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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
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U.S. MEDICAL GROUP, INC.
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(Name of Small Business Issuer in Its Charter)
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NEVADA IRS NO. 88-0320389
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification)
organization)
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1405 SOUTH ORANGE, ORLANDO, FLORIDA 32806
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(Address of principal executive offices)
407-849-2288
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(Company's telephone number including area code)
Securities to be registered under Section 12(b) of the Act:
Title of each class to be so registered: Name of each exchange on which each
class is to be registered
NONE NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK ($0.001 PAR VALUE)
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(Title of class)
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TABLE OF CONTENTS
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PAGE
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PART I....................................................................................................1
Item 1. Description of Business........................................................1
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations..................................12
Item 3. Description of Property........................................................19
Item 4. Security Ownership of Certain Beneficial Owners
and Management........................................................19
Item 5. Directors, Executive Officers, Promoters and
Control Persons.......................................................20
Item 6. Executive Compensation.........................................................21
Item 7. Certain Relationships and Related Transactions.................................22
Item 8. Description of Securities......................................................23
PART II...................................................................................................28
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters..................................28
Item 2. Legal Proceedings..............................................................29
Item 3. Changes in and Disagreements with Accountants..................................29
Item 4. Recent Sales of Unregistered Securities........................................29
Item 5. Indemnification of Directors and Officers......................................30
PART F/S - FINANCIAL STATEMENTS...........................................................................F-1
PART III - EXHIBITS......................................................................................
SIGNATURES................................................................................................
Index to Exhibits.........................................................................................
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
U.S. Medical Group, Inc. (the "Company"), through its wholly-owned
subsidiary, U.S. Medical Group (Florida), Inc. ("USMGF"), provides surgical
operating rooms and required support staff (such as nurses and technicians) by
means of a mobile unit on site at correctional facilities (the "Business"). The
Company currently owns, manages and operates a free-standing, totally
self-contained, mobile surgical facility that serves the Florida prison system
in Northern Florida. A similar contract was awarded to the Company by the
Department of Corrections of the State of North Carolina which commenced October
15, 1999, for which the Company purchased a second mobile unit. The Company uses
mobile ambulatory surgical centers, built into tractor-trailer vehicles with
expandable side panels, to deliver cost-effective surgical services to
correctional facilities. While the military has used similar services to perform
surgical procedures during periods of war and other conflicts, the Company
believes that USMGF is the first to provide a mobile surgery unit on site at a
correctional facility for ambulatory surgical procedures. The service is
designed to reduce the costs of the correctional authority (by reducing or
eliminating the need for hospitals) and to enhance security as well as cost by
reducing or eliminating the need to transport inmates to off-site hospitals and
guard them during hospital stays.
Until April 1999, the Business was conducted by and under the name of
American Mobile Surgical Services, Inc., a Florida corporation ("AMSSI"). In
April 1999, pursuant to the terms of an Agreement and Plan of Merger entered
into as of March 31, 1999 by and among AMSSI, USMGF and the Company (the "Merger
Agreement), AMSSI became a subsidiary of U.S. Medical Group, Inc. when USMGF
merged (the "Merger") with AMSSI with AMSSI being the surviving corporation.
Following the merger AMSSI changed its name to USMGF. In connection with the
Merger, the Company issued to the AMSSI stockholders a total of 10,500,000
shares of the Company's common stock, $.001 par value (the "Common Stock"). In
addition, the AMSSI management assumed the management of the Company. See "Part
I. Item 5. Directors, Executive Officers, Promoters and Control Persons." The
reason for the Merger was primarily AMSSI's need to gain broader access to
additional capital markers in order to continue implementing and expanding its
business model.
In connection with the Merger, the Company issued to AMSSI stockholders
a total of 10,500,000 shares of the Company's common stock, $.001 par value (the
"Common Stock"), of which 9,450,000 shares were issued to AMSSI management. At
the time of the merger, U.S. Medical Group, Inc. was inactive and had no
material assets. AMSSI's principal asset was one (1) mobile surgical unit and
installed specialized medical equipment. Prior to the merger in April 1999: (i)
none of the AMSSI shareholders, officers or directors had any equity interest in
the Company; (ii) none of the AMSSI shareholders, officers, or directors were
officers or directors of the Company; (iii) none of the Company's shareholders,
officers or directors had any interest in AMSSI; and (iv) none of the Company's
shareholders, officers, or directors were officers or directors of AMSSI.
