As filed with the Securities and Exchange Commission June 26, 2000.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MEDGRUP CORPORATION
-------------------
(Name of small business issuer in its charter)
Colorado 6411 84-1504390
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(State or jurisdiction of (Primary Standard Industrial I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.
1880 Willow Park Way, Suite B
Monument, Colorado 80132-9086
(Address and telephone number of principal executive offices
and principal place of business)
William D. Cronin,
Chairman of the Board and Chief Executive Officer
MedGrup Corporation
1880 Willow Park Way, Suite B
Monument, Colorado 80132-9086
(719) 481-1500
(Name, address and telephone number of agent for service)
Copies of all communications to:
David J. Babiarz, Esq.
Overton, Babiarz & Associates, P.C.
7720 E. Belleview Ave., Suite 200
Englewood, Colorado 80111
(303) 779-5900
Approximate date of proposed sale to the public: From time to time after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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<TABLE>
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CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
class of securities Amount to maximum offering maximum aggregate Amount of
to be registered be registered price per share(1) offering price(1) registration fee(1)
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<S> <C> <C> <C> <C>
Common Stock, $.001
par value 865,000 $1.75 $1,513,750 $400
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(1) Based upon the average of the bid and asked prices of the Company's
common stock on April 24, 2000 in accordance with Rule 457(c) of the Securities
Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
Subject to Completion. Dated June 26, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
865,000 SHARES OF COMMON STOCK
MEDGRUP CORPORATION
(LOGO)
This prospectus relates to 865,000 shares of common stock of MedGrup
Corporation that may be offered for sale or otherwise transferred from time to
time by one or more of the selling stockholders identified in this prospectus.
The total net proceeds to the selling stockholders from the sale of our shares
will equal the sales price of such shares, less any commissions. See "Plan of
Distribution." We will not receive any of the proceeds from the sale of the
common stock by the selling stockholders. We will pay the expenses incurred in
registering the common stock, including legal and accounting fees.
A total of 600,000 shares of common stock offered by this prospectus were
acquired by the selling stockholders in a private placement conducted by us
during late 1999 and early 2000. An additional 145,000 shares were acquired by
certain selling stockholders in conversion of notes payable by the Company. We
can issue the remaining 120,000 shares upon exercise of a warrant held by a
securities broker-dealer who assisted with our private placement. See "Selling
Stockholders."
Our common stock is traded over the counter under the symbol "CODX" and
quotations are published in the Pink Sheets maintained by members of the
National Association of Securities Dealers, Inc. and published by the National
Quotations Bureau. Following receipt of an effective date for the registration
statement of which this prospectus is a part, we intend to apply for quotation
of our common stock on the OTC Bulletin Board. The last quotes of our common
stock as reported by the National Quotations Bureau on June __, 2000 was $____
per share bid and $____ asked.
Our principal executive offices are located at 1880 Willow Park Way, Suite
B, Monument, Colorado 80132-9086, and our telephone number is (719) 481-1500.
Investing in our common stock involves substantial risks. See "Risk
Factors" (page 3)
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
Dated ______, 2000
<PAGE>
TABLE OF CONTENTS
Page
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1 SUMMARY OF THE OFFERING................................................1
1.1 OUR BUSINESS.....................................................1
1.2 OPERATING RESULTS................................................1
1.3 OUR GROWTH STRATEGY..............................................2
1.4 THE OFFERING.....................................................2
1.5 SELECTED FINANCIAL DATA..........................................3
2 RISK FACTORS...........................................................3
2.1 RISKS ASSOCIATED WITH OUR FINANCIAL POSITION.....................3
2.2 BUSINESS FACTORS THAT MAY NEGATIVELY AFFECT OUR OPERATIONS.......4
2.3 OTHER FACTORS THAT MAY NEGATIVELY AFFECT OUR COMMON STOCK........7
3 FORWARD-LOOKING STATEMENTS.............................................9
3.1 IN GENERAL.......................................................9
3.2 NO "SAFE HARBOR"................................................10
4 PRICE RANGE OF OUR COMMON STOCK.......................................10
5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................11
5.1 OVERVIEW........................................................11
5.2 LIQUIDITY AND CAPITAL RESOURCES.................................11
5.3 RESULTS OF OPERATION............................................14
5.4 PERSEUS ART GROUP, INC..........................................16
5.5 CHANGES IN OUR ACCOUNTANTS......................................16
6 OUR BUSINESS..........................................................17
6.1 GENERAL.........................................................17
6.2 INDUSTRY OVERVIEW AND COMPETITION...............................17
6.3 OPERATIONS......................................................19
6.4 MARKETING.......................................................22
6.5 COMPLIANCE AND INDUSTRY REGULATION..............................23
6.6 INSURANCE.......................................................24
6.7 EMPLOYEES.......................................................24
6.8 FACILITIES......................................................24
6.9 LEGAL MATTERS...................................................24
7 OUR MANAGEMENT........................................................24
7.1 OUR DIRECTORS AND EXECUTIVE OFFICERS............................25
7.2 SIGNIFICANT EMPLOYEES...........................................26
7.3 COMMITTEES OF THE BOARD OF DIRECTORS............................27
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7.4 DIRECTOR COMPENSATION...........................................27
7.5 EXECUTIVE COMPENSATION..........................................27
7.6 EMPLOYMENT CONTRACTS............................................29
7.7 QUALIFIED STOCK OPTION PLAN.....................................29
7.8 TRANSACTIONS WITH RELATED PARTIES...............................30
7.9 REPORTS TO SHAREHOLDERS.........................................31
8 PRINCIPAL STOCKHOLDERS................................................31
9 DESCRIPTION OF OUR CAPITAL STOCK......................................34
9.1 IN GENERAL......................................................34
9.2 COMMON STOCK....................................................34
9.3 OUR TRANSFER AGENT..............................................35
9.4 CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION.............35
9.5 LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION............35
10 SHARES ELIGIBLE FOR FUTURE SALE.......................................36
10.1 IN GENERAL......................................................36
10.2 SALES OF RESTRICTED SHARES......................................36
10.3 EFFECT OF SALES OF SHARES.......................................37
11 PLAN OF DISTRIBUTION..................................................37
12 LEGAL MATTERS.........................................................39
13 EXPERTS...............................................................39
14 ADDITIONAL INFORMATION................................................39
FINANCIAL STATEMENTS OF MEDGRUP CORPORATION, FORMERLY
MEDGRUP DEVELOPMENT SERVICES, INC...........................................F-1
FINANCIAL STATEMENTS OF MEDGRUP CORPORATION, FORMERLY PERSEUS
ART GROUP, INC..............................................................F-20
FINANCIAL STATEMENTS OF MED CORP, FORMERLY MDSI (UNAUDITED).................F-33
iii
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1 SUMMARY OF THE OFFERING
This summary highlights important information about our business and about
this offering. Because it's a summary, it doesn't contain all the information
you should consider before investing in the common stock. So please read the
entire prospectus.
MedGrup Corporation, a Colorado corporation, was organized in 1998. We were
originally founded as Perseus Art Group, Inc. to operate a retail fine art
business. In 1999, the assets and operations of MedGrup Development Services,
Inc. were merged with Perseus and we began operation in the medical services
industry. MedGrup Development Services, Inc. was originally organized in 1995.
Our principal executive offices are located at 1880 Willow Park Way, Suite B,
Monument, Colorado 80132-9086, and our telephone number is (719) 481-1500.
1.1 Our Business
As a company, we provide coding and consulting service for hospitals and
other healthcare providers located in the United States. Under existing Federal
and state requirements, these providers must submit billings for Medicare and
Medicaid reimbursement in a coded format. Many private health insurers also
require submission of billing information in this coded format. These providers
are therefore faced with strict regulatory compliance issues, as well as cash
flow concerns in addressing coding requirements. We maintain a staff of highly
qualified individuals to satisfy these coding requirements and help the
providers operate more efficiently and profitably. Most of our service is
provided off the premises of the providers, although we often maintain personnel
at the providers' location to facilitate our service. We license the computer
software used in connection with our coding service from an independent third
party and modify it to be used in our business. We do not own the rights to the
software.
We presently have approximately 57 clients. Many of these clients are
hospitals in rural areas, which can't afford or locate full-time coding staff.
We also work with larger, urban healthcare providers which believe our services
are more efficient than maintaining their own staff or use our services to
supplement their staff. Some highlights of our business include the following:
o We provide coding services for inpatient, outpatient and emergency
room services provided by healthcare organizations.
o We assist our clients in staffing their medical records department to
improve operations.
o We provide consulting services to healthcare providers to help their
medical records and business office departments run more smoothly and
profitably.
o We audit the medical records departments of our clients to assist them
to comply with Federal and state regulations.
1.2 Operating Results
We've operated in the medical services industry for 5 years. During that
time, we have significantly increased our clients, revenues and profit. Here are
some of our financial highlights:
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o We increased the number of clients from 17 in 1997 to 37 in 1998 and
57 at the date of this prospectus.
o Our revenues have increased from $968,267 during 1997, to $980,431 in
1998 and $1,986,596 in 1999.
o Our profit or loss after income taxes have increased from a loss of
$2,666 in 1997, to a profit of $195,269 in 1998 and $231,650 in 1999.
1.3 Our Growth Strategy
The strategy for our growth in the future is to add as many additional
clients as is consistent with our goal of providing superior service in the
medical services industry. Our target market is small, rural and community
hospitals, but we also market to large, urban health centers. We market our
services through personal contact by our employees, through industry
associations, services and various publications. We also obtain new customers by
word of mouth referral from existing clients. Our existing customer base is
located primarily in Texas, Oklahoma, California and Colorado. We hope to
continually add to that client base and expand the geographic reach. Finally, we
must continually update our technology to enhance productivity, profitability
and customer service.
We currently work with several networks of hospitals, including T.O.R.C.H.
and Covenant in Texas, Western Healthcare Alliance in Colorado and Tenet on a
nationwide basis. Our strategy for growth is to obtain additional service within
these networks, as well as expand our service into additional provider networks.
Our biggest obstacle to date has been managing our growth. The large
increase in clients and revenues that we have experienced over recent years has
strained our executive, administrative and operating staff. We must continually
add new coders to provide service to our clients. We must also maintain quality
over the service we provide to our customers. The proceeds that we received from
a recent private placement have been used to expand our infrastructure to help
with our growth.
1.4 The Offering
(a) Common stock offered: 865,000 shares to be sold by the selling
stockholders.
(b) Common stock outstanding: 5,541,538 shares.
(c) Proposed symbol and trading market: "CODX" on the OTC Bulletin Board
The number of shares of common stock outstanding (i) gives effect to a 1
for 2 reverse split of our common stock effective May 12, 1999, and (ii) does
not include 120,000 shares issuable upon exercise of a warrant at $1.10 per
share or 1,391,793 shares of common stock issuable upon exercise of stock
options outstanding under our stock option plan. The weighted average exercise
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price of these options is $1.18 per share. This number also does not include up
to an additional 91,207 shares of common stock reserved for future stock option
grants. See "Qualified Stock Option Plan" for a more complete description of our
stock option plan.
1.5 Selected Financial Data
The following financial information summarizes the more complete historical
financial information at the end of this prospectus. Our independent public
accountants, Cordovano & Harvey, P.C., have audited the information for the
years ended December 31, 1999 and 1998. The information for quarters ended March
31, 2000 and 1999 is unaudited. You should read the information below along with
all other financial information and analysis in this prospectus. Please don't
assume that the results below indicate results we'll achieve in the future.
<TABLE>
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Fiscal Year Ended Three Months Ended
December 31, March 31,
---------------------- -----------------------
1999 1998 2000 1999
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Statement of Operations Data:
-----------------------------
<S> <C> <C> <C> <C>
Revenues $1,986,596 $ 980,431 $ 899,487 $ 289,140
Gross profit 1,186,956 728,581 604,633 295,809
Operating expenses 932,340 532,611 395,580 205,314
Income from operations 254,616 195,970 206,720 88,585
Interest expense 14,912 701 3,667 1,910
Income tax provision 9,554 -0- 51,000 -0-
Income from continuing operations 231,650 195,269 155,720 88,585
Earnings per share .05 .05 .03 .03
Balance Sheet Data:
-------------------
Current assets $ 860,402 1,092,372
Total assets 1,205,385 1,573,358
Current liabilities 299,201 304,731
Long-term debt 86,049 110,469
Total stockholders' equity 811,088 1,158,158
</TABLE>
2 RISK FACTORS
Please carefully consider the following risk factors before deciding to
invest in the common stock.
2.1 Risks Associated With Our Financial Position
(A) Our limited operating history and revenues make it difficult to
anticipate the degree of success of our future operations. We completed the
merger with MedGrup Development Services on May 12, 1999. Prior to that, MedGrup
Development Services operated for a limited period of time. Consequently, we
have a limited operating history. Our revenues for the year ended December 31,
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1999 were approximately $2 million, an increase of approximately $1 million from
1998. We are in the early phase of our development. Purchasers of our common
stock should be aware of the difficulties encountered by companies such as ours,
including the need for working capital, limited operating history and intense
competition.
(B) Our limited capitalization and working capital make it likely that we
will require additional working capital to help finance our ongoing operations.
Our inability to acquire such additional capital or to acquire it upon
satisfactory terms and conditions could adversely impact our operations. We
presently have limited capitalization and working capital. At March 31, 2000, we
reported shareholder's equity of $1,158,158 and working capital of $787,641. We
believe we will require capital from outside sources to continue growing at our
present rate. We hope to finance these capital requirements through a
combination of debt and equity financing. While we believe we have resources
available to satisfy those requirements, we cannot assure that we can obtain
capital or that we can acquire such capital on terms acceptable to us.
(C) We depend upon collection of accounts receivable to finance our working
capital requirements, and failure to collect or unanticipated delays in
collection could adversely impact our operations. Accounts receivable in the
amount of $501,075 at March 31, 2000 represent a substantial portion of our
working capital. This represents a substantial investment for us. We depend on
collecting those receivables to finance our working capital requirements. While
we believe we maintain an adequate reserve against those receivables, we cannot
assure we will succeed in collecting the remainder. As most of our customers are
hospitals which are wholly or partially government funded, we believe our
collections are reasonably certain. However, we typically collect our
receivables 60 to 90 days after billing. We must finance our operations during
this collection time.
2.2 Business Factors That May Negatively Affect Our Operations
(A) We are growing at a rapid rate, and, if we cannot expand our personnel,
equipment and facilities fast enough to keep up with our growth, we may not be
able to maintain quality service. Because of our limited operating history and
revenues, we maintain a relatively limited staff of management and
administrative personnel. This situation places great stress on these
individuals to manage our growth. Our continued growth will depend on a variety
of factors, including our ability to initiate, develop and maintain new client
relationships. We must also assure that our existing clients receive quality
service from our coders. We must also develop systems to accurately record and
monitor our growth. We must also evaluate and expand our facilities and
equipment to ensure our clients receive quality service and we can continue to
grow as we hope. All of these factors place great demands on our people and our
systems, and we cannot assure that we will continue to grow at our past rate.
(B) We are dependent on the hospital market for our business, and cannot be
assured of the level of demand for our services in the future. Our customers are
typically hospitals and other healthcare providers, and we derive substantially
all of our revenues from services to hospitals. Our performance therefore
depends on continued demand for our service from these providers. Consolidation
in the healthcare industry, particularly in the hospital market, could decrease
the number of potential purchasers of our services or the loss of one or more of
our significant customers. Either of these events could negatively affect our
business, financial condition and results of operation. Legislative or
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market-driven reforms could also negatively affect our business. Finally, the
decision to purchase our services typically involves the approval of several
members of management of a hospital. Consequently, it is difficult for us to
predict the timing or outcome of the buying decision of our customers or
potential customers.
(C) We are dependent on the services of certain key personnel, and the loss
of any of the key personnel could adversely impact our business. We depend on
the continued service of key management employees. These individuals include
William Cronin, Chairman of the Board and Chief Executive Officer, Terry Holmes,
President, and Gary Mendenhall, Vice President. Mr. Cronin founded the Company
and is responsible for marketing the Company's services to our clients. Messrs.
Holmes and Mendenhall are responsible for managing the day-to-day operations of
our business. The loss of the services of any of these individuals could
adversely affect our business. We have employment agreements with each of these
individuals for a term of three years. However, we maintain no "key man" life
insurance on any of their lives. The loss of any of these individuals would
adversely affect our business.
(D) Our success depends upon our ability to keep up with rapidly changing
technology. We depend on our computer and telecommunications equipment and
software capabilities to run our business. Our failure to maintain the
competitiveness of our technological capabilities or respond effectively to
technological changes could negatively affect our business, results of
operations or financial condition. As we are not a computer software provider,
we do not typically invest funds in research and development for our coding
software. We depend on products acquired from independent third parties. Our
continued growth and future profitability will depend on a number of factors,
including our ability to (i) expand our existing service offerings to include
desired customer services and (ii) as our business matures, introduce new
services that leverage and respond to changing technological and healthcare
developments. We cannot assure that technologies or services developed by our
competitors will not render our products or services non-competitive or
obsolete.
(E) We compete with other industry participants, and may not be able to
market our services as effectively or provide the most cost-effective services
when competing against larger companies with greater resources or against
in-house departments of our potential customers. Although the outsourcing of
medical coding is a relatively new service, we compete with larger, well
established companies with greater resources than ours. Most importantly, we
compete with the medical records departments of hospitals and other clients and
potential clients. However, these providers are often unable to find qualified
personnel to work in their medical records department. In marketing our service,
we attempt to educate healthcare providers about the benefit of our service.
Providers are beginning to look to third parties for their coding and other
administrative needs. This has created competition for our service.
Larger, established services companies such as QuadraMed Corp., provide a
variety of coding and consulting services to participants in the healthcare
industry. Large professional accounting and management services firms such as
Arthur Anderson and Ernst and Young, have also developed departments which
provide coding services to their hospital clients. These companies have
substantially greater financial and personnel resources than we do and have
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established relationships with certain clients. We also compete with other
specialty coding companies, which provide services similar to ours. While we
believe we are favorably positioned to compete with these specialty and larger
companies, we cannot assure that our business will be successful in the future.
We must continually expand and refine our services to remain competitive.
Finally, pressures from current or future competitors could also cause our
services to lose market acceptance or result in price erosion, with a negative
effect on our business, results of operations or financial condition.
(F) We face liability for incorrect coding, and could be subject to
financial losses related thereto. If we incorrectly code charts for a client, we
may incur additional costs associated with correcting the errors and assisting
the client in the "reconsideration process" with the payer, i.e. Medicare,
Medicaid or a private health insurance company. This is done without additional
charge to the client. In addition, if monetary or other penalties are assessed
against a client by a state or Federal agency, it is possible that the client
could claim reimbursement or damages from us. We cannot assure that the amount
of our liability insurance will be adequate to insure against our potential
losses.
(G) A business interruption could materially disrupt our operations. Our
operations depend on our ability to protect our communication systems with
clients, including computer and telecommunications equipment and software,
against damage from fire, power loss, interruption or failure, natural disaster
and other similar events. In the event we experience a temporary or permanent
interruption at one or more of our coding locations, through casualty, operating
malfunction or otherwise, our business could be negatively affected and we may
be required to compensate clients for any loss that they incur. In order to
reduce the possibility of such an interruption, we maintain redundant service
locations for our computer and other operating systems. We also currently
maintain property and business interruption insurance; however, such insurance
may not adequately compensate for any losses we or our clients may incur.
