certain operations as follows: On April 1, 2000 the Company discontinued its manufacturing operations by agreeing to sell it's subsidiary Industrial Fabrication & Repair, Inc. ("IFR") back to its previous owner in exchange for 3,325 shares of the Company's common stock with a fair value of approximately $64,941 (or $19.53 per share). The shares reacquired have been reflected as treasury stock in the accompanying condensed consolidated balance sheet. On June 29, 2000, the Board of Directors, and a majority of the stockholders of the Company approved the adoption of a plan to effectively (i) discontinue the administrative services operations of PeopleFirst Staffing LLC (PeopleFirst) through the return of the right to operate its business to its previous owners in exchange for their agreement to relieve the Company of all obligations arising from such operations and (ii) liquidate the remaining assets and liabilities of PeopleFirst. The condensed consolidated statement of operations includes the operations of CLH, CMG and DMG from the respective effective dates that they were acquired by the Company. The results of operations IFR and PeopleFirst are reported as losses from discontinued operations. Pro Forma The following discussion includes the results of operations for the six months ended December 31, 2000 and 1999 as though both the acquisitions and dispositions described above had been consummated on July 1, 1999. During the six months ended December 31, 2000, consolidated revenues decreased by approximately $400,000 or 22% from approximately $1,800,000 for the six months ended December 31, 1999 to approximately $1,400,000 for the six months ended December 31, 2000. Operating costs for the six months ended December 31, 2000 increased approximately $1,000,000 or 53% from approximately $1,900,000 for the six months ended December 31, 1999 to approximately $2,900,000 for the six months ended December 31, 2000. This increase is attributable to an increases in kiosk and website development costs, administrative expenses and expenses related to changes in the Company's focus and direction. 16 On a pro forma basis, the Company's loss from continuing operations increased by approximately $1,455,000 or $(0.24) per share from approximately $(45,000) or $(0.01) per share for the six months ended December 31, 1999 to approximately $1,500,000 or $(0.25) per share for the six months ended December 31, 2000. Historical Information These results include the operations of CLH, CMG and DMG from the effective date of their acquisitions by the Company through December 31, 2000. During the six months ended December 31, 2000 the Company had revenues of $1,449,403, all of which was derived from its operating subsidiaries, CLH and DMG. Selling general and administrative expenses were $2,616,720 of which $1,937,163 was attributable to its operating subsidiaries and the remainder, of $679,557 was attributable to kiosk and website development costs as well as administrative expenses. Depreciation attributable to acquired assets and amortization of goodwill arising from these acquisitions amounted to $174,692 for the six months ended December 31, 2000. Interest expense was $141,739 for this period. As a result of all the above, the Company's loss from continuing operations and net loss amounted to $1,483,748 $(0.23 per share) and $1,582,168 $(0.25 per share), respectively, for the six months ended December 31, 2000. Liquidity and Capital Resources At December 31, 2000 the Company had a working capital deficiency of $1,502,388. The working capital deficiency is attributable to losses from operations, the excess of current liabilities over assets assumed in the acquisitions of CHP, current amounts due to sellers of CAT and CHP and current obligations incidental to CMG's kiosk and website development costs and fees incidental to the above, a private placement offering and a debt restructuring. Private Placement On July 17, 2000, the Company entered into subscription agreements with fifteen accredited investors under a private placement, which is exempt from registration under Regulation D of the Securities Act of 1933, as amended. The Company has agreed to sell to these accredited investors 5,000,000 shares of its common stock at a per share price of $.83 for an aggregate purchase price of $4,150,000. As of December 31, 2000, the Company has received or accounted for $2,448,000 of these subscriptions. Note Restructuring Prior to July 14, 2000, the Company had outstanding three 8% Convertible Promissory Notes, dated March 3, 1999 in the aggregate principle amount of $819,000 ("Convertible Notes") and one 8% Promissory Note having a principal amount of $81,000 ("Non-Convertible Note"). The Company was in default as to the above notes and interest of $30,000 was due. The terms and conditions of the Convertible Notes were amended and restated in a Note Reformation Agreement dated as of July 14, 2000 and new Convertible Notes were issued reflecting a total balance of $930,000, extending the maturity date to June 30, 2003 and amending and modifying the conversion terms of the Convertible Note. Additionally, the Non-Convertible Note was cancelled. Subsequently, the Amended and Restated Convertible Notes were sold by the note holder to a group of investors. 17 As of December 31, 2000 certain convertible note holders exercised their conversion rights resulting in the Company's issuance of 8,167,451common shares and thereby reducing the principal balance of the 8% Convertible Note to $676,810. The Company anticipates that its working capital, as a result of the private placement of its securities, working capital loans presently being negotiated, together with anticipated cash flow from the recently acquired companies, will be sufficient to satisfy the Company's cash requirements for at least twelve months. In the event the Company's plan changes (due to unanticipated expenses or difficulties of integrating these acquisitions), or if the working capital and projected cash flow otherwise prove insufficient to fund operations, the Company could be required to seek additional financing sooner than currently anticipated. The Company has no current arrangements with respect to, or sources of, additional financing. Accordingly, there can be no assurance that additional financing will be available to the Company when needed, or at all, on commercially reasonable terms. The Company's inability to obtain such additional financing could have a material adverse effect on the Company's liquidity. The Company believes that it will be able to obtain financing, if needed, although there can be no assurances of such. In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed or behalf by the undersigned thereunto duly authorized. Comprehensive Medical Diagnostics Group, Inc. A Florida Corporation /s/ Ronald Wilheim ---------------------------------------- Ronald Wilheim Chief Executive Officer Date: February 20, 2001 18

COMPREHENSIVE MEDICAL DIAGNOSTICS GROUP INC 10-Q