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The Company was incorporated under the laws of the State of Nevada
under the name of U.S. Medical Group, Inc. on April 25, 1994 as a wholly-owned
subsidiary of Best Equities Limited (the "Predecessor"). The Predecessor was
incorporated on April 4, 1985 under the laws of the Province of British
Columbia, Canada. In 1987, the Predecessor issued a total of 1,875,373 shares of
its common stock in a private placement to sophisticated investors in the
Province of British Columbia, Canada. On May 13, 1994, the shareholders of the
Predecessor exchanged all of the outstanding shares of common stock of the
Predecessor on a one-for-one basis for shares of common stock in the Company.
From the time of the Predecessor's incorporation until the Merger, neither the
Predecessor nor the Company engaged in any significant business activity other
than the search for acquisition opportunities, and in the three fiscal years
prior to the Merger, the Company did not have any significant assets or
liabilities.
In June 1999, USMGF purchased a Mobile Hyperbaric Chamber to be leased
to third parties. Hyperbaric oxygen provided by this unit involves a mode of
therapy in which the patient breathes 100% oxygen at pressures greater than
normal atmospheric (sea level) pressure.
The Company's business currently depends solely on its contracts with
the States of Florida and North Carolina and minimal revenues currently
generated by the Company's Mobile Hyperbaric Chamber.
AMSSI purchased its first mobile surgery unit in July 1999 for
$1,099,998 and spent an additional $425,782 on installed specialized equipment.
The source of funds for the purchase of the unit and equipment was the proceeds
from $1,655,000 of loans from a commercial bank. The unit was purchased from
Mobile Surgical International Corporation of Vermont. The unit is fully equipped
and comparable to any ambulatory surgical center. Pursuant to the Florida
Contract (as defined below in"-Markets"), the State contracts separately with
surgeons and anesthesiologists and USMGF supplies operating room facilities and
required support staff.
Major capital equipment in the unit includes:
-Anesthesia Machine
-Video Tower
-Monitor
-Camera
-Printer
-Light Source
-Printer
-VCR
-Shaver Motor
-Electric Operating Room Table
-Electrocautery Machine/Smoke Evacuator
-Full Size C-Arm w/Monitor
-Power Source for Electric Saw/Drill
-Head Light and Xerox Light Source
Also included is instrumentation to accommodate all specialties of
surgeries. The unit operates five days a week, 8 hours a day, with a permanent
staff of at least four. The Company
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purchased its second unit for use in North Carolina (with similar equipment) by
obtaining a loan in the amount of $2,200,000 with annual interest equal to the
LIBOR Market Index Rate plus 1.5% to be repaid over 4 years. The second unit
currently operates approximately 3 days a week, 10 hours a day with a permanent
staff of at least 4 persons. Each unit is driven by a driver who is an
independent contractor working on an as-needed basis. At this time, each unit is
located at one site only pursuant to the request of the states' Department of
Corrections, however, patients from other sites are transported to the Company's
units.
Typically, state departments of health or similar agencies require
medical facilities to be inspected and licensed as having met the minimum
established standards for that state. In Florida, where no standards were
previously established, USMGF was successful in lobbying for legislation which
was enacted to include mobile surgery units under contract with the Florida
Department of Corrections under the applicable State rules which govern
hospitals and free-standing surgery centers.
In North Carolina the Company's Mobile Surgery Unit is overseen by the
North Carolina Department of Corrections Hospital Administrator. The North
Carolina facility located in Raleigh, has a hospital on site. The
Company's Mobile Surgery Unit is an extension of the Central Prison hospital.