(H) Our client contracts may be terminated on short notice and do not
guarantee specific revenues. Our contracts with clients may be terminated on 90
days advance notice and do not ensure that we will generate a minimum level of
revenue. The profitability of each client may fluctuate, sometimes
significantly, depending on service required by that entity. We are not usually
designated as our clients' exclusive coding provider. To remedy these
situations, we are presently attempting to negotiate longer-term contracts with
our clients. However, we believe that meeting our client's expectations can have
a more significant impact on our revenues and profitability than the specific
terms of our contracts. We believe we have excellent relations with all of our
clients.
(I) Our success depends on retaining qualified coders. There is no
guarantee that we will be able to find experienced and quality staff to serve
our clients. Our success depends largely on our ability to recruit, hire, train
and retain qualified employees, especially medical coders. Our industry is very
labor intensive and requires highly trained and experienced personnel. While we
believe we have excellent relations with our existing employees, we must
continually recruit new employees to sustain our growth. Our employees are
partially responsible for successful relations with our clients. For that
reason, it is important that we maintain a qualified labor force. Qualified
coders are in high demand and short supply in our industry. We must also retain
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employees at acceptable costs, including wages, employee benefits and taxes. An
increase in these expenses could adversely affect our business and financial
condition.
(J) Our clients' business is heavily regulated by Federal and state law and
we must continually monitor regulations and train our staff to ensure we remain
in compliance. We could be subject to penalties or financial losses for failure
to comply with regulations, and cannot guarantee that the rapidly evolving
regulations will not restrict our ability to conduct our business. While we are
not directly regulated, the health care industry and our clients are heavily
regulated by Federal and state laws. On the Federal level, the U.S. Department
of Health and Human Services, through the Health Care Finance Authority ("HCFA")
and the Office of the Inspector General, implement and enforce regulations
specifying, among other thing, uniform coding requirements and strict billing
guidelines for Medicare and Medicaid claims. The regulations require that
providers use standardized numerical codes and descriptive terms to report
procedures and services provided. These regulations also impose substantial
penalties for incorrect billing. These regulations are found within the Social
Security Act, as amended. The regulations and the penalties are directed at the
health care providers, who directly provide the services and submit the claims
for payment. HCFA may impose civil monetary penalties, assessments or exclusion
from the Medicare and Medicaid programs for violations of the regulations. State
laws also govern health care providers. State regulations regarding uniformity
and submission are similar to the Federal regulations. Because we do not
actually submit the claims, we do not believe that the regulations directly
affect us, but we must follow state and Federal regulations in our coding work.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
regulated by Federal and state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by us. We cannot assure that
changes to state or federal laws will not materially restrict the ability of
healthcare providers to transmit information from patient records to facilitate
our service.
2.3 Other Factors that May Negatively Affect Our Common Stock
(A) There may be no active public market for our common stock, so it may be
difficult to resell. Because our stock presently trades in limited amounts, we
can't assure you that there will be an active public market for our shares in
the future. Quotations for our stock are currently reported in the "Pink Sheets"
maintained by securities brokers/dealers. This medium of quotation is not widely
recognized in the financial services industry. As a result, trading in our stock
may be limited. You shouldn't expect to easily resell our common stock if you
buy it.
(B) Our stock price may experience extreme price and volume fluctuations.
The stock market in general, and the OTC Market, has historically experienced
extreme price and volume fluctuations that have often been unrelated to the
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operating performance of companies and which has affected the market price of
securities of many companies. The trading price of our common stock is likely to
be highly volatile and could also be subject to significant fluctuations in
price in response to such factors as:
o variations in quarterly results of operations;
o announcements of new services or acquisitions by us or our
competitors;
o governmental regulatory action;
o general trends in our industry and overall market conditions; and
o other event or factors, many of which are beyond our control.
Movements in prices of equity securities may also affect the market price
of our common stock in general.
(C) There is no assurance of stock listing and if we are unsuccessful in
obtaining listing of our common stock on the OTC Bulletin Board, our common
stock will have limited liquidity. It is our intention to apply for listing of
our common stock in the OTC Bulletin Board following the date of this
prospectus. We believe such listing will provide additional exposure to our
stock and our company, and allow increased liquidity for our shareholders.
However, we cannot assure that our efforts to obtain this listing will be
successful. Representatives of the NASD, the agency that oversees the means of
electronic quotation, control application and approval for listing in the
Bulletin Board and other Nasdaq markets. Applications for listing in the
Bulletin Board have received increased scrutiny recently as a result perceived
abuse involving "micro-cap" securities. While we believe we will satisfy the
criteria for listing on the Bulletin Board, we cannot assure that our
application will be successful. Our failure to obtain such listing may result in
shareholders having difficulty selling their shares, should they desire to do
so.
(D) Our stock may be characterized as "penny stock," subjecting it to
additional disclosure and other requirements which may have the effect of
reducing the level of trading activity. Sales of certain lower priced securities
are regulated by special rules adopted by the Securities and Exchange
Commission. "Penny stocks" generally are equity securities with a price of less
than $5 per share, other than securities listed on certain national securities
exchanges or quoted in the Nasdaq system. These penny stock rules require a
securities broker or dealer, prior to a transaction in a penny stock not
otherwise excused from the rules, to deliver risk disclosure information to its
customer. The broker or dealer must also provide the customer with current sales
information for the stock, the compensation of the broker or dealer and monthly
account statements showing the market value of each stock held in the customer's
accounts. In addition, these rules require that the broker or dealer make a
written determination that the security is a suitable investment for the
customer and receive the customer's agreement to the transaction. These
disclosure and other requirements may have the effect of reducing the level of
trading activity in our stock. Based on the historical trading price of our
stock, we believe it will initially be characterized as a penny stock.
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(E) We don't plan to pay dividends in the near future, so investors will
not receive any dividend payments regardless of the level of earnings. We don't
expect to pay dividends on common stock anytime soon. We expect to use all
earnings to develop our business. Our Board of Directors will decide on any
future payment of dividends, depending on our results of operations, financial
condition, capital requirements and any other relevant factors.
(F) You will experience immediate dilution in value of shares purchased.
You'll experience immediate and substantial dilution in net tangible book value
for any common stock you purchase. Our net tangible book value as of March 31,
2000, was $1,158,158 or $.21 per share. Assuming sales of the common stock at
$1.75 per share, of which there is no assurance, shareholders will experience an
immediate decrease in net tangible book value of $1.54 per share.
(G) Our Company is controlled by management, so shareholders will have a
limited voice in the affairs of the Company. Members of our management own or
control approximately 70% of our outstanding common stock. As a result, these
individuals will be able to control election of our Board of Directors and other
events affecting our future. Our Articles of Incorporation under which we
operate allow approval of all significant transactions by a majority vote of the
outstanding shares. Because our management owns substantially in excess of 50%
of the outstanding common stock, they will be in a position to control the
Company for the foreseeable future. Other shareholders will have a limited voice
in the affairs of our Company.
(H) Sale of a substantial amount of our common stock into the market in the
future may depress our stock price. Sales of a substantial amount of our common
stock in the public market or the perception that such sales might occur could
negatively affect the market price of our common stock in the future. Of the
5,541,538 shares of common stock outstanding as of the date of this prospectus,
approximately 1,025,000 are freely tradable and 4,516,538 are subject to
restrictions on resale imposed by securities laws. The shares of restricted
stock may be sold in the public market only if registered or if they qualify for
an exemption from registration under federal and state law. Of the total amount
of restricted stock currently outstanding, 675,000 shares are immediately
available for resale in limited amounts, and will become completely unrestricted
on June 28, 2000. The shares issued in connection with the merger of MedGrup
Development Services became available for resale in limited amounts in May,
2000. Sales of any or all of these shares in the future may depress the price
for our common stock in the public market.
3 FORWARD-LOOKING STATEMENTS
3.1 In General
This prospectus contains statements that plan for or anticipate the future.
Forward-looking statements include statements about the future of the medical
services industry, statements about our future business plans and strategies,
and most other statements that are not historical in nature. In this prospectus,
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forward-looking statements are generally identified by the words "anticipate,"
"plan," "believe," "expect," "estimate," and the like. Because forward-looking
statements involve future risks and uncertainties, there are factors that could
cause actual results to differ materially from those expressed or implied. For
example, a few of the uncertainties that could affect the accuracy of
forward-looking statements, besides the specific factors identified in Section
2, include:
(a) changes in general economic and business conditions affecting the
medical services industry;
(b) financial strength of the Medicare, Medicaid and private healthcare
systems;
(c) new regulations which might be adopted by Federal or state
governments;
(d) changes in billing requirements which might be adopted by private
insurance carriers;
(e) our costs and the pricing of our services;
(f) the level of demand for our services; and
(g) changes in our business strategies.
3.2 No "Safe Harbor"
The Private Securities Litigation Reform Act of 1995, which provides a
"safe harbor" for similar statements by existing public companies, does not
apply to our offering.
4 PRICE RANGE OF OUR COMMON STOCK
The following table shows the range of high and low bids for our common
stock for the last two fiscal years or portions thereof as reported by the
National Quotations Bureau. Our common stock has traded over the counter since
July, 1999 and is currently quoted in the "Pink Sheets" maintained by securities
broker-dealers and published by the National Quotation Bureau. Trading in our
common stock is very limited at present. The quotations represent prices between
dealers, do not include retail markup, markdown or commissions, and may not
necessarily represent actual transactions.
Fiscal Quarter Ended High Low
-------------------- ---- ---
1999
----
September 30 $1.50 $1.50
December 31 1.50 1.00
2000
----
January 1 - March 31 1.3125 1.1875
April 1 - June 19 1.50 1.1875
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As of June __, 2000 there were approximately 50 record holders of our
common stock. No dividends have been paid with respect to our common stock and
we have no plans to pay dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors, including our financial condition, results
of operations, current and anticipated cash needs and plans for expansion.
5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
5.1 Overview
We derive our revenue from services provided in the medical services
industry. Specifically, we act as a third party source for coding of medical
records charts and other consulting services for the healthcare industry. Our
clients are primarily hospitals. A majority of our services are billed on a flat
fee basis based upon the number of charts coded. Fees for other services vary,
based on the type of service and client, but are also on a flat fee basis.
On May 12, 1999, we merged with MedGrup Development Services, Inc., then a
privately held Colorado corporation. At that time, our name was changed to
MedGrup Corporation. MedGrup Development Services had been engaged in the
medical services industry since approximately 1995.
Effective with the date of the merger, we issued 3,785,000 shares of our
common stock to the former shareholders of MedGrup Development Services. This
transaction has been treated as a recapitalization of MedGrup Development
Services for accounting purposes, although MedGrup Corporation, formerly known
as Perseus Art Group, Inc., is the legal survivor. The transaction was treated
as a reverse acquisition for accounting purposes, as if MedGrup Development
Services had acquired Perseus. Our historical financial information contained in
this prospectus is that of MedGrup Development Services. The merger was
effective May 12, 1999. However, the financial statements have been presented as
if the transaction took place on April 30, 1999.
5.2 Liquidity and Capital Resources.
(A) March 31, 2000. Our financial condition continued to improve during the
first quarter of 2000, compared to the years ended December 31, 1999 and 1998.
Our working capital at March 31, 2000 increased $226,440 from year end December
31, 1999. During that time, current assets increased approximately $232,000,
while current liabilities remained basically unchanged. The increase in our
current assets resulted from cash generated by operations, together with the
receipt of proceeds from a private placement completed during January. On the
basis of our financial condition at March 31, 2000, and our cash requirements
presently and estimated for the future, we believe our capital resources are
sufficient for the remainder of the 2000 fiscal year. Beyond that time, we may
require cash from outside sources if we continue to grow at our current pace.
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During the first quarter of 2000, we generated cash from both operating
activities and financing. Our operations, after adding back transactions not
requiring cash and considering a decrease in accounts receivable, generated
$337,469 of cash. Financing activities, primarily the sale of our common stock
in a private placement, generated an additional $205,078 net cash. After
deducting investment in equipment and leasehold purchases, our cash increased
$381,762 during the first quarter. We believe those resources, coupled with our
capital at December 31, 1999, will be sufficient for the balance of this year.
We finance our long-term capital requirements through a combination of
borrowing and leasing. Our long-term capital requirements include acquisition of
computers, office machines and related equipment for use in our coding
operations. A majority of that equipment is financed under capital leases, which
totaled $118,633 at March 31, 2000. Our total notes payable at March 31, 2000
was $53,352, of which $38,282 was considered long-term. We believe we have
sufficient cash flow to service our leases and debt.
(B) December 31, 1999 At December 31, 1999, we had working capital of
$561,201, consisting of current assets of $860,402 and current liabilities of
$299,201.
Our greatest need for cash is payment of salaries and benefits to our
coders, as well as management and administrative personnel. Whether our coders
are paid on a salary or piecework basis, we must compensate them in advance of
payment from our clients. At December 31, 1999, we had accrued $665,783 of
accounts receivable from our clients, net of allowances for potentially
uncollectable accounts. This represents a substantial investment for us.
However, we believe the reservoir of receivables accrued at year end, coupled
with our existing cash, will be sufficient to satisfy our cash and capital
requirements for the year 2000.
Historically, we have a very high collection rate for our receivables. As
many of our hospital clients are government funded, collections are reasonably
certain. However, our collection experience is historically approximately 60 to
90 days after billing. This resulted in the need to raise additional capital
during 1999. As our revenues grow, our need to finance additional receivables
will also increase.
Our other greatest need for capital is to finance equipment acquisition. We
have a substantial investment in equipment to conduct coding services, both
within our client hospitals and at remote locations where our coders operate. We
finance a portion of these equipment acquisitions. We acquire this equipment,
consisting of sophisticated fax machines and computers, from independent third
parties, through a combination of outright purchase and capital leases. At
December 31, 1999, we had acquired $343,683 of equipment, net of accumulated
depreciation, which included approximately $141,518 of capital leases. While we
believe our existing equipment is adequate for our immediate needs, we must
replace and/or expand our equipment in the future to maintain operations and our
perceived competitive edge.
We believe we have a variety of resources to finance future capital
requirements. In addition to our existing cash and accounts receivable, we have
available a line of credit from our commercial lender in the amount of $50,000,
all of which was available at the date of this prospectus. Any amounts which we
borrow on this line carry interest at a variable rate based on the existing
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prime rate (8.25% at December 31, 1999), are collateralized by substantially all
of our assets and will be due in full on October 30, 2000. Our lender has also
indicated its willingness to finance additional equipment acquisitions on a
longer-term basis. Finally, we believe we could obtain additional financing
through additional placement of our equity securities.
During the year ended December 31, 1999, our operations used approximately
$57,000 in cash. A majority of that use is attributable to an increase in
accounts receivable, in the approximate amount of $450,000. We used an
additional $150,000 in cash in connection with investing activities, primarily
the acquisition of equipment and leasehold improvements.
We satisfied our cash requirements during 1999 primarily through private
sales of our common stock. In July, 1999, we undertook an offering of up to
600,000 shares at a price of $1 per share pursuant to exemptions from the
registration requirements of existing Federal and state securities laws. A
securities broker/dealer acted as our placement agent for purposes of this
offering and charged us a 10% commission on sales and a non-accountable expense
allowance of 1% of the gross proceeds raised in the offering. We also issued
50,000 shares of common stock valued at $50,000 and warrants to acquire our
common stock at an exercise price of $1.10 per share at the rate of one warrant
for each five shares sold in the offering. We netted a total of $275,054 prior
to year-end on the sale of 385,000 shares after $110,000 of offering costs. The
remainder of the offering was sold during the quarter ended March 31, 2000.
We also received $87,000 through the issuance of notes to private parties
during 1999. These notes were subsequently converted to common stock during the
year at a price of $.60 per share. Overall, our cash increased approximately
$100,000 during the year.
We do not believe the expenses which we incurred in connection with the
merger will be repeated during the year 2000. Assuming no other changes in cash
flow, this could improve operations during year 2000 and reduce the need for
cash from outside sources. However, we are unable to predict with any degree of
certainty the results of our operations this year, and accordingly, make no
assurance as to future cash flow.
(C) Comparison of 1999 to 1998. Our financial condition improved from 1998
to 1999. Our working capital increased approximately $325,000 from December 31,
1998 to 1999. Our current assets increased significantly during that time, while
current liabilities also increased, but in a smaller amount. Our net worth also
improved, from negative $313,000 at December 31, 1998 to $811,000 at December
31, 1999.
The improvement in our financial condition during 1999 is primarily
attributable to the stock offering we conducted during that year. We also
converted $87,000 in notes payable to common stock with the consent of the note
holders. The result of those transactions, coupled with our net income and other
activity during the year, resulted in an increase in our net worth.
With regard to our working capital, accounts receivable increased
substantially from 1998 to 1999, from $214,000 at December 31, 1998 to $666,000
at December 31, 1999. This increase corresponds to the increase in business that
we experienced during 1999 and was made possible by the cash flow from financing
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activities described above. The greatest increase in current liabilities during
1999 was accrued salaries and payroll taxes. This too is attributable to our
increased business activity and greater compensation expense for our coders and
other personnel.
5.3 Results of Operation.
(A) Three months ended March 31, 2000. During the three month period ended
March 31, 2000, realized a net profit after taxes of $155,720, or $.03 per
share, on total revenues of $899,540. This compares to net income of $88,585 on
revenues of $374,635 for the three months ended March 31, 1999. Net income for
the first quarter of 2000 represents an increase of 76% from the comparable
period of 1999, while our revenues represent an increase of 140% from the
comparable period of the prior year. The substantial increase in our revenues is
attributable to an increase in the number of clients which we service, as well
as an increase in the amount of services provided certain clients.
Our net income during the first three months of 2000 did not increase as
rapidly as our revenues. This results, we believe, from two factors. First, our
profit margin decreased from 1999 to 2000, as we added many new coding personnel
with a commensurate increase in costs and decrease in productivity. However, we
expect the 67% profit margin generated during the first three months of 2000 to
be a reasonable expectation for the foreseeable future. The second factor
reducing the increase in our net income was the increase in general and
administrative expenses. As the number of clients we serve and the service we
provide increases, we must add additional staff and infrastructure to support
our operations. That addition is reflected in greater general and administrative
expenses, which increased approximately $171,000 from the first three months of
1999 to the comparable period during 2000.
An additional factor affecting our profitability during the first quarter
of 2000 was an accrual for income taxes. The Company recorded $51,000 of expense
for income taxes for the first quarter of 2000, compared to nothing during the
first three months of 1999. This results from the fact that we were treated as a
"S" corporation for Federal income tax purposes for the first three months of
1999. On a proforma basis, we would have recorded $21,854 of income tax for the
first three months of 1999, reducing our net income to $66,731. This brings the
increase in our net profit more into line with the increase in our revenue.
Due to the substantial growth we have realized in the last 18 months, we
have contracted to occupy new office space effective approximately July 1, 2000.
This will provide us additional space to accommodate our executive and
administrative functions. The increased rent at the new location, coupled with
continuing payments on our old space until we are successful in subleasing it,
will result in additional general and administrative expenses for the
foreseeable future. However, we do not expect such expenses to materially effect
our operations.
(B) Year ended December 31, 1999. During the year ended December 31, 1999,
we realized net income after taxes of $231,650, or $.05 per share, on revenues
of $1,986,596. Costs of revenue were approximately $800,000, resulting in a
gross profit margin of approximately 60%.
Costs of our revenue include primarily salaries and benefits for coding
personnel. We believe these costs were higher relative to our revenues during
1999 as compared to 1998 due to the integration of many new coders. We also
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added many new clients during 1999, which required set-up and familiarization
with new information. We expect each of these situations to continue for the
foreseeable future.