PRODUCTS AND SERVICES
Based upon the Company's experience to date, the following surgical
procedures can be carried out in a USMGF mobile unit:
- ORTHOPEDIC
- Knee Arthroscopy
- Knee Arthroscopy with Anterior Cruciate Ligament Repair
- Shoulder Arthroscopy
- Shoulder Arthroscopy with Open Repair
- Anterion Medialization
- Release of Trigger Finger
- Carpal Tunnel Release
- Open Reduction of Internal Fixation
- Dupuytren's Release
- Cubital Tunnel Release
- Carpal Matacarpal Arthrosplasty
- Excision of Mass
- Ganglion Cyst Removal
- Incision and Drainage of Extremities
- Tendon Transfer
- Achilles Tendon Repair
- PODIATRY
- Bunionectomy
- Removal of Toenail
- Plantar Fasiotomy
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- Excision of Hammertoe
- Excision of Neuroma
- Cauterization of Plantar Warts
- PAIN MANAGEMENT
- Epidural Block
- Epidural Block with Image
- Trigger Point Injection
- GENERAL SURGERY
- Hernia Repair (Inquinal, Ventral & Umbilical)
- Breast Biopsy
- Laparoscopic Cholecystectomy
- Mastecomy
- Upper Gastrointestinal Endoscopy
- Lower Gastrointestinal Endoscopy
- Hemorrhoidectomy
- Pilonidal Cystectomy
- Fissurectomy
- Excision of Tumors
- UROLOGY
- Cystoscopies
- Transurethral Resections
- Cauterization of Condyloma
- Prostate Biopsies
- Urethral Dilations
- Circumcisions
- Orchiectomy
- Hydrocelectomy
- PLASTIC SURGERY
- EAR NOSE AND THROAT
- Tonsillectomies
- Adenoidectomy
- Excision of Nasal Polyps
- Repair of Deviated Septum
- Correction of Nasal Deformities
- Caldwell-Luc Procedures
- Myringoplasty
- Tympanoplasties
- Stapecdectomy
- Myringotomy
- Mastoidectomy
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USMGF's historical experience from April 1997 to the present reflects
the following specialty break-down and case mix:
BREAKDOWN BY SPECIALTY
Podiatry 1
Ortho 17
Hand 5
Urology 19
ENT 8
General Surgery 50
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100%
CASE MIX
Miscellaneous 6
Wound Repair 3
Other Ortho 4
Hand 6
Hemorrhoidectomy 3
Ram Lesion 13
Cysto 16
Open Reduction 11
Knee Arthroscopy 12
Hernia Repair 26
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100%
In Florida, there are a total of 66,000 inmates incarcerated in
approximately 65 institutions managed in 5 regions. One third of the
institutions and approximately 35,000 inmates are in the North Florida area. The
North Florida Reception Center ("NFRC") operates a 150 bed facility caring for
medical, surgical and mental health patients. It is in the NFRC that USMGF has
the mobile surgical unit in operation. Commencing in 1999, the Florida
Department of Corrections began to transport elective surgical cases from the
South and Central districts to the NFRC so as to utilize the USMGF facility.
USMGF's monthly caseload is anticipated to increase to an average for the year
2000 of 100 cases per month as compared to 75 in 1999 due to an increase in the
types of services that are provided such as endoscopy and opthamology. Also, the
FDOC has indicated to the Company that it plans to send more patients to the
Company's mobile surgery unit from outlying facilities. The Company's agreement
with the State of Florida ends on September 30, 2000. USMGF requested in January
2000 that its contract be renewed for 3 years because management determined that
it would be in the best interest of USMGF to obtain a 3-year contract, rather
than 2 separate 1-year contracts in order to provide the Company with greater
stability of income. The State of Florida has an option to continue the service
for two additional one-year periods subject to current terms and renewal price
provisions included in the agreement.
In North Carolina, there are a total of 42,000 inmates incarcerated in
institutions throughout the state. Some of the inmates sentenced to a jail term
are also housed at North Carolina's Central Prison. Central Prison in Raleigh is
where USMGF has its Mobile Surgery Unit in service. The projected cases are
approximately 53 per month for the 1999/2000-contract year. The contract
encompasses all specialties of surgery. The surgeons and anesthesiologists are
contracted by Central Prison.