Our most significant item of expense was general and administrative, in the
approximate amount of $750,000. The most significant items included in general
and administrative expenses were payroll and related expenses, in the
approximate amount of $400,000. We believe salaries and benefits for our
management and administrative personnel will increase during 2000 as new people
are added, and will continue to represent a significant portion of our expenses.
We also incurred approximately $100,000 of expenses during 1999 for travel and
related expense associated with obtaining and retaining clients.
During the year ended December 31, 1999, we also incurred approximately
$83,000 of expenses for professional and consulting fees, many of which were
related to the merger. During 2000, we will incur additional professional fees
as we begin filing reports with the SEC.
Our revenues are divided between coding and miscellaneous services. Coding,
which represented approximately 97% of our revenues during 1999, includes
outsourcing of the coding function normally performed by healthcare providers.
Coding for emergency rooms services represents the most significant portion of
this service. Other revenue includes auditing service provided to our clients,
review of fees and other miscellaneous consulting. We expect that consulting
revenues will increase during 2000, as we have signed certain long-term
contracts with existing and new clients. However, we believe that coding will
continue to represent a majority of our revenues in the future.
(C) Comparison to 1998. During the year ended December 31, 1998, we
realized net income after taxes of $195,269, or $.05 per share, on total revenue
of $980,431. Our revenues increased 103% from 1998 to 1999, while our net income
increased approximately 24%.
The substantial increase in our revenue from 1998 to 1999 resulted from the
addition of many new clients, as well as additional services provided to
existing clients. We are continually adding additional infrastructure in an
effort to expand our service to additional clients. However, we do not wish to
sacrifice service for the sake of growth. Accordingly, additional clients will
be added only as we believe we can provide quality, reliable service.
Our net income increased at a much slower rate than our revenue. We believe
this is primarily attributable to two factors. First, our profit margin
decreased significantly from 1998 to 1999, from 75% in 1998 to 60% in 1999. We
believe this decrease is attributable to hiring and training many new coders
during 1999, with a concurrent increase in cost and decrease in productivity by
bringing coders on line prior to demand. We hope the results of our efforts will
improve during 2000 as these coders become more experienced and productive.
The second factor affecting our income significantly was the increase in
general and administrative expenses. Payroll and related expenses increased
approximately 100% from 1998 to 1999 with the increase in our management and
administrative staff. Travel and related expenses also increased. This coincides
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with our increased marketing efforts and client load. We believe our general and
administrative expenses will decrease as a percentage of revenue during 2000
with the elimination of expenses associated with the merger. However,
unpredictable expenses may arise which we cannot now anticipate.
We are unable at this time to accurately predict what effect, if any,
inflation will have on our operations in the future. While we believe labor
costs will increase in the short-term, we expect our prices will increase to
keep pace. However, there is no assurance that our clients will accept price
increases in the future. We also cannot predict what effect new services will
have on our operation, as this is an evolving part of our business.
5.4 Perseus Art Group, Inc.
Perseus Art Group, Inc. was organized on June 26, 1998 under the laws of
the State of Colorado to develop and operate an e-commerce market for the sale
of original art and art reproductions. Prior to the merger with MedGrup
Development Services, Inc., the activities of Perseus were limited to
organizational efforts and obtaining financing. Perseus had no revenues prior to
the merger.
From its inception to December 31, 1998, Perseus survived entirely on the
sale of its common stock to fund operating activities. In a limited public
offering completed in October, 1998, the Company raised $82,500, net of offering
costs, through the sale of 180,000 shares of its common stock to investors.
Proceeds of that offering were used to acquire inventory and equipment, as well
as pay operating costs. At December 31, 1998, Perseus had remaining $14,938 of
assets, including $10,859 of cash. Total liabilities at that date equaled
$1,854.
Perseus raised an additional $10,000 through the sale of its common stock
in the period January 1, 1999 through the date of the merger. Proceeds of that
financing were used to fund additional operating expenses. At the date of the
merger, the Company had no assets and no liabilities.
For the period from inception through December 31, 1998, Perseus realized a
net loss of $519,416, or $.48 per share. Significant expenses during that time
included $60,500 of consulting fees paid to related parties and $450,000 of
stock-based compensation. This latter expense was a non-cash expense, recorded
under applicable accounting rules for stock issued to the founders of the
Company. Perseus was in the development stage during 1998, and had no revenues
from operations.
During the period from January 1, 1999 through the date of the merger, the
Company incurred an additional loss of $23,084, or $.02 per share. Significant
expenses during that period include $10,069 paid to the vice president as
compensation and $6,321 in legal and accounting fees. Perseus also realized a
loss of $3,920 on the disposal of its assets and inventory prior to the merger.
For further discussion of certain transactions between Perseus and its officers
and directors, see Transactions With Related Parties.
5.5 Changes in our accountants.
We retained Cordovano & Harvey, P.C., independent accountants, to audit our
financial statements for the year ended December 31, 1999. Cordovano & Harvey
replaced A. Liparulo, CPA, who acted as the accountant for MedGrup Development
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Services, Inc. and audited its financial statements for the year ended December
31, 1998. The dismissal of A. Liparulo and hiring of Cordovano & Harvey was
approved by our Board of Directors. Cordovano & Harvey, P.C. audited the
financial statements of Perseus Art Group, Inc. prior to its name change to
MedGrup Corporation.
The report of A. Liparulo for December 31, 1998 did not contain an adverse
opinion or disclaimer of opinion, nor was such report modified as to
uncertainty, audit scope or accounting principles. There was no disagreement
with A. Liparulo on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved to
his satisfaction, would have caused him to make reference to the subject matter
of the disagreement in connection with his report.
6 OUR BUSINESS
6.1 General
We provide coding and consulting services to hospitals and other healthcare
providers. Billing provided through Medicare, Medicaid and all private insurance
companies must be coded in accordance with Federal regulations in order for
healthcare providers to obtain reimbursement and remain in compliance with these
regulations. We offer outsourcing of these coding and related consulting
services to our clients.
6.2 Industry Overview and Competition
(A) The Market. An important trend in healthcare today is outsourcing of
various services. Hospitals and other healthcare providers are under increasing
pressure to reduce costs to maintain or increase profitability. Healthcare costs
in general are continually rising while consumers, Federal and state government
agencies demand increasing efficiency from healthcare providers. An additional
factor influencing this trend is the need of healthcare providers to ensure
compliance with Federal billing regulations and reduce liability for incorrect
coding. One means of addressing this demand is by outsourcing certain functions
that can be provided by independent third parties. Healthcare providers often
find that independent parties can provide services with more efficiency and
reduced cost.
An additional trend affecting this industry is the effort by the United
States Government to reduce healthcare fraud. An initiative by the Clinton
Administration has resulted in several high-profile actions against healthcare
providers for over-billing Medicare and Medicaid. Existing regulations also
provide substantial monetary penalties for errors in coding medical services.
For this reason, coding departments of healthcare providers are under increased
pressure to obtain accuracy in coding services.
Many hospitals have a substantial backlog of information waiting to be
coded due to their inability to find adequately trained personnel and to keep up
with demand. With the increased emphasis on profitability, healthcare providers
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can no longer afford to retain an abundance of personnel. Unable to reduce staff
personnel below minimum levels required for direct patient care, many healthcare
providers reduce business office personnel to reduce overall costs. This has
created the need for outsourcing of many business office functions.
Our most important market is small to medium-sized hospitals located in
rural and small urban areas. As a general rule, these institutions cannot locate
or afford to pay, specialized personnel necessary to accurately code hospital
charts for reimbursement. These institutions often find it more economical and
efficient to retain outside coders to provide this service. Of approximately
5,700 acute healthcare facilities in the United States, we estimate that less
than 10% retain outside coding services. Little additional information is
available about this segment of the medical services industry, due to its
relatively recent development.
(B) Demographics. It is undisputed that the U.S. population is aging
rapidly. Members of the baby boom generation born after World War II have
reached middle age and are rapidly approaching retirement. In addition, life
expectancy is increasing as healthcare and living habits of individuals improve.
These trends will result in increased healthcare and hospital demand for the
U.S. population in the future.
The following statistics illustrate the convergence of these trends:
Projected Life Expectancy at birth, 1999 to 2100*
-------------------------------------------------
Male Female
---- ------
1999 74.1 79.8
2025 77.6 83.6
2050 81.2 86.7
2100 88.0 92.3
* Methodology and Assumptions for the Population Projections of the United
States: 1999 to 2100, Population Division Working Paper No. 38, U.S. Census
Bureau, Issued January 13, 2000.
POPULATION DISTRIBUTION AMONG AGES, 1990 - 1999
================================================================================
Population Mean Aged 65 percentage of Aged 85 percentage of
All ages* Age and over* population and over* population
--------------------------------------------------------------------------------
1990 249,439 35.2 31,239 12.52 3059 1.23
1991 252,127 35.3 31,777 12.60 3189 1.26
1992 254,995 35.4 32,294 12.66 3315 1.30
1993 257,746 35.6 32,812 12.73 3446 1.34
1994 260,289 35.7 33,209 12.76 3562 1.35
1995 262,765 35.8 33,618 12.79 3684 1.40
1996 265,190 35.9 33,955 12.80 3800 1.43
1997 267,744 36.1 34,198 12.77 3919 1.46
1998 270,299 36.2 34,401 12.73 4054 1.50
1999 272,878 36.4 34,578 12.67 4184 1.53
*Numbers in thousands
**Source: Population Estimates Program, Population Division, U.S. Census Bureau
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(C) Our Competition. Competition in the coding segment of the medical
services industry is poorly defined, due to the relatively new development of
this segment. Our most recognizable competition is from the existing medical
records department of clients and potential clients. We continually strive to
educate our clients and potential clients of the advantages of outsourcing the
coding function. We believe education is an important part of our marketing
function.
Among the industry participants who offer outsourcing of the medical
records function, participants include major accounting firms with specialty
departments and specialty coding services companies.
o Major accounting firms, such as Ernst and Young and Arthur Andersen,
are acquiring or developing coding departments within their overall
firm strategy. Their service is generally provided to existing
hospital clients as a supplement to other management services.
o Specialty coding companies. Several medium to large participants exist
in the specialty coding segment of the medical services industry.
These include Laguna, MC Strategies and QuadraMed. Some of these
organizations provide on-site coding review and may be implementing
off-site coding. QuadraMed offers a wide variety of services,
including software development and integration, which is designed to
assist healthcare providers with the coding function, as well as their
overall business office functions. While these entities present
competition for our business, we believe the quality and variety of
our service gives us a competitive advantage. However, we may be at a
competitive disadvantage as a result of our limited financial
resources and personnel.
We believe our service of off-site coding assistance has major competitive
advantages compared to services offered by most of our competitors. These
advantages include minor on-site space or equipment requirements,
non-threatening relationship with medical records staff and immediate response.
These advantages, coupled with the experience and variety of service offered by
the Company, gives us what we believe to be a competitive advantage.
6.3 Operations.
(A) We operate primarily as an independent coding service. We operate as an
independent, third party service satisfying coding requirements for hospitals
and other healthcare providers. At the date of this prospectus, we had
approximately 57 active clients in nine states. We offer a variety of services,
primarily independent coding of medical charts. While our executive offices are
located in Colorado, we maintain coders in approximately 9 states. A vast
majority of our coding service is provided off-site through qualified
individuals employed by us. The majority of our services are billed on a
per-chart basis.
(B) We offer a variety of services. We offer healthcare providers a
reliable, quality alternative to in-house medical record department staffing
requirements. Coding is primarily an administrative function which many
healthcare providers find inefficient or uneconomical. However, these same
providers must comply with strict Federal, state and private regulations to
obtain reimbursement for services provided. Accordingly, we believe there is a
strong demand for our service.
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Our services can generally be broken down into the following categories:
o Coding review. We review coding originally preformed by the healthcare
provider medical records department. Our qualified staff randomly
selects patient charts for review to determine the accuracy of
in-house coding. Specific documentation from each chart which has
previously been coded is reviewed by our personnel, and the results
relayed to the client within as little as 24 hours. In this capacity,
we act as a safety check and education tool for hospital records
departments. By providing this service, we believe we can increase
revenue to the client while reducing errors and potential penalties.
o Independent coding. We provide off-site, independent coding for
services provided by hospitals and other healthcare providers.
Services rendered to medical patients is initially recorded in a
narrative format and accumulated in a chart. In order for the
healthcare provider to be reimbursed for its service, the chart must
be converted to a coded format specified primarily by Federal law.
Coding is required for inpatient treatment (where patients remain
overnight), outpatient services and emergency room treatment. In this
capacity, we may supplement the service of the provider's medical
records department on a temporary or permanent basis, or completely
replace in-house coders. We generally charge our clients on a
per-chart basis.
o Professional fee schedule review. We work with administrative staff in
a consulting capacity to review fees for emergency room services.
Because of our experience in the healthcare industry, we believe we
possess expertise in evaluating various charges for emergency room
services. Our goal is to increase the profitability and enhance
compliance of emergency room departments.
o Staffing. We assist healthcare providers with permanent or temporary
clerical staffing requirements. Due to our knowledge and contacts in
the industry, we maintain a database of qualified personnel to
alleviate staffing problems associated with clean-up or ongoing
projects. We believe this service provides an important supplement to
our independent coding services since some clients prefer to retain
the coding function in-house and hire our clerical personnel on a
temporary basis.
(C) How we operate. We derive 97% of our revenues from out-source coding
and related services; the balance is derived from consulting services. To
conduct our coding services, we maintain electronic data connections between our
clients and our coding personnel. We receive patient charts via facsimile from
our clients, code the information and return the coded summary to them within as
little as 24 hours. Our coding personnel are located in various states, often in
home offices, which allows them flexible working schedules and provides us
access to highly qualified personnel. We maintain the latest data transmission
and computer equipment, which is purchased or leased, depending on our working
capital and perceived cost savings.
We license a software package from a third-party provider that assists our
coding staff in converting the providers' medical chart information to
appropriate numerical codes. These codes are required by Medicare, Medicaid and
private insurance companies for reimbursement to the provider for medical
20
<PAGE>
services provided. We entered into a Software Limited License Agreement on
December 4, 1997 and entered into an addendum to the Agreement December 13,
1999. The term of the Agreement is three years (December 13, 1999 through
December 13, 2002). We are charged annual license fees on a per-user basis,
which may be increased annually with proper notice from the licensor.
We randomly audit our employees' performance to insure quality standards.
Our coding supervisors periodically select random client charts for review.
Errors or inaccuracies are immediately reported to our employees and steps taken
to correct improper procedures. Due to the credentials and experience of our
employees and the results of our internal audit process, we believe we have an
extremely small margin of error.
Our coders are required to maintain current credentials with the American
Health Information Management Association or the American Academy of
Professional Coders, Registered Health Information Administrator, Registered
Health Information Technician, Certified Coding Specialist, Certified Coding
Specialist for Physician Offices, Certified Procedural Coder, or Certified
Procedural Coder for Hospitals. We require inpatient coders to have proof of at
least 5 years inpatient coding experience in a medium to large sized facility
prior to employment. This provides the expertise needed to code high acuity
illness and invasive procedures often performed at large medical centers. We
also require each full-time coder to complete 10 hours of continuing education
credits each year pertaining specifically to coding.
In most cases, we are retained by our clients on an indefinite basis. This
means we may work with a client for one month or many years. While our
relationships may be terminated with as little as 90 days notice from our
clients, we believe the quality and efficiency of our service will afford long
working relationships. All of our contracts are in writing, but may be
terminated by either us or our clients on written notice.
Our most important market is small to medium hospitals with less than 150
beds. Hospitals in these markets typically lack financial and other resources
sufficient to adequately staff medical records departments or simply cannot find
qualified people. We often work with hospital groups, such as Torch and Covenant
in Texas, Western Healthcare Alliance in Colorado and Tenet on a nationwide
basis. These hospitals are typically located in rural and small urban markets.
Two clients, Covenant Medical Center in Lubbock, Texas and Hillcrest Healthcare
Systems in Tulsa, Oklahoma, each account for more than 10% of our revenue.
(D) Our operating strategy. We try to be a leader in our segment of the
medical service industry through superior customer service and technological
innovation. Our goals are to enhance our clients' compliance with government
regulations regarding billing for medical services, and increase our clients'
profitability through efficient coding and increased reimbursement. Some clients
verify that the cost of our service can be wholly or partially recovered by the
increased revenues realized from more accurate coding. We emphasize the benefits
of outsourcing versus in-house coding by:
o Adhering to high professional service standards;
o Maintaining only highly qualified coding personnel;
21
<PAGE>
o Educating our clients on accurate and complete coding; and
o Providing our services at a cost which is affordable to our clients.
We also try to increase customer satisfaction by offering a wide variety of
services. In addition to independent coding services, we offer coding review,
staffing and consulting services. We believe our clients view this as a turn-key
solution for an important administrative function.
In addition to offering a variety of services, we endeavor to offer a
coding solution which will address a variety of client needs. Our off-site
coding services may be used in the following situations:
o To temporarily replace the services of an absent staff member;
o As a permanent replacement to increase efficiency and accuracy and
decrease costs;
o To alleviate temporary back-logs; or
o As a staffing solution to replace or supplement existing personnel.
Our service can therefore be viewed as a total solution for healthcare coding
requirements.
Our future strategy is to increase the number of clients we serve, and to
increase our services to each client. Numerous rural and community hospitals
operate throughout the United States with inadequately staffed coding
departments. We believe we can offer an excellent solution for their coding
requirements. As we continue to develop our coding expertise in smaller
hospitals, we hope to appeal to larger institutions, such as large urban
hospitals throughout the United States. Our existing clients are located in the
United States, primarily Texas, Oklahoma, California and Colorado. As our staff,
technologies and administrative functions increase, we hope to increase the
geographic scope of our markets.
By initially concentrating on the rural and community hospital market, we
believe we are positioning ourselves for long-term, steady growth. By continuing
to market our service to medium to large urban facilities, especially those in
more remote urban areas, we hope to grow more rapidly.
We believe our existing services will be adequate to sustain our growth for
the foreseeable future. However, as new opportunities come to our attention, we
will attempt to capitalize on additional revenue opportunities to accelerate
that growth.
6.4 Marketing.
Our marketing is conducted primarily through a staff managed by Bill
Cronin, Chairman of the Board and Chief Executive Officer. Mr. Cronin has
substantial experience in the medical services industry and enjoys an excellent
reputation. Our marketing department calls periodically on numerous individual
and group hospitals to acquaint them with our services. They also maintain
contact with existing clients to ensure satisfaction with our service.
22
<PAGE>
To supplement the efforts of our employees, we also maintain various
marketing programs designed to acquaint healthcare providers with our services.
These include membership and participation in various industry related
associations, trade shows, public relations, print media and business
development. We maintain a database of prospective clients and endeavor to reach
provides through seminars, newsletters and targeted events. However, we believe
nothing contributes to our marketing more than the quality of service we provide
our clients.
We also receive numerous referrals from our existing clients by
word-of-mouth advertising. However, we expect our marketing efforts will
increase in the future as competition in our industry increases.
6.5 Compliance and Industry Regulation.
While we are not directly regulated, the health care industry and our
clients are heavily regulated by Federal and state law. On the Federal level,
the U.S. Department of Health and Human Services, through the Health Care
Finance Authority and the Office of the Inspector General, implement and enforce
regulations specifying, among other thing, uniform coding requirements and
strict billing guidelines for Medicare and Medicaid claims. The regulations
require that providers use standardized numerical codes and descriptive terms to
report procedures and services provided. These regulations also impose
substantial penalties for over billing and other statutory violations.