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In June 1999, USMGF purchased a Mobile Hyperbaric Chamber for lease to
a third party. The purchase price for the unit was $68,900 which was financed
with the proceeds from a bank loan. Approximately $87,500 was spent in upgrades
and repairs, bringing the Company's total investment in the Mobile Hyperbaric
Chamber to $152,000. In December 1999, the Company leased the unit to a medical
services company in Alabama. The unit was put into service in Wisconsin in late
January 2000. The unit is being leased for $3,000 per month and 25% of net
profits earned from use of the Unit.
The Mobile Hyperbaric Unit has a multi-placed chamber that can
accommodate up to 6 patients at a time. In contrast with attempts to force
oxygen into tissues by topical applications at levels only slightly higher than
atmospheric pressure, hyperbaric oxygen therapy involves the systemic delivery
of oxygen at levels 2-3 times greater than atmospheric pressure.
Oxygen is essential for maintaining cellular integrity, function, and
repair when tissues are injured. Oxygen not only plays an important role in
energy metabolism, but also is very important in polymorphonuclear cell
function, neovascularization, fibroblast proliferation, and collagen deposition.
Indications for Hyperbaric Referral
Standard of Care
Acute Severe Carbon Monoxide Poisoning
Cerebral Arterial Gas Embolism
Clostridial Myonecrosis
Decompression Sickness
Osteoradionecrosis
Adjunctive Therapy
Crush Injury; Compartment Syndrome
Exceptional Blood Loss Anemia
Necrotizing Soft Tissue Infections
Radiation Tissue Injury
Chronic Osteomyelitis
Thermal Burns
Treatment Protocol Oxygen, when breathed under increased atmospheric
pressure, is a potent drug. Besides the beneficial effects discussed above,
hyperbaric oxygen can produce noticeable toxic effects if administered
indiscriminately. Safe time limits have been established for hyperbaric oxygen
exposure, and these profiles form the basis for today's treatment protocols. It
is only quite recently that disease-specific hyperbaric oxygen dosing has been
introduced.
Emergency cases, such as carbon monoxide poisoning or cerebral arterial
gas embolism may only require one or two treatments. In those cases for which
angiogenesis is the primary goal, as many as 20 to 40 treatments may be
necessary. The precise number of treatments will often depend upon the clinical
response of each patient.
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With exception of decompression sickness and cerebral arterial gas
embolism, periods of exposure last approximately two hours. Treatments may be
given once, or twice or occasionally three times daily, and can be provided in
both, inpatient or outpatient settings.
A technician and physician trained in hyperbarics who are not employees
and are not otherwise engaged with the Company are in attendance at all times
when a patient is in the chamber. The Company has yet to generate any material
revenue from its leasing of its Mobile Hyperbaric Chamber.
MARKETS
CORRECTIONAL HEALTHCARE
In 1996, total annual inmate healthcare spending in the United States
was estimated to be between $3-$5 billion. (Source: Bureau of Justice
Statistics, State Prison expenditures for inmate medical care, fiscal year
1996). Approximately 30% of such spending is currently privatized and the
Company believes this percentage will continue to increase due to growing
acceptance and success of privatization, pressure on government to contain
taxes, tougher sentencing guidelines and the managed care trend in healthcare
delivery generally.
Typically, state departments of correction recruit in-house staff and
contract with local hospitals, physicians and dentists that provide medical and
dental services for inmates. Additional costs are frequently incurred by
correctional facilities as a result of correctional officers accompanying
inmates to and from hospital settings. For example, in Florida and in North
Carolina two officers generally have to accompany an inmate when he or she is
outside the correctional facility.
Correctional authorities are increasingly contracting with managed care
providers for services associated with providing health and dental care. One
such provider, Correctional Medical Services Inc. of St. Louis, Missouri,
("CMS"), a leading provider of health-care services to prisons and jails in the
U.S., claims to currently provide healthcare to approximately 269,000 inmates at
332 correctional facilities in 28 states. CMS is a subsidiary of Spectrum
Healthcare Services Company. CMS claims to provide healthcare coverage for one
of every seven inmates in the United States. CMS promotional literature states
that CMS correctional patients requiring surgery are transported to off-site
hospital facilities accompanied by correctional officers in correctional
vehicles. (Source: Internet Website of CMS.)
The Company believes that more state and local governments are
contracting with private inmate healthcare providers. There are approximately
1.8 million inmates currently incarcerated in the United States and this number
is projected to grow 8% per annum for the next several years. Approximately 60%
of inmates are housed in state prisons, 30% in local jails, and the remainder
are in federal prisons or under jail supervision. (Source: Department of Justice
and Bureau of Labor Statistics.)
In 1995, two percent of all state and federal inmates were held in 110
facilities operated by private contractors. (Source: U.S. Bureau of Justice.)
This included 81 privately-run community based facilities and 29 confinement
institutions. By 1998, this total had increased to
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170 facilities encompassing a capacity of 123,206 inmates. (Source: Private
Prisons Research Site of the University of Connecticut.)
PRISONS AND JAILS
Prisons generally hold inmates for terms of one year or longer
following formal sentencing as a result of felony offenses. Jails are facilities
that are more local in nature that hold persons for shorter period of times
including pre-trial and pre-sentencing periods.
At the end of 1995 (the last formal census data available), there were
a total of 1,375 state correctional facilities and 125 federal facilities. The
census excluded the approximately 3,300 locally operated jails and county or
municipal detention centers. State and federal facilities are located as
follows:
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State Federal
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North East 204 20
Mid-West 275 18
South 629 62
West 267 25
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Totals 1,375 125
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At year-end 1996, 5.5 million people were on probation, in jail or
prison, or on parole, approximately 2.8 percent of all U.S. adult residents. At
year-end 1997, state prisons on average were operating at between 15% and 24%
above capacity, while Federal prisons were operating at 19% above capacity. At
mid-year 1998, state and federal prison authorities had under their jurisdiction
1,277,866 inmates of which 1,210,034 were physically in their custody. Also at
mid-year 1998, local jails held or supervised 664,847 persons awaiting trial or
serving their sentence. (Source: Bureau of Justice Statistics, U.S. Department
of Justice.)
The Company believes that one of the primary reasons that inmate
population is growing is that more inmates are being required to serve out
greater percentages of their sentenced terms than what they served in the past.
Included in the overall totals are the following states with inmate
populations exceeding 10,000 persons:
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STATE NUMBER OF INMATES NUMBER OF FACILITIES
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Alabama 22,501 12
Arizona 24,879 9
California 158,742 24
Connecticut 17,437 20
Florida 66,280 38
Georgia 38,194 32
Illinois 42,140 20
Indiana 18,552 15
Kentucky 15,107 13
Louisiana 30,907 11
Maryland 22,566 12
Massachusetts 11,867 11
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Michigan 44,501 47
Missouri 25,118 11
New Jersey 29,724 11
New York 70,723 46
North Carolina 32,407 89
Ohio 49,289 19
Oklahoma 20,994 12
Pennsylvania 35,644 19
South Carolina 21,530 29
Tennessee 17,656 5
Texas 143,299 32
Virginia 28,681 17
Wisconsin 17,316 21
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Inmate population numbers are from a May 1998 Corrections Compendium
publication updated to reflect Bureau of Justice statistical data from March
1999.
STATE CORRECTIONAL ORGANIZATIONS
The Company is currently operating only in Florida, North Carolina and
Wisconsin. USMGF's current contract (the "Florida Contract") with the Florida
Department of Corrections (the "FDOC") to provide Mobile surgical services
became effective on November 12, 1997 and will terminate on September 30, 2000.
The Florida Contract may be renewed, at FDOC's option, for two additional
one-year periods after the initial period upon the same terms and at the renewal
prices listed in the Florida Contract. The Company, however, has requested that
its contract be renewed for a three year term. See "-Products and Services."
The Florida Contract provides that USMGF will provide on-site surgical
services for FDOC pursuant to applicable State and regulatory requirements.