HCFA can impose civil monetary penalties and additional assessments and may
exclude providers from participating in the Medicare and Medicaid programs for
certain specified time periods for violations of the regulations. The
assessments are additional monetary payments in lieu of damages sustained by the
government because of the claim. Maximum civil monetary penalties range up to
$10,000 per item or service in noncompliance, and assessments may be up to three
times the amount claimed for some violations. Additionally, a person who is
found guilty of committing Medicare fraud faces a host of different criminal,
civil and administrative sanctions. The regulations and the penalties are
directed at the health care providers, who directly provide the services and
submit the claims for payment.
State laws also govern health care providers. State regulations regarding
uniformity and submission of Medicaid claims are similar to the Federal
regulations.
Because the Company does not actually submit the claims, we do not believe
that the regulations directly affect us, but we must follow state and Federal
regulations in our coding practices, or face potential liability to our client.
In addition, because we bill on a flat fee per chart basis, we have no financial
incentive to overbill, specify higher cost codes or otherwise incorrectly code.
As our primary business is coding, our staff keeps abreast of the regulations
regarding coding, including the pronouncement of new and additional procedure
codes that are or will be required by providers. The coding staff is trained on
new legal coding requirements prior to the implementation of such requirements.
We believe that use of our services provide a valuable service to our
clients in keeping them in compliance with state and Federal regulations,
thereby lessening the likelihood of sanctions to the client. Because our clients
do not do the coding themselves, and we have no financial incentive to code
incorrectly, we believe the possibility of fraud is virtually eliminated.
23
<PAGE>
6.6 Insurance
We presently maintain errors and omissions insurance on all of our coders
to insure against claims resulting from the coding process. This policy provides
protection in the amount of $1 million per claim and $3 million in the aggregate
for acts or omissions resulting from the coding process of our business. We
believe such policy to be sufficient for the needs of our company for the
foreseeable future.
6.7 Employees.
As of June 1, 2000, we employed 76 people, including full and part-time
employees. Of that amount, four are executive officers of the Company, four are
other management personnel, three are in sales, 31 are clerical level
individuals servicing our clients, 2 are administrative staff and 22 are coding
providers. Of the coding providers, 16 are employed on a full-time basis and the
remainder on a part-time basis. None of our employees are unionized and we
believe we enjoy excellent relations with our employees.
6.8 Facilities.
Our executive and administrative headquarters are located in Monument,
Colorado, north of Colorado Springs, in office space leased from an unaffiliated
third party. We presently occupy approximately 2,000 square feet of office space
which serves our executive officers, billing, bookkeeping and certain other
administrative functions. The space is leased for a period lasting until March,
2002. The remainder of our employees are located on site at various client
locations or in home offices throughout the United States.
Due to the substantial growth we realized during the recent years, we have
leased new premises commencing approximately July 1, 2000. This space, located
at 1824 Woodmore Drive, Suite 102, Monument, CO 80132, is in close proximity to
our existing space and provides additional facilities for our employees. The new
lease covers approximately 3,400 square feet and extends for a period of three
years. Total annual rent for the 12 month period beginning July 1, 2000 is
$47,096, escalating to $48,778 for the second year and $50,460 for the third
year, each payable in monthly installments. The lease also provides for payment
of our pro rata share of real estate taxes, insurance, utilities and other
operating expenses. We believe this new space will be adequate for our needs for
the foreseeable future. We will continue efforts to sublease our old space after
we move.
6.9 Legal Matters.
No lawsuits are pending, or to our knowledge, threatened against the
Company or any of our officers or directors in their capacities as such.
7 OUR MANAGEMENT
24
<PAGE>
7.1 Our Directors and Executive Officers
Our board of directors includes 4 members, all of whom are officers of our
Company.
<TABLE>
<CAPTION>
Name Position Biographical Information
---- -------- ------------------------
<S> <C> <C>
William D. Cronin Chairman of the Board and Mr.Cronin, who is 42 years of age, has been
Chief Executive Officer our Chairman and Chief Executive Officer
since the Company was merged with MedGrup
Development Services in 1999. Prior to
that, he was the president and founder of
MedGrup Development Services, a position he
occupied since 1995. Prior to that, he
spent over 15 years in engineering and
related sales and marketing. From 1993 to
1994, he was a vice president and business
unit manager for Automatic Building
Controls, a privately-held company engaged
in engineering services. Mr. Cronin is a
graduate of the Bolton Street College of
Engineering in Dublin, Ireland.
Terry J. Holmes President and Director Mr. Holmes, 45, joined the Company as
President on February 14, 2000. From June,
1995 through September, 1999, he worked for
American Telecasting, Inc., first as vice
president of operations and later senior
vice president. American Telecasting was a
publicly-traded entity engaged in the
wireless communications industry. Sprint
Corporation acquired it in September, 1999.
From March, 1991 to June, 1995, Mr. Holmes
worked as the general manager of Fresno
MMDS Associates, a privately held
business operating a wireless cable
system in central California.
Margaret M. Cronin Vice President - Finance, Ms. Cronin, who is 42 years old, became
Treasurer, Secretary and Vice President, Treasurer and a Director of
Director MedGrup Development Services in August,
1998 and assumed those positions with the
Company following the merger in May, 1999.
Prior to those positions, she functioned as
the office manager of MedGrup Development
Services since approximately March, 1997.
Prior to her association with the Company
25
<PAGE>
and its predecessor, she worked as a senior
financial analyst for Texaco Corporation in
a Texas office. Ms. Cronin graduated from
the Illinois State University with a
Bachelors of Business Administration in
1979.
Gary B. Mendenhall Vice President - Operations, Mr. Mendenhall, who is 41 years old, joined
Chief Operating Officer the Company in his current capacity in
and Director February, 1999. Prior to that, he was the
director of international event marketing
for Meckler Media/Penton Media, a
publicly-traded company, where he was
responsible for internet world trade shows
in 32 countries. Mr. Mendenhall occupied
that position from January, 1998 until
February, 1999. From October, 1994 to
December, 1997, he was the manager of
international event marketing for Softbank
Comdex, a publicly-traded entity. He is a
1981 graduate of the University of Michigan
School of Engineering.
7.2 Significant Employees.
We also employ the following individuals which we believe are significant to our
business:
James S. Wantman Controller Mr. Wantman, who is 57 years old, joined us
as Controller on January 3, 2000. From
March, 1998 to December 1999, he was the
vice president of finance and controller
for National Accounts, Inc., a national
service company. From 1990 until 1997, Mr.
Wantman was the owner of a small photo
processing and custom framing business with
three locations in the North Boston area.
He is a graduate of the Bently College of
Accounting and Finance with a Bachelor of
Science in Accounting in 1967.
Alice O. Zentner Manager, Coding Services Ms. Zentner, who is 50 years of age, joined
MedGrup Development Services, Inc. in
February, 1998 and has occupied that
position with us since the merger in May,
1999. In her capacity as Manager of Coding
Services, Ms. Zentner is responsible for
overseeing all of our coding employees and
operations. Prior to her association with
26
<PAGE>
us or our predecessor, she worked as an
independent contractor for various
hospitals in the Denver area and other
companies providing coding services,
providing coding support and education. She
functioned in that capacity from 1995 to
1998. Ms. Zentner is a 1987 graduate of
Carroll College, Helena, Montana, with a
Bachelor of Arts in Medical Records
Administration.
</TABLE>
Margaret Cronin is the wife of William Cronin and Gary Mendenhall is the
brother-in-law of William Cronin. No other family relationship exists between
any of the officers or directors of the Company.
Directors hold office until the next annual meeting of shareholders and
until their successors are duly elected and qualified. Officers are appointed by
the Board of Directors and serve at the pleasure of the Board of Directors.
7.3 Committees of the Board of Directors.
The Board of Directors is not presently comprised of any committees.
Rather, the entire Board considers all matters presented for consideration.
However, the Board may appoint an audit, compensation or such other committees
as it deems appropriate in the future.
7.4 Director Compensation.
None of the Directors receive any additional compensation for their
services as Directors.
7.5 Executive Compensation
The following table sets forth the compensation paid, or to be paid, by the
Company for services rendered during the fiscal year ended December 31, 1998 and
1999, to (a) the Chief Executive Officer of the Company, and (b) each of the
four most highly compensated executive officers who served as executive officers
at the end of the last fiscal year and whose total annual salary and bonus
exceeded or may exceed $100,000.
27
<PAGE>
Summary Compensation
--------------------
Long-term Compensation -
Year Ended Securities Underlying
Name December 31, Salary Options
--------------------------------------------------------------------------------
William D. Cronin, Chief 1999(1) $72,500
Executive Officer and 1998 -0-
Chairman of the Board
Bruce A. Capra(2) 1999 -0-
1998 -0-
Gary B. Mendenhall, Vice 1999 56,500 250,000(3)
President and Chief Operating 1998 -0-
Officer
------------------------------
(1) Excludes 3,154,000 shares of common stock issued to Mr. Cronin in
connection with the merger with MedGrup Development Services, Inc.. See "Certain
transactions with related parties."
(2) Mr. Capra served as the president and chief executive officer of the
Company until its merger with MedGrup Development Services in May, 1999.
(3) Excludes an additional 250,000 shares of our stock underlying options
issued to the named executive officer but not yet vested.
------------------------------
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
----------------------------------------------------------------------------------------
Name Number of Percent of total Exercise or Expiration
Securities options/SARs granted base price date
Underlying to employees in fiscal ($/Sh)
Options/SARs 1999
Granted (#)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary B. Mendenhall 500,000(1) 71% $1.00 May 26, 2006
</TABLE>
-------------------------------
(1) A total of 250,000 of these options are presently vested; 60,000
additional options vest when the Company's stock price reaches $2 per share;
60,000 additional options vest when the Company's stock price reaches $3 per
share; 60,000 additional options vest when the Company's stock price reaches $4
per share and 70,000 options vest when the Company's stock price reaches $5 per
share. For purposes of this vesting provision, the share price will be measured
based upon the average of the mean between the closing bid and the asked prices
during the preceding 30 calendar days.
-------------------------------
28
<PAGE>
Fiscal Year End Option Value
Number of Shares
Underlying Unexercised Value of Unexercised
Options at FY-End Options at FY-End
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
Gary B. Mendenhall 250,000/250,000 $187,500/$187,500(1)
-------------------------------
(1) Based upon the mean between the closing bid and asked prices of our
common stock on June __, 2000.
-------------------------------
7.6 Employment Contracts.
Each of Messrs. Cronin, Holmes and Mendenhall and Mrs. Cronin serve the
Company pursuant to written employment contracts. The agreements with Mr. and
Mrs. Cronin and Mr. Mendenhall were effective January 1, 2000, each for a three
year term. Mr. Holmes serves under a three-year agreement that commenced
February 14, 2000. All of the agreements provide for automatic one-year renewals
after the original term unless notice of nonrenewal is given prior to
expiration. Each agreement provides for base compensation with a minimum 5%
annual increase, discretionary bonuses or incentive compensation, participation
in employee benefit plans, and reimbursement of expenses incurred on the
Company's behalf. Mr. Cronin's initial base salary is $105,000 per annum, Mr.
Holmes' base salary is $80,000, and Mrs. Cronin and Mr. Mendenhall are each
compensated $78,000. In addition, Mr. Holmes has been granted 500,000 stock
options which vest at a rate of 83,333 every six months as long as he remains
employed by the Company. The agreements also provide for either a company
vehicle or $700 per month car allowance, and each individual is also entitled to
a severance package which, under certain conditions of termination, may entitle
him or her to one year's base salary and benefits.
7.7 Qualified Stock Option Plan.
1999 Incentive Stock Option Plan. Our 1999 Incentive Stock Option Plan (the
"Plan") provides for the granting of stock options for up to 1,500,000 shares of
our common stock to our executive officers and other employees. The plan also
permits the granting of non-qualified options to persons who are not employees
of the Company but none-the-less provide valuable service to the Company.
Currently, the Board of Directors administers the Plan, but the Plan permits a
Compensation Committee to administer it. The Board of Directors has the sole
discretion to determine eligibility of persons to receive incentive stock
options, as well as the amounts, terms and conditions of the granting of
options. Our shareholders have approved this plan.
The stock-option grants under the Plan have various vesting schedules,
including partial vesting immediately upon date of the grant, partial quarterly
automatic vesting, quarterly vesting based upon the occurrence of certain
events, vesting on a date certain, vesting on the one year anniversary date of
29
<PAGE>
the grant or some combination thereof. Early vesting of all or part of the
unvested options may occur upon certain events, including retirement or
permanent disability of the employee, dissolution, liquidation, reorganization,
merger or consolidation of the Company, or upon sale of all or substantially all
of the property of the Company. The majority of the options expire seven years
after the date of the grant.
Options to purchase 1,416,793 shares of our common stock were granted as of
May 31, 2000, 1,391,793 of which remain outstanding and 1,000,000 of which were
made to our directors or executive officers. As of May 31, 2000, 91,207 shares
of common stock remain available for new option grants under this Plan. The
Company intends to ask its shareholders to increase the number of shares
available for grants under the Plan at its next regularly scheduled
shareholders' meeting in 2001. As of May 31, 2000, options for 314,293 shares of
common stock have vested, and 6,538 shares have been acquired on exercise of
options. The exercise price of the options ranges from $1.00 per share to $1.79
per share.
7.8 Transactions with related parties.
(A) Merger with MedGrup Development Services, Inc. Effective May 12, 1999,
the assets and liabilities of MedGrup Development Services, Inc. were merged
into our company, and we commenced operation as MedGrup Corporation. In
connection with this merger, we split our stock such that every two shares
outstanding prior to the merger were converted into one share at the effective
date. Prior to the merger, MedGrup Development Services, Inc. was a Colorado
corporation owned entirely by Bill and Margaret Cronin. In connection with the
merger, we issued 3,154,000 shares of our common stock to Mr. Cronin and 631,000
shares to Mrs. Cronin.
Also in connection with the merger, we transferred our assets and
liabilities existing prior to the effective date to former officers and
directors. We assigned assets consisting of art inventory and valued at $2,765
for purposes of that transaction were assigned to Bruce Capra, former president,
chief executive officer and director of the Company, in consideration of his
surrendering 125,000 shares of our common stock to us. We assigned assets
consisting of a computer and cash valued at $11,223 for purposes of the
transaction to Scott Thornock, former vice president and director of the
Company, in consideration of his assuming and agreeing to pay all of the
liabilities which existed prior to the merger. The Board of Directors of our
company as then constituted considered the foregoing transactions to be no less
favorable than could have been obtained from unaffiliated third parties.
(B) Other related transactions. In connection with the initial
capitalization of our company, Messrs. Thornock and Capra acquired a total of
900,000 shares of our common stock. Mr. Thornock acquired a total of 630,000
shares for a price of $.002 per share or a total of $1,260, and Mr. Capra
acquired a total of 270,000 shares for the same price per share or $540. The
shares issued to Messrs. Thornock and Capra on June 30, 1998 were issued in
consideration for services rendered to the Company.
In conjunction with a subsequent financing conducted by us in April, 1999,
Messrs. Thornock and Capra acquired stock upon the same terms and conditions as
other purchasers in the offering. Mr. Thornock acquired 35,000 shares of common
30
<PAGE>
stock for a price of $.05 per share, or a total of $1,750 and Mr. Capra acquired
30,000 shares for a purchase price of $1,500. Messrs. Thornock and Capra were
the only members of the Board of Directors participating in the decision to
issue those shares on behalf of the Company.
In July, 1998, prior to the merger, we entered into a consulting agreement
with Scott Thornock whereby he agreed to provide business consulting services to
the Company. The services consisted of advice regarding refinement and
implementation of our business plan, consultation regarding corporate financing
and other management services. Mr. Thornock was paid a total of $20,000 for
those services.
During the year ended December 31, 1999, we repaid advances received from
Bill Cronin, Chairman of the Board and Chief Executive Officer, totaling
$10,287. Furthermore, prior to termination of its status as an "S" corporation
for Federal income tax purposes, we recorded a distribution payable of $100,000
to Bill and Margaret Cronin, shareholders of MedGrup Development Services. At
March 31, 2000, $94,449 of that amount had not been paid, and is accordingly
recorded as a liability due to a related party.
7.9 Reports to shareholders.
Effective with the date of this prospectus, we registered our common stock
under the Securities Exchange Act of 1934. As a result, we will file periodic
reports and proxy statements with the SEC. We will send an annual report
containing financial statements audited by our independent accountants to
shareholders in conjunction with each annual meeting of shareholders. We may
also deliver quarterly and other reports to our shareholders as the Board of
Directors deems appropriate.
8 PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us regarding
beneficial ownership of our common stock at the date of this prospectus and as
adjusted to reflect the sale of the shares of common stock in this offering by:
o each person known by us to be the beneficial owner of more than 5% of
our common stock;
o each of our executive officers;
o each of our directors;
o all selling stockholders; and
o all executive officers and directors as a group.
Unless otherwise indicated, to our knowledge, each stockholder possesses
sole voting and investment power over the shares listed, except for shares owned
jointly with that person's spouse.
The percentage of common stock owned by individuals or entities described
in the table is based on 5,541,538 shares of common stock outstanding as of the
date of this prospectus. For purposes of calculating each person's or entity's
percentage ownership, stock options or warrants exercisable within 60 days of
the date of this prospectus are included for that person or entity, but not the
stock options or warrants of any other person or entity.
31
<PAGE>
Unless otherwise stated, the current address for each beneficial owner is
that of the Company, 1880 Willow Park Way, Suite B, Monument, Colorado
80132-9086.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
Before the Offering Percentage
Name and address of ------------------- Shares To After the
Beneficial Owner Number Percentage Be Sold(1) Offering(1)
---------------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Executive Officers and Directors
--------------------------------
William D. Cronin 3,205,500 57.84% 57.91%
Margaret M. Cronin(2) 631,000 11.39% 11.40%
Gary B. Mendenhall(3) 260,000 4.49% 4.49%
Terry Holmes(4, 5) 42,250 * 25,000 *
All Directors and Executive
Officers as a Group (4 individuals)(3, 4) 4,138,750 74.69% 25,000 74.23%
All Selling Shareholders(5)
---------------------------
Kashner Davidson Securities, Inc.(6) 120,000 2.12% 120,000 -0-
77 South Palm Avenue
Sarasota, FL 34236
Donal Finnegan 10,000 * 10,000 -0-
36A Woodlands Road
Dun Laolre
Dublin, Ireland
Douglas J. Fleming 100,000 1.80% 100,000 -0-
6900 SW Oleson Road
Portland, OR 97223
Frank P. Cassano 25,000 * 25,000 -0-
17545 McCarron Road
Lockport, IL 60441
Thomas Vickers 35,000 * 35,000 -0-
6025 S. Quebec, Suite 150
Englewood, CO 80111
James E. Hosch 20,000 * 20,000 -0-
7038 Willa Lane
Evergreen, CO 80439
Steven M. Bathgate 20,000 * 20,000 -0-
6376 E. Tufts Avenue
Englewood, CO 80111
Eugene C. McColley 20,000 * 20,000 -0-
C/0 Bathgate McColley
5350 S. Roslyn Street, Suite 380
Englewood, CO 80111
Paul H. Dragul, M.D. 17,500 * 17,500 -0-
22 Blue Heron Drive
Littleton, CO 80121
Greg Fulton 27,500 * 27,500 -0-
5520 S. Newport Street
Greenwood Village, CO 80111
32
<PAGE>
Shares Beneficially
Owned
Before the Offering Percentage
Name and address of ------------------- Shares To After the
Beneficial Owner Number Percentage Be Sold(1) Offering(1)
---------------- ------ ---------- ---------- -----------
Alpha International, Ltd. 75,000 1.35% 75,000 -0-
C/O Charlotte House
Charlotte Street
Nassau Bahamas
Dermot Walsh(7) 110,000 1.99% 110,000 -0-
49 Dawson Street
Dublin, Ireland
Elizabeth W. Murdaugh 30,000 * 30,000 -0-
580 Silhouette Way
Monument, CO 80132
Bryan H. Scott 25,000 * 25,000 -0-
4893 Shadow Ridge Road
Castle Rock. CO 80104
Rodney L. Rich 25,000 * 25,000 -0-
P.O. Box 12624
Pensacola, Fl 32574
Oliver A. Conrads(8) 45,000 * 45,000 -0-
2511 Autumn Shore Circle
Katy, TX 77450
Brent Henshaw 25,000 * 25,000 -0-
4825 E. Kansas Drive
Denver, CO 80222
Gary E. Markman 50,000 * 50,000 -0-
424 Charles Lane
Wynnewood, PA 19096
Kieron Cronin(9) 60,000 1.08% 60,000 -0-
42 Glenlawn Drive
The Park Cabinteely
Dublin, Ireland
-----------------------------
</TABLE>
*Less than 1%.