Compensation by the FDOC is provided on a fee for service basis. A fee schedule
has been provided with the Contract to designate the appropriate fee for each
procedure. An invoice is submitted to the FDOC on a weekly basis by USMGF. Any
procedure performed after the initial fifty (50) in each month is billed at a
10% discount.
USMGF's contract with the North Carolina Department of Corrections
("NDOC") is for one year and may be renewed by the NDOC at its option for four
one-year periods. The contract became effective in North Carolina on October 15,
1999. On May 6, 1999, the North Carolina Department of Corrections ("NDOC")
awarded USMGF a contract to provide mobile surgical services at Central Prison
in Raleigh. The contract began on October 15, 1999 and is effective through
October 14, 2000. The contract may be renewed by the NCDOC for four (4) one (1)
year periods. Compensation of $1,512,720 per year is paid in twelve payments of
$126,000. USMGF is required to provide an invoice by the 15th of each month for
the services performed in the prior month.
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Under the Florida and North Carolina contracts, USMGF provides: a
mobile surgical unit including all required equipment, instrumentation, and
supplies, and the staff as designated in the Florida and North Carolina
Contracts (including one Operating Room Coordinator/Circulator, one Surgical
Technician, one Recovery Room Registered Nurse, and one patient care
technician). The respective states provide a Registered Nurse in the pre-op area
who has knowledge of the policies and procedures of the Department of
Corrections.
The State of Florida's performance and obligation to pay under the
Florida Contract is contingent upon an annual appropriation by the Florida
Legislature. The Company fee schedule is substantially below customary hospital
charges thereby generating significant savings for the State of Florida in
facility fees, security related costs, and transportation costs. The Florida
Contract may be terminated by either party upon no less than 30 calendar days
notice, without cause, unless a lesser time is mutually agreed upon by both
parties. In the event funds to finance the Florida Contract become unavailable,
or in the event of a breach of contract by USMGF, the FDOC may terminate the
Florida Contract upon no less than 24 hours written notice.
On May 6, 1999, NDOC notified USMGF that it had been awarded the
contract regarding mobile operating room services to be provided by USMGF. The
contract was issued for the base period commencing October 15, 1999 continuing
through June 30, 2000. Pursuant to the agreement between USMGF and NDOC, USMGF
provides NDOC with a "State of the Art" fully mobile, operating room truck with
the specifications set forth in the agreement (the "NDOC Contract"). NDOC is
entitled to extend the NDOC Contract for an additional period of four years in
one-year increments.
In the event NDOC determines that USMGF is not satisfactorily
performing the NDOC contract, NDOC may, by giving 30 days written notice, demand
satisfactory performance. If USMGF fails to perform within 30 days of receiving
that notice, NDOC may terminate all or part of the NDOC Contract. NDOC is also
entitled to terminate the NDOC Contract at any time, with or without cause, by
giving 30 days written notice to USMGF. In addition, the NDOC Contract will be
automatically terminated if funds cease to be available.
The Company has agreed to pay a third party 5% of net profits received
by the Company from its operations in North Carolina as a fee for assisting
USMGF to obtain the North Carolina contract. This agreement is effective for the
length of the initial contract as well as any renewed contract thereafter. There
are no affiliations between and among the entities and management of the third
party and USMGF. The third party is an independent consultant hired by the
Company.
The Company has learned that the California Department of Corrections
is considering the solicitation of bids for mobile surgical services similar to
those the Company currently provides. To provide a comparable level of service
under a California contract, as is carried out in Florida and North Carolina,
the Company would require three additional mobile units. The Company plans to
bid on the California contract when the California Department of Corrections
issues a Request For Proposals.
Contracts with governmental agencies are generally obtained through a
competitive bidding process, which is governed by applicable state and local
statutes and ordinances. Although practices and procedures vary, typically a
formal request for proposal ("RFP") is issued stating the scope of work to be
performed, length of contract, performance bonding
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requirements, minimum qualifications of bidders, selection criteria and the
format to be followed in the bid or proposal. Usually, a committee appointed by
the governmental agency reviews bids and makes an award determination. The
committee may award the contract to a particular bidder or decide not to award
the contract to the private sector. The award of a contract may be subject to
formal or informal protest, through a governmental appeals process, by
unsuccessful bidders.