(1) Assumes sale of all shares included in this prospectus, of which there
is no assurance.
33
<PAGE>
(2) Margaret Cronin is the wife of William Cronin. Each individual
disclaims beneficial ownership of shares owned by his or her spouse.
(3) Includes 250,000 shares immediately issuable upon exercise of an option
at a purchase price of $1 per share until 2006. Excludes an additional 250,000
shares underlying an option which are not yet vested.
(4) Excludes 500,000 shares issuable upon exercise of an option at a
purchase price of $1.31 per share. This option vests in equal, semiannual
installments of 83,333.4 shares beginning with the six month anniversary of Mr.
Holmes employment (August 14, 2000), and continuing each six month interval
thereafter.
(5) Unless otherwise stated, all shares offered by the selling shareholders
were acquired in a private placement conducted by the Company and completed in
January, 2000.
(6) Consists of 120,000 shares issuable upon exercise of a warrant at a
purchase price of $1.10 per share until September 3, 2004. The warrant was
issued as compensation to the selling stockholder in connection with the private
placement conducted by the Company and completed in January, 2000. The selling
stockholder acted as placement agent for the Company in this offering.
(7) Includes 60,000 shares acquired by the selling shareholder in exchange
for cancellation of a promissory note payable by the Company.
(8) Includes 25,000 shares acquired by the selling shareholder in exchange
for cancellation of a promissory note payable by the Company.
(9) Consists of 60,000 shares acquired by the selling shareholder in
exchange for cancellation of a promissory note payable by the Company.
-----------------------------
9 DESCRIPTION OF OUR CAPITAL STOCK
9.1 In General
Our articles of incorporation provide that we may issue up to 50,000,000
shares of common stock. As of March 20, 2000, we had 50 shareholders of record
with a total of 5,535,000 shares of common stock outstanding. We do not have any
shares of preferred stock outstanding.
9.2 Common Stock
Each outstanding share of common stock is entitled to one vote on all
matters to be submitted to a vote of the shareholders. Holders do not have
preemptive rights, so we may issue additional shares that may reduce each
holder's voting and financial interest in our company. Cumulative voting does
not apply in the election of our directors, so holders of a simple majority of
the shares voted at a meeting at which a quorum is present can elect all of the
directors to be elected at that meeting. The right of holders of our common
stock to receive dividends may be restricted by the terms of any shares of our
preferred stock issued in the future. If we were to liquidate, dissolve, or wind
up our affairs, holders of common stock would share proportionally in our assets
that remain after payment of all of our debts and obligations and after any
liquidation payments with respect to preferred stock.
34
<PAGE>
9.3 Our Transfer Agent
The transfer agent for our common stock is Corporate Stock Transfer, Inc.
Its address is 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80202-4616,
and its telephone number is (303) 282-4800.
9.4 Certain provisions of our Articles of Incorporation.
Pursuant to provisions of our Articles of Incorporation, cumulative voting
is not permitted in the election of directors. As a result, a simple majority of
the shares outstanding and entitled to vote at a meeting at which a quorum of
shares is present can elect our entire Board of Directors. This provision will
have the effect of limiting any voice which purchasers of our common stock may
have in the affairs of the Company.
Shareholders of our company are not entitled to preemptive rights with
regard to any of our common stock. As a result, we can issue common stock to
third parities in the future which would have the effect of diluting a
shareholder's interest in the Company.
9.5 Limitation of director liability and indemnification.
(A) Director liability. Under provisions of our Articles of Incorporation
and Section 7-109-101 and following of the Colorado Business Corporation Act, we
shall eliminate or limit the personal liability of our directors to our
shareholders for monetary damages for breach of fiduciary duty. This limitation
shall not apply for monetary damages for any breach by a director in the
following circumstances:
(1) for a breach of a director's duty of loyalty to the Corporation or its
shareholders;
(2) for acts or omissions committed by the director not in good faith or
which involve intentional misconduct or knowing violation of law;
(3) an unlawful distribution authorized by a director; or
(4) any transaction from which a director directly or indirectly derived
an improper personal benefit.
(B) Director indemnification. Also under provisions of our Articles of
Incorporation and similar provisions of the Colorado Business Corporation Act,
we may indemnify a person made a party to a proceeding because the person is or
was an officer, director or agent if:
(1) the person conducted himself or herself in good faith; and
(i) the person reasonably believed:
(a) in the case of conduct in an official capacity, that his or
her conduct was in our best interests; and
(b) in all other cases, that his or her conduct was at least not
opposed to our best interests; and
35
<PAGE>
(ii) in the case of a criminal proceeding, the person had no
reasonable cause to believe that his or her conduct was unlawful.
However, we may not indemnify an individual in connection with any
proceeding by or in our right in which the individual is adjudged liable to us
or in any proceeding charging that such individual derived a personal benefit or
in which proceeding the individual was adjudged liable on the basis that he or
she derived an improper personal benefit.
We must also indemnify such a person who was successful in defending
himself or herself against reasonable expenses incurred by him or her in
connection with that proceeding. We may also advance expenses to persons under
certain circumstances. The determination of whether an individual is entitled to
indemnification may not be made until a determination has been made that the
individual met the standards of conduct set forth above. This determination
shall be made by the Board of Directors at a meeting at which a quorum is
present and only those directors not party to the proceeding are counted in
satisfying the quorum, by a committee of the Board of Directors consisting of
two or more parties not parties to the proceeding, independent legal counsel, by
the shareholders or by a court.
In the event that a claim for indemnification against liabilities under the
Securities Act (other than the payment of expenses incurred or paid by such
individual in the successful defense of any action, suit or proceeding) is
asserted by such a person in connections with the securities in this prospectus,
we will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.
10 SHARES ELIGIBLE FOR FUTURE SALE
10.1 In General
We will have a total of 5,661,538 shares of common stock outstanding,
assuming the sale of all common stock included in this prospectus, of which
there is no assurance. Of these shares, 1,145,000 will be freely tradable
without restriction or further registration under the Securities Act.
10.2 Sales of restricted Shares
(A) In General. The remaining 4,516,538 shares of common stock are
"restricted securities" as defined in Rule 144. Restricted securities may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under the Securities Act. Additional shares of
common stock will be available for sale in the public market (subject in the
case of shares held by affiliates to compliance with certain volume
restrictions) as follows:
(B) Who can sell.
36
<PAGE>
(1) In general. Under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for
at least one year can sell, within any three-month period beginning 90 days
after the date of this prospectus, a number of shares of common stock that
does not exceed the greater of:
(a) 1% of the then outstanding shares of common stock (about 56,500 shares
immediately after the offering); or
(b) the average weekly trading volume in the common stock during the four
calendar weeks before notice of Rule 144 sale is filed, subject to
certain restrictions.
(2) No volume limits. In addition, any person not deemed to have been our
affiliate at any time during the 90 days before a sale and who has
beneficially owned the shares proposed to be sold for at least two years
may sell those shares under Rule 144(k) without regard to the volume limits
described above.
10.3 Effect of Sales of Shares
Before the offering, there has been a limited public market for the common
stock, and no precise prediction can be made about any effect that market sales
of common stock or the availability for sale of common stock will have on the
market price of the common stock. Nevertheless, sale of substantial amounts of
common stock in the public market could adversely affect prevailing market
prices and could impair our future ability to raise capital through the sale of
our equity securities.
11 PLAN OF DISTRIBUTION
We are registering the shares of common stock covered hereby on behalf of
the Selling Stockholders. The Selling Stockholders, purchasers or other
recipients, may sell the shares directly or through brokers, dealers, agents or
underwriters who may receive compensation in the form of discounts, commissions
or similar selling expenses. Such compensation will be paid by a Selling
Stockholder or by a purchaser of the shares on whose behalf such broker-dealer
may act as agent. Sales and transfers of the shares may be effected from time to
time in one or more transactions, in private or public transactions, in the
over-the-counter market, in negotiated transactions or otherwise, at a fixed
price or prices that may be changed, at market prices prevailing at the time of
sale, at negotiated prices, without consideration or by any other legally
available means.
Any or all of the shares may be sold from time to time by means of (i) a
block trade, in which a broker or dealer attempts to sell the shares as agent
but may position and resell a portion of the shares as principal to facilitate
the transaction; (ii) purchases by a broker or dealer as principal and the
subsequent sale by such broker or dealer for its account pursuant to this
prospectus; (iii) ordinary brokerage transactions (which may include long or
short sales) and transactions in which the broker solicits purchasers; (iv) the
writing (sale) of put or call options on the shares; (v) the pledging of the
shares as collateral to secure loans, credit or other financing arrangements
and, upon any subsequent foreclosure, the disposition of the shares by the
lender thereunder; and (vi) any other legally available means.
37
<PAGE>
To the extent required with respect to a particular offer or sale of the
shares, a prospectus supplement will be filed pursuant to Section 424(b)(3) of
the Securities Act, and will accompany this prospectus, to disclose (i) the
number of shares to be sold, (ii) the purchase price, (iii) the name of any
broker, dealer or agent effecting the sale or transfer and the amount of any
applicable discounts, commissions or similar selling expenses, and (iv) any
other relevant information.
The Selling Stockholders may transfer the shares by means of gifts,
donations and contributions. This prospectus may be used by the recipients of
such gifts, donations and contributions to offer and sell the shares received by
them, directly or through brokers, dealers or agents and in private or public
transactions; however, if sales pursuant to this prospectus by any such
recipient could exceed 500 shares, than a prospectus supplement would need to be
filed pursuant to Section 424(b)(3) of the Securities Act to identify the
recipient as a Selling Stockholder and disclose any other relevant information.
Such prospectus supplement would be required to be delivered, together with this
prospectus, to any purchaser of such shares.
In connection with distributions of the shares or otherwise, the Selling
Stockholders may enter into hedging transactions with brokers, dealers or other
financial institutions. In connection with such transactions, brokers, dealers
or other financial institutions may engage in short sales of our common stock in
the course of hedging the positions they assume with Selling Stockholders. To
the extent permitted by applicable law, the Selling Stockholders also may sell
the shares short and redeliver the shares to close out such short positions.
The Selling Stockholders and any broker-dealers who participate in the
distribution of the shares may be deemed to be "underwriters" within the meaning
of Sections 2(11) of the Securities Act and any discounts, commissions or
similar selling expenses they receive and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
As a result, we have informed the Selling Stockholders that Regulation M,
promulgated under the Exchange Act, may apply to sales by the Selling
Stockholders in the market. The Selling Stockholders may agree to indemnify any
broker, dealer or agent that participates in transactions involving the sale of
the shares against certain liabilities, including liabilities arising under the
Securities Act. The aggregate net proceeds to the Selling Stockholders from the
sale of the shares will be the purchase price of such shares less any discounts,
concessions or commissions.
Each of the Selling Stockholders is acting independently of us in making
decisions with respect to the timing, price, manner and size of each with the
distribution of the shares. There is no assurance, therefore, that the Selling
Stockholders will sell any or all of the shares. In connection with the offer
and sale of the shares, we have agreed to make available to the Selling
Stockholders copies of this prospectus and any applicable prospectus supplement
and have informed the Selling Stockholders of the need to deliver copies of this
prospectus and any applicable prospectus supplement to purchasers at or prior to
the time of any sale of the shares offered hereby.
38
<PAGE>
The shares covered by this prospectus may qualify for sale pursuant to
Section 4(1) of the Securities Act or Rule 144 promulgated thereunder, and may
be sold pursuant to such provisions rather than pursuant to this prospectus.
We will not receive any proceeds from the sale of the shares covered by
this prospectus and have agreed to pay all of the expenses incident to the
registration of the shares, other than discounts and selling concessions or
commissions, if any, and fees and expenses of counsel for the Selling
Stockholders, if any.
12 LEGAL MATTERS
We are being advised on the legality of the shares included in this
prospectus by Overton, Babiarz & Associates, P.C. of Englewood, Colorado.
Entities associated with a principal of that firm own an aggregate of 30,000
shares of our common stock.
13 EXPERTS
Our financial statements and related schedules as of December 31, 1999 and
for each of the years in the two year period ended December 31, 1999 included in
this prospectus and elsewhere in the registration statement, have been included
in reliance on the report of Cordovano & Harvey, P.C., our independent certified
public accountants. These financial statements have been included on the
authority of that firm as experts in accounting and auditing.
14 ADDITIONAL INFORMATION
We have filed our Form SB-2 registration statement with the SEC. This
prospectus does not contain all the information set forth in the registration
statement. You'll find additional information about us and our common stock in
the registration statement. For example, in this prospectus we've summarized or
referred to some contracts, agreements, and other documents that have been filed
as exhibits to the registration statement. You may inspect he registration
statement, including its exhibits and schedules, without charge at the SEC's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its
regional offices located at 7 World Trade Center, New York, NY 10007 and 500
West Madison Street, Suite 1400, Chicago, IL 60661, and you may obtain copies
from those offices, upon payment of the applicable fees. You may call the SEC at
1-800-SEC-0030 for further information on the operation of public reference
rooms and you can request copies of the documents by writing to the SEC. The
registration statement, including its exhibits and schedules, are also available
on the SEC's website at www.sec.gov.
Prospective investors may rely only on the information contained in this
prospectus. This prospectus isn't an offer to sell to - nor is it seeking an
offer to buy these securities from - any person in any jurisdiction in which it
is illegal to make an offer or solicitation. The information here is correct
only on the date of this prospectus, regardless of the time of the delivery of
this prospectus or any sale of these securities.
39
<PAGE>
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus. Persons who come into possession of this prospectus in
jurisdictions outside the United States must inform themselves about and observe
any restrictions on this offering and on the distribution of this prospectus in
that jurisdiction.
40
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
Page
----
Independent auditors' report............................................... F-2
Balance sheet as of December 31, 1999...................................... F-3
Statements of operations, for the years ended December 31, 1999 and 1998... F-4
Statement of shareholders' equity, for the period January 1, 1998
through December 31, 1999................................................ F-5
Statements of cash flows, for the years ended December 31, 1999 and 1998... F-6
Notes to financial statements.............................................. F-7
F-1
<PAGE>
To the Board of Directors and Shareholders
Medgrup Corporation
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Medgrup Corporation as of
December 31, 1999 and the related statements of operations, shareholders' equity
and cash flows for the years ended December 31, 1999 and 1998. These 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audits provide 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 Medgrup Corporation, as of
December 31, 1999 and the results of its operations and cash flows for the years
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
/s/ Cordovano and Harvey, P.C.
------------------------------
Cordovano and Harvey, P.C.
Denver, Colorado
January 31, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS
<S> <C>
Cash ........................................................... $ 182,443
Accounts receivable, net of $54,685 allowance .................. 665,783
Prepaid expenses ............................................... 12,176
----------
TOTAL CURRENT ASSETS 860,402
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $81,644 (Note C) ................... 343,683
DEPOSITS ............................................................. 1,300
----------
$1,205,385
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade ........................................ $ 44,498
Due to related party (Note B) ................................. 100,000
Other accrued expenses ......................................... 29,691
Accrued salaries and payroll taxes ............................. 60,420
Income taxes payable ........................................... 507
Current portion of note payable (Note D) ....................... 5,747
Current portion of capital leases payable (Note D) ............ 58,338
----------
TOTAL CURRENT LIABILITIES 299,201
NOTE PAYABLE (Note D) ............................................... 10,919
CAPITAL LEASES PAYABLE (Note D) ..................................... 75,130
DEFERRED INCOME TAXES (Note F) ....................................... 9,047
COMMITMENTS (Note H) ................................................. --
----------
394,297
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 50,000,000 shares authorized;
5,320,000 shares issued and outstanding ...................... 5,320
77,000 outstanding common stock warrants ..................... 27,104
15,293 outstanding common stock options ...................... 4,634
Additional paid in capital ..................................... 619,803
Retained earnings .............................................. 154,227
----------
TOTAL SHAREHOLDERS' EQUITY 811,088
----------
$1,205,385
==========
See accompanying notes to the financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------
1999 1998
----------- -----------
REVENUES
<S> <C> <C>
Coding services ................................ $ 1,651,439 $ 951,910
Other .......................................... 335,157 28,521
----------- -----------
TOTAL REVENUES 1,986,596 980,431
----------- -----------
COSTS AND EXPENSES
Cost of revenue ................................ 799,640 251,850
Stock based compensation, coding services ...... 4,634 --
Provision for doubtful accounts ................ 39,136 7,184
General and administrative ..................... 833,033 511,950
Depreciation ................................... 57,820 13,477
Gain on disposal of assets ..................... (2,283) --
----------- -----------
TOTAL OPERATING EXPENSES 1,731,980 784,461
----------- -----------
OPERATING INCOME 254,616 195,970
OTHER INCOME (EXPENSE)
Interest expense ............................... (14,912) (701)
Other income ................................... 1,500 --
----------- -----------
NET INCOME BEFORE INCOME TAXES $ 241,204 $ 195,269
INCOME TAXES (NOTE F)
Current tax expense ............................ (507) --
Deferred tax expense ........................... (9,047) --
----------- -----------
NET INCOME $ 231,650 $ 195,269
=========== ===========
NET INCOME PER SHARE:
Basic .......................................... $ 0.05 $ 0.05
=========== ===========
Diluted ........................................ $ 0.05 $ 0.05
=========== ===========
SHARES USED FOR COMPUTING NET INCOME PER SHARE:
Basic .......................................... 4,544,167 3,785,000
=========== ===========
Diluted ........................................ 4,907,917 3,785,000
=========== ===========
Pro forma information (Note A):
Pro forma net income before income taxes ....... $ 141,204 $ 175,269
Pro forma benefit (provision) for income taxes . 1,314 (50,914)
----------- -----------
Pro forma net income ........................... $ 142,518 $ 124,355
=========== ===========
Pro forma basic earnings per share ............. $ 0.03 $ 0.03
=========== ===========
See accompanying notes to the financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
From January 1, 1998 through December 31, 1999
Additional Total
Common Stock Outstanding Common Stock Paid In Retained Shareholders'
Shares Amount Warrants Options Capital Earnings Equity
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 .......... 3,154,000(a) $ 3,154 $ -- $ -- $ 1,846 $ 132,281 $ 137,281
Stock issued for cash ............. 631,000(b) 631 -- -- (431) -- 200
Shareholders' distribution ........ -- -- -- -- -- (20,000) (20,000)
Net income for the year
ended December 31, 1998 ......... -- -- -- -- -- 195,269 195,269
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 3,785,000* 3,785 -- -- 1,415 307,550 312,750
Shareholders' distribution ........ -- -- -- -- -- (100,000) (100,000)
Net income from January 1,
1999 to April 30, 1999 .......... -- -- -- -- -- 77,423 77,423
S Corporation termination ......... -- -- -- -- 284,973 (284,973) --
Merger with Perseus Art Group ..... 955,000 955 -- -- (955) -- --
Stock issued for cash, net
of $109,946 offering costs ...... 385,000 385 -- -- 274,669 -- 275,054
Stock issued for payment of
$50,000 offering costs,
valued at fair value of
stock ........................... 50,000 50 -- -- (50) -- --
Stock issued for conversion
of notes payable ................ 145,000 145 -- -- 86,855 -- 87,000
77,000 warrants issued for
payment of offering costs,
valued at fair value of
warrants ........................ -- -- 27,104 -- (27,104) -- --
15,293 options issued for
coding services, valued
at fair value of options ........ -- -- -- 4,634 -- -- 4,634
Deferred taxes relating to
the termination of S
Corporation ..................... -- -- -- -- -- (4,418) (4,418)
Net income from May 1, 1999
through December 31, 1999 ....... -- -- -- -- -- 158,645 158,645
--------- ------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 5,320,000 $ 5,320 $ 27,104 $ 4,634 $ 619,803 $ 154,227 $ 811,088
========= ========================================================================
(a) Restated from 1,000
(b) Restated from 100
*Restated from 1,100 - See Note A
See accompanying notes to the financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income ...................................................... $ 231,650 $ 195,269
Transactions not requiring cash:
Depreciation ................................................ 57,820 13,477
Gain on sale of assets ...................................... (2,283) --
Increase to allowance for doubtful accounts ................. 39,136 4,895
Stock based compensation expense ............................ 4,634 --
Changes in current assets and current liabilities:
Increase in receivables and prepaid expenses ............... (501,515) (88,324)
Increase in accounts payable and accrued liabilities ........ 113,132 18,832
--------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (57,426) 144,149
--------- ---------
INVESTING ACTIVITIES
Equipment and leasehold purchases ............................... (155,153) (43,229)
Proceeds from sale of equipment ................................. 7,000 --
Cash paid for deposits .......................................... (1,300) --
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (149,453) (43,229)
--------- ---------
FINANCING ACTIVITIES
Sale of common stock ............................................ 385,000 200
Cash paid for offering costs .................................... (109,946) --
Shareholder distributions ....................................... -- (20,000)
Repayments to shareholder ....................................... (10,287) (574)
Payments on capital leases ...................................... (42,748) (2,845)
Payments on note payable ........................................ (953) --
Proceeds from notes payable ..................................... 87,000 --
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 308,066 (23,219)
--------- ---------
NET INCREASE IN CASH ................................................ 101,187 77,701
Cash, beginning ...................................................... 81,256 3,555
--------- ---------
Cash, ending ......................................................... $ 182,443 $ 81,256
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................... $ 14,912 $ 701
========= =========
Cash paid for income taxes ........................................... $ -- $ --
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
50,000 common shares issued for payment of offering costs ............ $ 50,000 $ --
77,000 stock options issued for payment of offering costs ............ $ 27,104 $ --
145,000 common shares issued for conversion of notes payable ......... $ 87,000 $ --
Vehicle acquired in exchange for note payable ........................ $ 19,119 $ --
Equipment acquired under capital lease ............................... $ 88,919 $ 90,143
See accompanying notes to the financial statements
F-6
</TABLE>
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note A: Organization, business, and summary of significant accounting policies
------------------------------------------------------------------------------
Organization and business
Effective May 7, 1999, Medgrup Development Services, Inc. ("MDSI") merged with
Perseus Art Group, Inc. ("Perseus") which was incorporated under the laws of the
state of Colorado on June 26, 1998. Concurrent with the merger, Perseus changed
its name to Medgrup Corporation (the "Company").
Perseus was originally incorporated for the purpose of developing an on-line art
gallery which would market, sell and trade original artworks and art
reproductions on the Internet.
MDSI is a medical consulting company that specializes in the coding of medical
record charts of previously discharged patients from various hospitals'
inpatient, outpatient and emergency room settings. The Company provides services
to fifty seven hospitals in nine states. The contracts with the hospitals vary
from the Company coding all of the medical charts for the hospitals to the
hospitals having some of their coded medical charts reviewed by the Company.
Hospitals pay the Company on a per chart basis. MDSI originated as an Illinois
corporation then moved all operations to Colorado in 1997 where it subsequently
became a corporation under the laws of the state of Colorado on February 2,
1997.
Acquisition and merger
----------------------
On May 7, 1999, MDSI exchanged 100 percent of its outstanding shares of common
stock for 3,785,000 shares of the common stock of Perseus. This acquisition has
been treated as a recapitalization of MDSI, a Colorado corporation, with Perseus
the legal surviving entity. Since Perseus had, prior to the recapitalization, no
assets or liabilities and no operations, the recapitalization has been accounted
for as the sale of 1,100 shares of MDSI for the net liabilities of Perseus. The
recapitalization took place on May 7, 1999; however, the financial statements
have been prepared as if the recapitalization took place on April 30, 1999. MDSI
and Perseus were unrelated prior to the reverse merger.
S Corporation termination
-------------------------
MDSI terminated its S Corporation tax status as of April 30, 1999 in conjunction
with its merger with Perseus. At that date MDSI had $284,973 of undistributed
earnings. The financial statements include the transfer of $284,973 from
retained earnings to additional paid-in-capital. The financial statements also
show the pro forma effect on net income of shareholder distributions totaling
$100,000 and $20,000 for the years ended December 31, 1999 and 1998,
respectively, as if the distributions were compensation expense to the
shareholders. The pro forma financial information also shows pro forma corporate
tax expense for the years ended December 31, 1999 and 1998. Pro forma basis
earnings per share reflect the weighted average shares outstanding as if the
merger was effective at the beginning of all periods presented.
F-7
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Summary of significant accounting policies:
Use of estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements.
Cash
----
The Company considers all short-term, highly liquid investments with an original
maturity date of three months or less to be cash equivalents. Cash is stated at
cost, which approximates fair value.
Concentrations and credit risk
------------------------------
Approximately 41% of the Company's net revenues in 1999 were from services
rendered to two customers.
The Company has concentrated its credit risk for cash by maintaining deposits in
financial institutions, which may at times, exceed the amounts covered by
insurance provided by the United States Federal Deposit Insurance Corporation
("FDIC"). The maximum loss that would have resulted from that risk totaled
$82,443 at December 31, 1999, for the excess of the deposit liabilities reported
by financial institutions over the amount that would have been covered by
federal insurance. The Company has not experienced any losses to date in such
accounts and accordingly, believes it is not exposed to any significant credit
risk.
Accounts receivable
-------------------
The Company closely monitors extensions of credit and has not experienced
significant losses related to its receivables. Two customers comprised 46.3% of
the accounts receivable balance at December 31, 1999. Management periodically
reviews the aging of accounts receivable and records a charge to provision for
doubtful accounts for those accounts that significantly exceed 90 days past due.
Accounts receivable at January 1, 1999, net . $ 214,397
Collection of accounts receivable ........... (203,205)
Increase in allowance for doubtful accounts . (39,136)
Accounts written off ........................ --
Increase in accounts receivable ............. 693,727
---------
Accounts receivable at December 31, 1999, net $ 665,783
=========
F-8
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Long-lived assets
-----------------
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of", the Company periodically
reviews the values assigned to long-lived assets, such as property and
equipment, to determine whether any impairments are other than temporary. SFAS
No. 121 requires that an impairment loss be recognized when the carrying amount
of an asset exceeds the expected future undiscounted net cash flows. Management
believes that the long-lived assets in the accompanying balance sheets are
appropriately valued.
Income taxes
------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
Revenue recognition
-------------------
Revenue is recognized at the time the services are rendered. Other revenue is
comprised of services provided to customers for clerical support, consulting and
review of charts coded by hospital employees.
Stock-based compensation
------------------------
The Company accounts for any stock-based compensation plans using the intrinsic
value method prescribed by the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation cost for
stock options, if any, is measured as the excess of the quoted market prices of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") was issued
in October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in APB 25 to account for stock-based
compensation arrangements. Companies that elect to use the method provided in
APB 25 are required to disclose the pro forma net income and earnings per share
that would have resulted from the use of the fair value based method. The
Company has elected to continue to determine the value of the stock-based
compensation arrangements under the provision of APB 25 and, accordingly, has
included the pro forma disclosures required under SFAS 123 in Note E.
F-9
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Fair value of financial instruments
-----------------------------------
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts receivable,
prepaid expenses, accounts payable, accrued compensation, and other accrued
liabilities approximate fair value due to the short-ter maturity of the
instruments.
Earnings per share
------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" (SFAS 128). The Company adopted SFAS 128 for the
two-year period ended December 31, 1999. Under SFAS 128, net income per
share-basic excludes dilution and is determined by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Net income per share-diluted reflects the potential dilution
that could occur if securities and other contracts to issue common stock were
exercised or converted into common stock.
Property and equipment
----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is estimated to be three to five years.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the consolidated statements of operations. Leasehold improvements
are amortized over sixty months.
Leased property meeting certain criteria is capitalized and the present value of
the related lease payments is recorded as a liability. Amortization of
capitalized leased assets is computed on the straight-line method over the term
of the lease.
Recently issued accounting pronouncements
-----------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1999. There was no material effect on the financial
statements presented from the adoption of the new pronouncements.
SFAS No. 130, "Reporting Comprehensive Income," requires the reporting and
display of total comprehensive income and its components in a full set of
general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers.
F-10
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Summary of significant accounting policies continued:
Recently issued accounting pronouncements, continued
----------------------------------------------------
SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits," which requires additional disclosures about pension and other
post-retirement benefit plans, but does not change the measurement or
recognition of those plans.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires an entity to recognize all derivatives as either an asset or liability
and measure those instruments at fair value, as well as identify the conditions
for which a derivative may be specifically designed as a hedge.
Statement of Position ("SOP") 98-1, "Accounting for the costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires that
entities capitalize certain internal-use software costs once certain criteria
are met.
SOP 98-5, "Reporting on the costs of Start-Up Activities." SOP 98-5 provides,
among other things, guidance on the reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred.
The Company will continue to review these new accounting pronouncements over
time to determine if any additional disclosures are necessary based on evolving
circumstances.
Note B: Related party transactions
----------------------------------
For the year ended December 31, 1999
------------------------------------
During the year ended December 31, 1999, the Company repaid advances received
from the President of the Company totaling $10,287. Also, during the year ended
December 31, 1999, the President of the Company leased office space to the
Company for three months for a total of $1,500.
Prior to the termination of the S Corporation status, the Company recorded a
distribution payable (return of earnings) of $100,000 to the S Corporation
shareholders. At December 31, 1999 the $100,000 had not been paid, and is
accordingly recorded as a current liability due to related party.
For the year ended December 31, 1998
------------------------------------
At December 31, 1997, the Company owed the President of the Company $10,861 for
advances the President had made to the Company. During the year ended December
31, 1998, the Company repaid $574 of the advances to the President.
F-11
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note C: Property and equipment
------------------------------
Furniture and equipment consisted of the following at December 31, 1999:
Property
Property under Capital Total
Acquired Lease Property
-----------------------------------
Furniture and fixtures ...... $ 26,791 $ 11,397 $ 38,188
Computer equipment .......... 78,919 39,658 118,577
Fax equipment ............... 123,117 123,501 246,618
Vehicles .................... 19,119 -- 19,119
Leasehold improvements ...... 2,825 -- 2,825
--------- ----------------------
250,771 174,556 425,327
Less accumulated depreciation (48,606) (33,038) (81,644)
--------- ----------------------
$ 202,165 $ 141,518 $ 343,683
========= ======================
Note D: Debt
------------
Line of credit
--------------
The Company has a $50,000 revolving line-of-credit, of which, $50,000 was unused
as of December 31, 1999. Advances on the line carry an interest rate of the
Norwest Bank, N.A. prime rate plus two percent (10.25% at December 31, 1999).
The credit line is collateralized by substantially all corporate assets and is
personally guaranteed by an officer of the Company. Interest payments only are
due monthly and any unpaid interest and principal are due at October 30, 2000.
Convertible notes
-----------------
On April 30, 1999 the Company issued notes in the amounts of $15,000, $36,000
and $36,000 to three individuals. The notes were non-interest bearing and were
convertible in 3.95, 9.50 and 9.50, respectively, of shares of the Company's
common stock. On May 26, 1999 the Company converted the notes to 25,000, 60,000
and 60,000 shares of common stock, respectively.
F-12
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note D: Debt, continued
-----------------------
Long-term debt consists of the following note payable and capital leases payable
at December 31, 1999:
Note payable:
Note payable due in monthly installments of
$489, interest at 0.90 percent, maturing October
15, 2002, collateralized by vehicle ............ $ 16,666
Less: current maturities ....................... (5,747)
--------
$ 10,919
========
Maturities on note payable, subsequent to December 31, 1999 are as follows:
2000..................... $ 5,747
2001..................... 5,799
2002..................... 5,120
--------
$ 16,666
========
Capital leases payable:
-----------------------
Capital lease, due in monthly installments of
$2845, net of imputed interest, maturing November
2001, collateralized by equipment ............... $ 59,900
Capital lease, due in monthly installments of
$2845, net of imputed interest, maturing May
2002, collateralized by equipment ............... 73,568
---------
133,468
Less: current maturities ........................ (58,338)
---------
$ 75,130
=========
Maturities on capital leases payable, subsequent to December 31, 1999 are as
follows:
2000........................................... $ 68,280
2001........................................... 65,435
2002........................................... 14,225
---------
147,940
Less: imputed interest......................... (14,472)
---------
Present value of net minimum lease payments.... $ 133,468
=========
F-13
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note E: Stock based compensation
--------------------------------
Common stock options
--------------------
The Company has an Incentive Stock Option Plan (the "Plan"), and has reserved
1,500,000 shares for issue as options are granted. Under the Plan, the Company
may grant incentive stock options under Section 422 of the Internal Revenue Code
of 1986, as amended. Under Section 422 of the Code, exercise of a qualified
incentive stock option will not create income to the option holder on the date
of exercise; income recognition is deferred until disposition of the stock
acquired. Incentive stock options must be granted with an exercise price equal
to or greater than the fair market value of the underlying common stock on the
date of grant. Incentive stock options granted to holders of more than ten
percent of the outstanding common stock must have (1) an exercise price equal to
at least 110% of the fair market value of the underlying common stock on the
date of grant, and (2) a term not exceeding five years.
The Plan provides that the total number of shares covered by such plan, the
number of shares covered by each option, and the exercise price per share may be
proportionally adjusted in the event of a stock split, reverse stock split,
stock dividend, or similar capital adjustment which is effected with receipt of
additional consideration by the Company.
During the year ended December 31, 1999 the Company granted 1,014,793 options
pursuant to the Plan. 209,500 of the options were canceled prior to vesting due
to termination of the employee or non-performance of the terms of the option
agreement. The options vest over a period of up to one year, or vest based on
certain performance criteria and are priced at or above the current
over-the-counter share trading price. 363,293 of the options granted during 1999
were exercisable at December 31, 1999 at a weighted average price of $1.02;
however, none of the options were exercised at December 31, 1999. The options
expire on various dates. The expiration dates are based on the date of grant and
expire from five to seven years after date of grant. The following summarizes
the expiration schedule for options outstanding at December 31, 1999.
Expiration Number
Date of Options
---------------------------------
September 2, 2004.... 50,000
December 8, 2004..... 27,000
May 26, 2006......... 572,000
June 3, 2006......... 40,293
December 1, 2006..... 35,000
December 30, 2006.... 81,000
-------
805,293
=======
F-14
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note E: Stock based compensation, continued
-------------------------------------------
Common stock options, continued
-------------------------------
<TABLE>
<CAPTION>
Incentive Stock Option Plan
---------------------------------- Weighted
Options and Weighted Weighted Average
Incentive Executive Warrants Average Average Exercise Price
Stock Employment Issued to Exercise Fair Currently Currently
Options Options Non-Employees Price Value Exercisable Exercisable
------- ------- ------------- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 1998 -- -- -- $ -- $ -- -- $ --
Options and warrants granted ........... -- -- -- -- -- -- --
-------- -------- -------- ----- ----- -------- -----
Outstanding, December 31, 1998 -- -- -- -- -- -- --
Options granted ........................ 172,500 500,000 342,293 1.04 0.32 363,293 1.02
Options cancelled ...................... (34,500) -- (175,000) (1.00) (0.30) -- --
-------- -------- -------- ----- ----- -------- -----
Outstanding, December 31, 1999 138,000 500,000 167,293 $1.05 $0.32 363,293 $1.02
======== ======== ======== ===== ===== ======== =====
All options and warrants were granted above their fair value.
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contracual Number Exercise
Range of Exercisable Price Outstanding Price Life Exercisable Price
-------------------------- ----------- ----- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.00 - $1.31 805,293 $1.05 6.34 363,293 $1.02
======= ===== ==== ======= =====
</TABLE>
F-15
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note E: Stock based compensation continued
------------------------------------------
Common stock options continued
------------------------------
On May 26, 1999 the Company granted options for 500,000 shares of its common
stock, to an officer of the Company, exercisable for $1.00 per share. The
options begin vesting at the rate of 250,000 as of the grant date with the
remaining 250,000 vesting based on the performance of the Company's common stock
price. If the stock trades greater than $2.00, $3.00, $4.00 or $5.00 per share;
60,000, 60,000, 60,000 and 70,000, vest respectively. The options expire on May
26, 2006. The options were granted at the market value of the Company's common
stock as of May 26, 1999. The market price was based on the $1.00 cash offering
price of the Company's common stock, which was contemporaneous with the grant
date. In accordance with APB 25, no compensation expense was recorded.
On June 3, 1999 the Company granted options for 15,293 shares of its common
stock, exercisable for $1.00 per share to an individual for payment of coding
services rendered to the Company. The options were granted at the market value
of the Company's common stock as of June 3, 1999. They are fully vested and
expire on June 3, 2006. The fair value of the options as determined in
accordance with SFAS No. 123 is $4,634 and has been charged to operations with a
corresponding credit to equity shown as outstanding common stock options.
On September 2, 1999 and December 8, 1999 the Company issued warrants for 50,000
and 27,000 shares, respectively of its common stock, exercisable for $1.10 per
share to the agent that assisted the Company with its common stock offering. The
warrants were granted at 110% of the market value of the Company's common stock
as of the date of grant. The warrants are fully vested and expire five years
from the date of grant. The fair value of the warrants as determined in
accordance with SFAS No. 123 is $27,104 and has been charged to additional paid
in capital as offering costs with a corresponding credit to equity shown as
outstanding common stock warrants.
SFAS 123
--------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 encourages the use of a fair value based method of
accounting for compensation expense associated with stock option awards and
similar plans. SFAS 123 permits the continued use of the intrinsic value based
method prescribed by APB 25, but requires additional disclosures, including pro
forma calculations of net earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been applied for the applicable
periods.
F-16
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note E: Stock based compensation continued
------------------------------------------
SFAS 123 continued
------------------
The fair value of each option granted has been estimated as of the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.623 percent, expected volatility of 60
percent, expected life of seven years, and no expected dividends. During the
year ended December 31, 1999, the weighted-average exercise price and fair
values of options granted and fully vested were $1.00 and $.30, respectively, on
the date of grant for options granted with an exercise price equal to the market
price of the stock. There were no fully vested options at December 31, 1999 that
were granted at prices less than or in excess of the market price of the
underlying stock on date of grant.
Had compensation expense been determined based on the fair value at the grant
date, and charged to expense over vesting periods, consistent with the
provisions of SFAS 123, the Company's net income and net income per share would
have decreased to the pro forma amounts indicated below:
Amount
-----------
Net income, as reported ................... $ 231,650
Decrease due to:
Employee stock options ............. (6,363)
Executive employment options ....... (75,750)
-----------
Pro forma net income ...................... $ 149,537
===========
Net income per share - basic, as reported . $ 0.05
Net income per share - diluted, as reported $ 0.05
Pro Forma:
Net income per share - basic .......... $ 0.03
Net income per share - diluted ........ $ 0.03
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Company believes that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards.
F-17
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note F: Income taxes
--------------------
As discussed in Note A, the Company reports income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". Also, as discussed in Note A, the
Company terminated its S Corporation status on April 30, 1999. In connection
with that termination, the Company recorded deferred income taxes as of April
30, 1999 and a one-time charge to earnings of $4,418. The total income tax
provision for the eight months ended December 31, 1999 has been allocated as
follows:
Arising from termination of S Corporation ... $4,418
Subsequent to S Corporation termination ..... 5,136
------
$9,554
======
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows for the eight months subsequent to the S Corporation
termination.
U.S. statutory federal rate, graduated ... 15.00%
State rate, net of federal benefit ....... 4.25%
Temporary differences (depreciation) ..... -1.97%
Permanent differences, other ............. 1.97%
Permanent differences (offering costs).... -18.94%
-------
0.31%
=======
At December 31, 1999, the deferred tax liability consisted of the temporary
differences related to tax versus book depreciation methods.
Note G: Shareholders' equity
----------------------------
On July 9, 1999 the Company commenced an offering of 600,000 shares of its
common stock for $1.00 per share. The shares were offered pursuant to an
exemption from the securities offering registration requirements provided by
rule 506 of Regulation D of the Securities Act of 1933, as amended. The offering
closed on January 15, 2000. As of December 31, 1999 the Company sold 385,000
shares for net proceeds of $275,054 after deducting $109,946 in cash offering
costs. The Company also issued 50,000 shares to the placement agent as non-cash
offering costs valued at $50,000. Pursuant to the placement agent agreement, the
placement agent also received warrants to purchase 77,000 shares of the
Company's common stock for $1.10 per share. The warrants have been valued at
their fair value of $27,104 and recorded in the financial statements as
outstanding common stock warrants. Subsequent to December 31, 1999 the Company
sold an additional 215,000 shares for net proceeds of $191,350 after deducting
$23,650 in offering costs.
F-18
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
Note H: Commitments and contingencies
-------------------------------------
Non-cancelable leases
---------------------
The Company leases office space under a non-cancelable operating lease that
expires in March 2002. Total office rent expense incurred under the leases for
the years ended December 31, 1999 and 1998 was $16,000 and $-0-, respectively.
The Company also leases vehicles and fax machines under non-cancelable leases
that begin to expire in April 2000. Total lease expense for the vehicles and fax
machines for the year ended December 31, 1999 was $14,633 and $5,526,
respectively. Total lease expense for the vehicles and fax machines for the year
ended December 31, 1998 was $12,391 and $5,526, respectively. Future minimum
lease payments for the leases with initial terms in excess of one year as of
December 31, 1999 are as follows:
December 31, 2000............. $ 45,002
December 31, 2001............. $ 37,448
December 31, 2002............. $ 20,308
December 31, 2003............. $ 6,608
December 31, 2004............. $ 551
Note I: Subsequent events
-------------------------
On January 3, 2000, the Company granted options to two consultants to purchase
10,000 shares (per each consultant) of the Company's common stock for $1.31 per
share, when $1.19 was the market value of the Company's common stock on that
date. The options vest in two equal increments of 5,000 shares six months and
twelve months from the date of grant. The options expire seven years from date
of grant.
On January 3, 2000, the Company granted 135,000 incentive stock options to five
employees. The options were granted at $1.31 per share and the market price of
the Company's common stock on that date was $1.19.
Employment contracts
--------------------
On February 14, 2000 the Company entered into an Executive Employment Agreement
(the "Agreement") with the new President of the Company. The Agreement provides
for an annual salary and a grant of 500,000 incentive stock options. The options
vest in increments of 83,333 options every six months, provided the President is
still employed by the Company. The options are exercisable for $1.31 per share
and the market price on the date of grant was $1.19.
F-19
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Index to Financial Statements
Page
Independent auditors' report............................................... F-21
Balance sheets, May 6, 1999 and December 31, 1998.......................... F-22
Statements of operations, from January 1, 1999 through May 6, 1999, from
June 26, 1998 (inception) through December 31, 1998, and from
June 26, 1998 (inception) through May 6, 1999......................... F-23
Statement of shareholders' equity, from June 26, 1998 (inception)
through May 6, 1999................................................... F-24
Statements of cash flows, from January 1, 1999 through May 6, 1999, from
June 26, 1998 (inception) through December 31, 1998, and from
June 26, 1998 (inception) through May 6, 1999......................... F-25
Notes to financial statements.............................................. F-27
F-20
<PAGE>
To the Board of Directors and Shareholders
Medgrup Corporation (Formerly Perseus Art Group, Inc.)
Independent Auditors' Report
We have audited the balance sheets of Perseus Art Group, Inc. as of May 6, 1999
and December 31, 1998, and the related statements of operations, shareholders'
equity and cash flows for the periods of January 1, 1999 to May 6, 1999, from
June 26, 1998 (inception) through December 31, 1998, and from June 26, 1998
(inception) through May 6, 1999. 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 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 Perseus Art Group, Inc. as of
May 6, 1999 and December 31, 1998, and the related statements of operations and
cash flows for the period periods of January 1, 1999 to May 6, 1999, from June
26, 1998 (inception) through December 31, 1998, and from June 26, 1998
(inception) through May 6, 1999, in conformity with generally accepted
accounting principles.
Perseus Art Group, Inc. has incurred consulting fees of $60,500, and $-0- from
three affiliated companies during the periods from June 26, 1998 (inception)
through December 31, 1998, and the period from January 1, 1999 to May 6, 1999,
respectively.
/s/ Cordovano and Harvey, P.C.
------------------------------
Cordovano and Harvey, P.C.
Denver, Colorado
January 31, 2000
F-21
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
BALANCE SHEETS
May 6, December 31,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
CASH ....................................................................... $ -- $ 10,859
INVENTORY .................................................................. -- 2,765
EQUIPMENT, less accumulated depreciation of
$0 and $77, respectively (Notes A and B) .............................. -- 1,315
--------- ---------
$ -- $ 14,939
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable ..................................................... $ -- $ 214
Accrued expenses ..................................................... -- 1,640
--------- ---------
TOTAL LIABILITIES -- 1,854
--------- ---------
SHAREHOLDERS' EQUITY (Notes C and E)
Common stock, $.001 par value, 50,000,000 shares authorized,
955,000 and 1,080,000 shares issued and outstanding, respectively .. 955 1,080
Additional paidin capital ............................................ 541,545 531,420
Deficit accumulated during the development stage ..................... (542,500) (519,415)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY -- 13,085
--------- ---------
$ -- $ 14,939
========= =========
See accompanying notes to financial statements.
F-22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
June 26,
1998 June 26,
(Inception) 1998
January 1, 1999 Through (Inception)
through December 31, Through
May 6, 1999 1998 May 6, 1999
----------- ----------- -----------
COSTS AND EXPENSES
<S> <C> <C> <C>
Consulting, related parties (Note B) ........................... $ -- $ 60,500 $ 60,500
Stock based compensation organizational services (Note C) ..... -- 450,000 450,000
Compensation ................................................... 10,069 -- 10,069
Legal and accounting ........................................... 6,321 3,090 9,411
Stock transfer fees ............................................ 93 1,500 1,593
Website ........................................................ -- 2,100 2,100
Other .......................................................... 2,747 2,346 5,093
----------- ----------- -----------
OPERATING LOSS (19,230) (519,536) (538,766)
NONOPERATING INCOME (EXPENSE)
Investment income .............................................. 64 121 185
Loss on disposal of assets and inventory (Note B) .............. (3,919) -- (3,919)
----------- ----------- -----------
NET LOSS BEFORE INCOME TAXES (23,085) (519,415) (542,500)
INCOME TAX BENEFIT (EXPENSE) (Note D)
Current ........................................................ 4,395 192,885 197,280
Deferred ....................................................... (4,395) (192,885) (197,280)
----------- ----------- -----------
NET LOSS $ (23,085) $ (519,415) $ (542,500)
=========== =========== ===========
Basic loss per common share ......................................... $ (0.02) $ (0.48) $ (0.49)
=========== =========== ===========
Basic weighted average common shares outstanding .................... 1,120,000 1,080,000 1,096,667
=========== =========== ===========
See accompanying notes to financial statements.
F-23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
STATEMENT OF SHAREHOLDER'S EQUITY
June 26, 1998 (Inception) through May 6, 1999
Deficit
Accumulated
Common Stock Additional During the Total
--------------------- Paid-in Development Shareholders'
Shares Amount Capital Stage Equity
------ ------ ------- ----- ------
<S> <C> <C> <C> <C> <C>
Balance, June 26, 1998 (Inception) .................... -- $ -- $ -- $ -- $ --
Common stock issued for services rendered at
estimated fair value (Note C) ...................... 900,000* 900 449,100 -- $ 450,000
Shares issued in common stock offering, less
$7,500 of offering costs (Note C) .................. 180,000* 180 82,320 -- $ 82,500
Net loss for the period ended
December 31, 1998 .................................. -- -- -- (519,415) $ (519,415)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 1,080,000* 1,080 531,420 (519,415) $ 13,085
Shares issued in common stock offering (Note C) ....... 100,000* 100 9,900 -- $ 10,000
Retirement and cancellation of
shares of common stock (Note C) .................. (225,000)* (225) 225 -- $ --
Net loss for the period from January 1, 1999
through May 6, 1999 ................................ -- -- -- (23,085) $ (23,085)
---------- ---------- ---------- ---------- ----------
BALANCE, MAY 6, 1999 955,000* $ 955 $ 541,545 $ (542,500) $ 0
========== ========== ========== ========== ==========
* Restated (See Note E)
See accompanying notes to financial statements.
F-24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
June 26,
1998 June 26,
(Inception) 1998
January 1, 1999 Through (Inception)
through December 31, Through
May 6, 1999 1998 May 6, 1999
----------- --------- -----------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss ........................................................... $ (23,085) $(519,415) $(542,500)
Transactions not requiring cash:
Depreciation .................................................... 160 77 237
Loss on disposal of assets and inventory (Note B) ............... 3,920 -- 3,920
Common stock issued for services rendered
by officers (Note C) .......................................... -- 450,000 450,000
--------- --------- ---------
(19,005) (69,338) (88,343)
Changes in operating assets and liabilities:
(Decrease)/Increase in accounts payable and accrued expenses .... (1,854) 1,854 --
--------- --------- ---------
NET CASH (USED IN)
OPERATING ACTIVITIES (20,859) (67,484) (88,343)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of inventory .............................................. -- (2,765) (2,765)
Purchase of equipment .............................................. -- (1,392) (1,392)
--------- --------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES -- (4,157) (4,157)
--------- --------- ---------
FINANCING ACTIVITIES
Sale of common stock ............................................... 10,000 90,000 100,000
Offering costs incurred ............................................ -- (7,500) (7,500)
--------- --------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 10,000 82,500 92,500
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................... (10,859) 10,859 --
Cash and cash equivalents at beginning of period ................... 10,859 -- --
--------- --------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ................................................... $ -- $ 10,859 $ --
========= ========= =========
See accompanying notes to financial statements.
F-25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
June 26,
1998 June 26,
(Inception) 1998
January 1, 1999 Through (Inception)
through December 31, Through
May 6, 1999 1998 May 6, 1999
----------- ---- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C> <C>
Cash paid for interest ................................ $-- $-- $--
====== ==== =====
Cash paid for income taxes ............................ $-- $-- $--
====== ==== =====
Noncash investing and financing activities:
Retirement and cancellation of 225,000
shares of common stock (Note C) ................... $ 225 $-- $ 225
====== ==== =====
See accompanying notes to financial statements.
F-26
</TABLE>
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Note A: Organization and summary of significant accounting policies
Organization and basis of presentation
--------------------------------------
Perseus Art Group, Inc. (the "Company") is a development stage company which was
organized under the laws of the state of Colorado on June 26, 1998. The Company
proposes to develop an "on-line" art gallery for the purpose of marketing,
selling, and trading original artworks and art reproductions on the Internet.
Since inception, the Company has been engaged primarily in organizational
matters, the development of its business plan, and the offer and sale of 280,000
shares of its $.001 par value common stock.
On May 7, 1999, Medgrup Development Services, Inc. ("MDSI") exchanged 100
percent of its outstanding shares of common stock for 3,785,000 shares of the
common stock of Perseus Art Group, Inc. ("Perseus"). This acquisition has been
treated as a reverse acquisition whereby MDSI is considered the surviving
entity. Costs of the transactions have been charged to the period. Immediately
prior to the merger Perseus changed its name to Medgrup Corporation.
Cash equivalents
----------------
For financial accounting purposes and the statement of cash flows, cash
equivalents include all highly liquid debt instruments purchased with an
original maturity of three months or less.
Use of estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities;
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. Accordingly, actual results could differ from those estimates.
Inventory
---------
Inventory, consisting of pieces of art, is valued at the lower of cost or
market. The cost of the inventory has been determined on a specific
identification basis.
Equipment and depreciation
--------------------------
Equipment is recorded at cost and depreciated using the straight-line method
over the useful lives of the assets, beginning at the time the assets are placed
into service. As of December 31, 1998, equipment consisted of computer hardware
and software. Depreciation expense for the period from June 26, 1998 (inception)
through December 31, 1998 totaled $77. Depreciation expense for the period from
January 1, 1999 through May 6, 1999 was $160.
F-27
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Note A: Organization and summary of significant accounting policies, concluded
Equipment and depreciation, concluded
-------------------------------------
Upon retirement or disposition of the equipment, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations. Repairs and maintenance are charged to expense as
incurred and expenditures for additions and improvements are capitalized.
Loss per share
--------------
The Company reports loss per share using a dual presentation of basic and
diluted loss per share. Basic loss per share excludes the impact of common stock
equivalents. Diluted loss per share utilizes the average market price per share
when applying the treasury stock method in determining common stock equivalents.
Stock-based compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in October
1995. This accounting standard permits the use of either a "fair value based
method" or the "intrinsic value method" defined in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) to account for
stock-based compensation arrangements.
Companies that elect to use the method provided in APB 25 are required to
disclose pro forma net income and pro forma earnings per share information that
would have resulted from the use of the fair value based method. The Company has
elected to determine the value of stock-based compensation arrangements under
the provisions of SFAS 123 and, accordingly, has not included pro forma
disclosures.
Income taxes
------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and the tax
basis of assets and liabilities for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
F-28
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Note B: Related party transactions
The Company engaged an affiliate to provide consulting services concerning
financing, shareholder relations, public market strategy, broker relations,
capitalization, and corporate structure. For the periods from June 26, 1998
(inception) through December 31, 1998 and from January 1, 1999 through May 6,
1999, the Company paid the affiliate $38,000 and $-0-, respectively, in
consulting fees, all of which were expensed.
The Company also engaged an affiliate to provide assistance with business
development matters. For the periods from June 26, 1998 (inception) through
December 31, 1998 and from January 1, 1999 through May 6, 1999, the Company paid
the affiliate $2,500 and $-0-, respectively, for consulting services, all of
which were expensed. The President of the Company is the owner and President of
the affiliate.
In addition, the Company engaged an affiliate to provide assistance with
business development matters. For the periods from June 26, 1998 (inception)
through December 31, 1998 and from January 1, 1999 through May 6, 1999, the
Company paid the affiliate $20,000 and $-0-, respectively, for consulting
services, all of which were expensed. The Vice-president of the Company is the
owner and managing member of the affiliate.
Pursuant to the terms of the reverse merger with Medgrup Development Services,
Inc., the assets and liabilities of the Company were distributed to the
President and Vice-President of the Company immediately prior to the reverse
merger. The Company's cash, consisting of $10,069, was distributed to the
Vice-president of the Company. Accordingly, the cash distribution has been
classified as compensation expense for the period ended May 6, 1999. The
Vice-president also received the Company's computer equipment, valued at $1,155,
net of accumulated depreciation. The Vice-President of the Company was given the
other assets of the Company consisting of inventories valued at $2,765. The
distribution of equipment and inventories was accounted for as a loss on
disposal of assets for the period ended May 6, 1999.
F-29
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Note C: Shareholders' equity
Common stock issuances
----------------------
Effective June 30, 1998, the Company issued to its Vice-president and President,
respectively, 630,000 and 270,000 shares of the Company's $.001 par value per
share common stock for services in connection with its organization. The shares
were valued by management at $.002 per share, or a total of $1,800. However, the
issuance of the shares was accounted for based on the fair value of the
Company's common stock as established by contemporaneous equity transactions and
other analysis, measured on July 10, 1998. Accordingly, the Company recorded
stock-based compensation of $450,000 in the accompanying financial statements.
Effective July 10, 1998, the Company offered for sale 900 Units aggregating
$90,000 through its officers and directors. Each Unit included 200 shares of the
Company's $.001 par value common stock. Upon issuance, the shares are detachable
from the Units and may be transferred separately.
The Company closed the offering and issued 900 Units representing 180,000 shares
of common stock for net proceeds of $82,500 after deducting $7,500 in offering
costs. The shares were issued without registration under the federal securities
laws in reliance upon an exemption from registration requirements contained in
the Securities Act of 1933, as amended.
On March 31, 1999 the Company sold an additional 100,000 shares of its $.001 par
common stock for $.10 per share. No offering costs were incurred in relation to
this sale.
Immediately prior to the reverse merger with Medgrup Development Services, Inc.
the Company's President returned to the Company 225,000 shares of common stock
to be retired and cancelled. This was accounted for as an increase to additional
paid in capital since no consideration was received for the 225,000 shares upon
retirement and cancellation.
Also immediately prior to the reverse merger with Medgrup Development Services,
Inc., the board of directors approved an amendment to the articles of
incorporation increasing the number of shares of common stock outstanding to
50,000,000 from 20,000,000.
Description of common stock
---------------------------
All shares of common stock have equal voting rights and, when validly issued and
outstanding, are entitled to one vote per share in all matters to be voted upon
by shareholders. The shares of common stock have no preemptive, subscriptive,
conversion or redemption rights. Cumulative voting in the election of directors
is not permitted. In case of liquidation of the Company, each shareholder is
entitled to receive a proportionate share of the Company's assets available for
distribution to shareholders after the payment of liabilities.
F-30
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Note D: Income taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
June 26,
1998 June 26,
(Inception) 1998
January 1, 1999 Through (Inception)
through December 31, Through
May 6, 1999 1998 May 6, 1999
-------------- ------------ -----------
<S> <C> <C> <C>
U.S. statutory federal rate, graduated ............. 15.00% 34.00% 34.00%
State income tax rate, net of federal benefit ...... 4.04% 3.13% 3.14%
Net operating loss (NOL) for which
no tax benefit is currently available .......... -19.04% -37.13% -37.14%
------- ------- -------
0.00% 0.00% 0.00%
======= ======= =======
</TABLE>
At December 31, 1998, deferred taxes consisted of a net tax asset of $192,885
due to operating loss carryforwards of $519,416, which was fully allowed for in
the valuation allowance of $192,885. The valuation allowance offsets the net
deferred tax asset for which there is no assurance of recovery. The change in
the valuation allowance from June 26, 1998 (inception) through December 31, 1998
was $192,885. Net operating loss carryforwards will expire in 2018.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the asset will be realized. At that
time, the allowance will either be increased or reduced; reduction could result
in the complete elimination of the allowance if positive evidence indicates that
the value of the deferred tax asset is no longer impaired and the allowance is
no longer required.
At May 6, 1999, deferred taxes consisted of a net tax asset of $4,395 due to
operating loss carryforwards of $23,084, which was fully allowed for in the
valuation allowance of $4,395. The valuation allowance offsets the net deferred
tax asset for which there is no assurance of recovery. The change in the
valuation allowance from December 31, 1998 through May 6, 1999 was $4,395. Net
operating loss carryforwards will expire through 2019.
F-31
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Perseus Art Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Note E: Reverse Stock Split
Effective May 6, 1999, the shareholders approved a reverse split of common stock
of one share for each two shares of common stock (1:2) held. The accompanying
financial statements have been retroactively restated to give effect to the
reverse stock split for all periods presented.
F-32
<PAGE>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
Page
----
Balance sheet as of March 31, 2000 (unaudited)......................... F-34
Statements of operations, for the three months ended
March 31, 2000 and 1999 (unaudited).................................. F-35
Statement of shareholders' equity, for the three months
ended March 31, 2000 (unaudited)..................................... F-36
Statements of cash flows, for the three months ended
March 31, 2000 and 1999 (unaudited).................................. F-37
Notes to interim financial statements (unaudited)...................... F-38
F-33
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
BALANCE SHEET
MARCH 31, 2000
(UNAUDITED)
ASSETS
CURRENT ASSETS
<S> <C>
Cash .......................................................... $ 564,205
Accounts receivable, net of $54,685 allowance ................. 501,075
Prepaid expenses .............................................. 27,092
----------
TOTAL CURRENT ASSETS 1,092,372
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $106,426 .......................... 479,686
DEPOSITS ............................................................ 1,300
----------
$1,573,358
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade ....................................... $ 46,280
Due to related party .......................................... 94,449
Other accrued expenses ........................................ 81,932
Income taxes payable .......................................... 11,507
Current portion of long-term debt ............................. 15,070
Current portion of capital leases payable ..................... 55,493
----------
TOTAL CURRENT LIABILITIES 304,731
NOTE PAYABLE ........................................................ 38,282
CAPITAL LEASES PAYABLE .............................................. 63,140
DEFERRED INCOME TAXES ............................................... 9,047
----------
415,200
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 50,000,000 shares authorized;
5,535,000 shares issued and outstanding ..................... 5,535
77,000 outstanding common stock warrants .................... 27,104
15,293 outstanding common stock options ..................... 4,634
Additional paid in capital .................................... 810,938
Retained earnings ............................................. 309,947
----------
TOTAL SHAREHOLDERS' EQUITY 1,158,158
----------
$1,573,358
==========
See accompanying notes to the unaudited interim financial statements
F-34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months ended
March 31,
---------------------------
2000 1999
----------- -----------
REVENUES
<S> <C> <C>
Coding services .............................. $ 873,976 $ 362,430
Other ........................................ 25,564 12,205
----------- -----------
TOTAL REVENUES 899,540 374,635
----------- -----------
COSTS AND EXPENSES
Cost of revenue .............................. 294,907 78,826
General and administrative ................... 368,226 195,588
Depreciation ................................. 26,801 9,726
Loss on disposal of assets ................... 553 --
----------- -----------
TOTAL OPERATING EXPENSES 690,487 284,140
----------- -----------
OPERATING INCOME 209,053 90,495
OTHER INCOME (EXPENSE)
Interest expense ............................. (3,667) (1,910)
Interest income .............................. 1,334 --
----------- -----------
NET INCOME BEFORE INCOME TAXES $ 206,720 $ 88,585
INCOME TAXES
Current tax expense .......................... (51,000) --
Deferred tax expense ......................... -- --
----------- -----------
NET INCOME $ 155,720 $ 88,585
=========== ===========
NET INCOME PER SHARE:
Basic ........................................ $ 0.03 $ 0.02
=========== ===========
Diluted ...................................... $ 0.03 $ 0.02
=========== ===========
SHARES USED FOR COMPUTING NET INCOME PER SHARE:
Basic ........................................ 5,535,000 3,785,000
=========== ===========
Diluted ...................................... 5,899,250 3,785,000
=========== ===========
Pro forma information:
Pro forma net income before income taxes ..... NA $ 88,585
Pro forma benefit (provision) for income taxes NA (21,854)
-----------
Pro forma net income ......................... NA $ 66,731
===========
Pro forma basic earnings per share ........... NA $ 0.02
===========
See accompanying notes to the unaudited interim financial statements
F-35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
From December 31, 1999 through March 31, 2000
(UNAUDITED)
Additional Total
Common Stock Outstanding Common Stock Paid In Retained Shareholders'
Shares Amount Warrants Options Capital Earnings Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ............ 5,320,000 $ 5,320 $ 27,104 $ 4,634 $ 619,803 $ 154,227 $ 811,088
Stock issued for cash,
net of $23,650 offering costs .... 215,000 215 -- -- 191,135 -- 191,350
Net income for the three months
ended March 31, 2000 ............. -- -- -- -- -- 155,720 155,720
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 2000 5,535,000 $ 5,535 $ 27,104 $ 4,634 $ 810,938 $ 309,947 $1,158,158
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to the unaudited interim financial statements
F-36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDGRUP CORPORATION
-------------------
(Formerly Medgrup Development Services, Inc.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
--------------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income ..................................................... $ 155,720 $ 88,585
Transactions not requiring cash:
Depreciation ............................................... 26,801 9,726
Loss on disposal of assets ................................. 553 --
Increase to allowance for doubtful accounts ................ -- --
Changes in current assets and current liabilities:
Decrease (Increase) in receivables and prepaid expenses ... 149,792 (163,994)
Increase in accounts payable and accrued liabilities ....... 4,603 28,466
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 337,469 (37,217)
--------- ---------
INVESTING ACTIVITIES
Equipment and leasehold purchases .............................. (125,235) --
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (125,235) --
--------- ---------
FINANCING ACTIVITIES
Sale of common stock ........................................... 215,000 --
Cash paid for offering costs ................................... (23,650) --
Repayments to shareholder ...................................... (5,551) --
Payments on capital leases ..................................... (14,835) (8,987)
Payments on note payable ....................................... (1,436) --
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 169,528 (8,987)
--------- ---------
NET INCREASE IN CASH ............................................... 381,762 (46,204)
Cash, beginning ..................................................... 182,443 81,256
--------- ---------
Cash, ending ........................................................ $ 564,205 $ 35,052
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 3,702 $ 1,910
========= =========
Cash paid for income taxes .......................................... $ -- $ --
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Vehicles purchsed with issuance of promissory note .................. $ 35,550 $ --
========= =========
See accompanying notes to the unaudited interim financial statements
F-37
</TABLE>
<PAGE>
MEDGRUP CORPORATION
-------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note A: Basis of presentation
-----------------------------
Interim Statements
------------------
The interim period financial statements presented herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
interim financial statements should be read in conjunction with the Company's
audited financial statements, notes and accounting policies thereto included in
the Company's Registration Statement on Form SB-2.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results that may be expected for future periods.
In the opinion of management, the unaudited interim financial statements
furnished reflect all adjustments necessary (which all are of a normal recurring
nature) for a fair presentation of the Company's financial condition as of March
31, 2000, and the results of its operations and cash flows for the three months
ended March 31, 2000 and 1999.
Note B: Shareholders' equity
----------------------------
During the three months ended March 31, 2000 the Company sold for $215,000 cash,
215,000 shares of its common stock. Net proceeds to the Company after deducting
$23,650 in costs of the offering were $191,350.
F-38
<PAGE>
MEDGRUP CORPORATION
865,000 SHARES OF COMMON STOCK
Prospective investors may rely on the information contained in this
prospectus. This prospectus isn't an offer to sell to - nor is it seeking an
offer to buy these securities from - any person in any jurisdiction in which it
is illegal to make an offer or solicitation. The information here is correct
only on the date of this prospectus, regardless of the time of the delivery of
this prospectus or any sale of the securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus. Persons who come into possession of this prospectus in
jurisdictions outside the United States must inform themselves and observe any
restrictions on this offering and on the distribution of this prospectus in that
jurisdiction.
Until (insert date), all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
June _____, 2000
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Included in prospectus at Section 9.5 beginning at page 35.
Item 25. Other Expenses of Issuance and Distribution
Description of Expenses Amount
----------------------- ------
SEC filing fee .......................................... $ 400
Legal fees and expenses ................................. 30,000
Accounting fees and expenses ............................ 30,000
Blue Sky filing fees and expenses ....................... 1,500
Printing ................................................ 2,500
Miscellaneous ........................................... 600
--------
Total $ 65,000
========
Item 26. Recent Sales of Unregistered Securities
The Company commenced its capitalization on June 30, 1998 by issuing an
aggregate of 900,000 shares of its common stock (on a post-split basis) to its
officers and directors. Messrs. Scott Thornock and Bruce Capra acquired 630,000
and 270,000 shares, respectively, in a transaction exempt from the registration
requirements of the Securities Act pursuant to the provisions of Section 4(2)
thereof. Each of those individuals was afforded access to information typically
contained in a registration statement, and each had a preexisting relationship
with the Company. Finally, Messrs. Thornock and Capra were able to bear the
financial risks of the investment. In conjunction with this offering, the
Company placed stop transfer instructions with its transfer agent and
certificates representing the shares were embossed with the restrictive legend
required by Rule 144. In conjunction with the merger, Mr. Capra returned 225,000
shares to the Company.
In October, 1998, the Company completed an offering exempt from the
registration requirements of the Securities Act pursuant to the provisions of
Regulation D, Rule 504 thereof and Section 3(b). The Company sold an aggregate
of 180,000 shares of its common stock for total gross proceeds of $90,000. The
offering was made by means of a Private Placement Memorandum dated July 10, 1998
and investors were advised of the absence of any registration under the
Securities Act. The following list sets forth the name and share amounts
acquired by the purchasers in that offering, each of which was a friend or
business associate of officers and directors of the Company:
Name of Number Transaction
Shareholder of Shares Date
----------- --------- ----
Brad Keech 6,000 6/29/98
Roana Thornock 1,000 6/30/98
Peter Garthwaite 4,000 6/30/98
Heidi Wertz-Garthwaite 4,000 6/30/98
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<PAGE>
Name of Number Transaction
Shareholder of Shares Date
----------- --------- ----
Stephene McKay 6,000 6/30/98
Diana Thornock 5,000 6/30/98
Karl White 2,000 6/30/98
Horace Starr 2,000 7/01/98
Michael Bryant 1,000 7/01/98
Ross W. King 4,000 7/01/98
Ed Venerable 12,000 7/01/98
Mark A. Tellinger 4,000 7/01/98
John F. Hyer, Jr. 2,000 7/01/98
Daniel R. Albright 2,000 7/01/98
Richard K. Krause 2,000 7/01/98
Matthew Nicholas 2,000 7/01/98
Michael Krause 3,000 7/01/98
Jim DeLutes 6,000 7/07/98
William Moore 1,500 7/07/98
Kyla B. Moore 1,500 7/07/98
Jeffrey H. Lee 2,000 7/08/98
Jessica Lee 2,000 7/08/98
Rick Neitenbach 12,000 7/16/98
Bradley R. Parker 10,000 7/16/98
Robert E. Nye 10,000 7/16/98
Kirk Eberl 10,000 7/16/98
Dan Nye 10,000 7/16/98
Bruce Capra 5,000 7/17/98
II-2
<PAGE>
Name of Number Transaction
Shareholder of Shares Date
----------- --------- ----
Mary E. Writer 12,000 10/24/98
James Kreutz 12,000 10/21/98
James H. Watson, Jr. 12,000 10/21/98
Velma Walters 12,000 10/21/98
-------
Total 180,000
=======
In April, 1999, the Company conducted a subsequent offering pursuant to the
provisions of Rule 504. The Company sold an aggregate of 100,000 shares of its
Common Stock at an offering price of $.05 per share, or a total of $10,000. This
offering was conducted by means of a subscription agreement executed by each of
the purchasers. Each purchaser acknowledged that the shares were not registered
under the Securities Act. The following individuals, each of whom was a friend
or business associate of officers and directors of the Company, participated in
that offering:
Name of Number Transaction
Shareholder of Shares Date
----------- --------- ----
Bruce A. Capra 15,000 4/05/99
Entrepreneur Investments, LLC 10,000 4/05/99
Michael D. Tanner 10,000 4/05/99
Scott M. Thornock 17,500 4/05/99
C. Edward Venerable 17,500 4/05/99
Velma Walters 10,000 4/05/99
James H. Watson, Jr. 10,000 4/05/99
Mary A. Writer 10,000 4/05/99
-------
Total 100,000
=======
II-3
<PAGE>
In conjunction with the merger of the Company with MedGrup Development
Services, the Company issued an aggregate of 3,785,000 shares of its common
stock on May 12, 1999 in a transaction exempt from the registration requirements
under Section 4(2). The stock was issued in consideration for the surrender of
shares of MedGrup Development Services valued at $284,973, based upon the value
of MDSI at the time of the merger. Mr. and Mrs. Cronin, former officers,
directors and shareholders of MedGrup Development Services, were afforded access
to the information about the Company customarily contained in a registration
statement. Each was able to fend for himself or herself in the transaction.
Further, the Company placed stop-transfer restrictions with its transfer agent
and certificates representing the shares were embossed with a restrictive
legend.
In conjunction with an offering completed in January, 2000, the Company
issued an additional 600,000 shares of its Common Stock pursuant to the
provisions of Regulation D, Rule 506 and Section 4(2) of the 1933 Act. This
offering was conducted by Kashner Davidson Securities, Inc. as placement agent,
who acted on the Company's behalf for purposes of placing its common stock. The
Company paid compensation to the placement agent in the amount of 10% of the
sale price of each share sold in the offering. The Company also paid a
non-accountable expense allowance in the amount of 1% of the gross proceeds of
the offering, and issued 50,000 shares of its common stock valued at $50,000.
The Company also issued a warrant to purchase one share of common stock for each
five shares sold in the offering, each warrant exercisable at $1.10 per share.
Purchasers in the offering, all of whom are selling shareholders described in
this registration statement, represented customers of the placement agent,
friends and business associates of officers and directors of the Company. The
offering was conducted by means of a Private Placement Memorandum dated July 9,
1999 and each purchaser executed a questionnaire and subscription agreement
demonstrating his status as an accredited investor. Stop transfer instructions
were issued to the Company's transfer agent in connection with issuance of the
certificates for that stock, each of which bore the restrictive legend required
by Rule 144.
In conjunction with the issuance of the common stock and warrant to the
placement agent described above, the Company relied on the exemption provided by
Section 4(2) of the Securities Act. The placement agent was afforded access to
the type of information customarily contained in a registration statement.
Furthermore, the placement agent was able to fend for itself in the transaction.
Finally, certificates representing the common stock and warrants were embossed
with a restrictive legend and stop transfer instructions were issued to the
Company's transfer agent.
In May, 1999, the Company issued an aggregate of 145,000 shares of its
common stock to three individuals in conversion of notes payable by the Company.
Principal and interest in the amount of $87,000 were converted at a price of
$.60 per share. The Company relied on the exemption provided by Section 4(2) in
issuing these shares. By virtue of their relationship with the Company, each
note holder was afforded access to information customarily contained in a
registration statement, and each was able to fend for himself in the
transaction. Finally, certificates representing the common stock were embossed
with a restrictive legend and stop transfer instructions were issued to the
Company's transfer agent.
Finally, several times during the 12 months succeeding the merger with
MedGrup Development Services, the Company has issued options to acquire its
common stock to employees and consultants of the Company. Such options were
issued under the 1999 Incentive Stock Option Plan maintained by the Company. As
of May 31, 2000, 1,391,793 options are outstanding with 314,293 of those options
vested. Options to acquire 6,538 shares have been exercised as of the date of
this registration statement.
II-4
<PAGE>
Item 27. Exhibits
1 Not applicable.
2 Articles of Merger, MedGrup Corporation, as the survivor and MedGrup
Development Services, Inc., as filed with the Secretary of State of
the State of Colorado on May 12, 1999.
3.1 Articles of Incorporation of the Company as filed on June 26, 1998
with the Secretary of State of the State of Colorado.
3.2 Articles of Amendment to the Articles of Incorporation, as filed
with the Secretary of State of the State of Colorado May 12, 1999.
3.3 Amended and Restated Bylaws
4 Form of Certificate for Common Stock
5 Opinion re: legality of securities - Included with Exhibit 23.2
6 Not applicable.
8 Not applicable.
9 Not applicable.
10.1 Form of Agreement for Coding Services
10.2 Form of Capital Lease Agreement between the Company and Wells Fargo
Equipment Finance, Inc. dated June 2, 1999.
10.3 Commercial Property Lease Agreement between the Company and Gary
Bader dated March 15, 2000.
10.4 Form of Warrant Agreement between the Company and Kashner Davidson
Securities Corporation.
10.5 Employment Agreement between the Company and William D. Cronin,
dated January 1, 2000.
10.6 Employment Agreement between the Company and Terry J. Holmes, dated
February 14, 2000.
10.7 Employment Agreement between the Company and Margaret M. Cronin,
dated January 1, 2000.
II-5
<PAGE>
10.8 Employment Agreement between the Company and Gary B. Mendenhall,
dated January 1, 2000.
10.9 Incentive Stock Option Plan with Form of Option Agreement.
10.10 Option Agreement between the Company and Gary Mendenhall, dated May
26, 1999.
10.11 Option Agreement between the Company and Terry Holmes, dated
February 14, 2000.
10.12 Software Limited License Agreement between the Company and QuadraMed
Corporation dated December 13, 1999.
11 Not applicable.
12 Not applicable.
15 Not applicable.
* 16 Letter to the Company from A. Liparulo, CPA dated June 9, 2000
21 Not applicable.
* 23.1 Consent of Cordovano & Harvey, P.C.
23.2 Consent of Overton, Babiarz & Associates, P.C.
24 Power of Attorney (included in the signature page to this
registration statement)
25 Not applicable.
26 Not applicable.
* 27 Financial Data Schedule.
99 Not applicable.
-------------------------------
* Filed with the Amendment to Registration Statement
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-6
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than insurance payments and the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the act and will
be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorize this amendment to
registration statement to be signed on its behalf by the undersigned, in the
County of El Paso, State of Colorado on this 26 day of June, 2000.
MEDGRUP CORPORATION
By:/s/ William D. Cronin
------------------------
William D. Cronin, Chairman of the Board
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendement to registration statement was signed by the following persons on the
26 day of June, 2000 in the capacities stated.
/s/ William D. Cronin Chairman of the Board, Chief Executive Officer
---------------------
William D. Cronin
/s/ Terry J. Holmes President, Director
-------------------
Terry J. Holmes
/s/ Margaret M. Cronin Vice President - Finance (Principal Financial
---------------------- Officer), Treasurer, Secretary and Director
Margaret M. Cronin
/s/ Gary B. Mendenhall Vice President - Operations, Chief Operating
---------------------- Officer and Director
Gary B. Mendenhall
/s/ James S. Wantman Controller
--------------------
James S. Wantman
II-8