A successful bidder must often agree to comply with numerous additional
requirements regarding record-keeping and accounting, non-discrimination in the
hiring of personnel, safety, safeguarding classified information, management and
other matters. Upon a violation of the terms of an applicable contractual or
statutory provision, a contractor may be debarred or suspended from obtaining
future contracts for specified periods of time in the applicable location.
The Company's operations are subject to the same laws, regulations and
rules regarding inspections and licensing that govern hospitals and free
standing surgical centers. The Company is also subject to the same laws,
regulations and rules regarding medical waste disposal of sharp material and
sterilization practices.
COMPETITION
The Company is aware of three other companies that have attempted to
enter the corrections mobile surgical marketplace.
- Vantage Surgical, Incorporated is a for-profit business
offering information regarding out patient, acute mobile
medical/surgical facilities with headquarters located in
Hanford, California. The Company understands that Vantage was
previously licensed to operate in California as a mobile
surgical unit but such license has expired. Vantage used a
vehicle similar to that operated by USMGF. Vantage literature
states that they are "the nation's first fully licensed mobile
ambulatory surgical center." To the Company's knowledge, there
are no active and direct competitors in the corrections mobile
surgical marketplace. Vantage has not as yet contracted for
provision of any mobile services with any correctional
institution. In April 1998, Vantage announced that Mobile
Surgical Unit, Incorporated of San Diego, had merged with
them. USMGF understands that Vantage does not currently have
any valid licenses in place.
- Mobile Surgical Unit, Incorporated is located in San Diego,
California, and merged with Vantage Surgical in 1998. To the
Company's knowledge, this organization does not advertise or
promote its business concept.
- Mobile Medical Surgical Services, Inc. is the California
subsidiary of Mobile Medical International, Inc., the provider
of the original mobile surgical unit that USMGF purchased.
Their units are manufactured by U.S. Trailer, Inc. in New
Hudson, Michigan. USMGF maintains an ongoing positive
relationship with MMSS, even though it is attempting to become
a competitor.
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STRATEGY
The Company's management believes that it has established a cost
effective and proven concept for the utilization of its equipment and services
in Florida and North Carolina and intends to expand its operations to other
states, to other target and emerging growth markets and to add to its services
capabilities by searching out new niche markets. The Company plans to expand its
services capabilities, beyond mobile surgery and mobile hyperbarics, into
additional markets which have potential for mobility, such as dentistry,
mammography endoscopy and opthamology. It is also seeking other markets in which
the Company can utilize its expertise, such as hospital construction.
The Company's initial product offering, the mobile, fully equipped
surgical center, has proven its cost saving capability with the Florida State
Department of Corrections. The use of mobile surgical units commenced in October
1999 in North Carolina and is planned for introduction to other state
authorities and to managed healthcare providers that have correctional facility
contracts. USMGF is seeking to expand its products and services to include the
provision of full dental services including oral surgeries not requiring
anesthesia.
The Company plans to establish local offices with regional managers for
states in which new operations commence.
The Company's pricing policy has been on the basis of a discount from
traditional healthcare costing formulas such as Medicare. Additional discounts
may be given where monthly case loads exceed certain pre-determined levels.
Services utilizing the proposed mobile dental unit would be priced on a similar
discount basis to standard rate structures.
The Company's primary marketing focus involves identifying and
developing business opportunities with correctional facilities that are not
sufficiently close to adequate surgical centers and that have infirmaries large
enough to handle post-op patients. USMGF has actively commenced a program of
correctional industry journal advertising and attendance at all key industry
trade shows.
EMPLOYEES
The Company presently has 12 full time employees and 2 part time
employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION:
This document includes forward-looking statements. All statements other
than statements of historical fact included in this document, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" regarding the Company's strategies, plans, objectives, expectations,
and future operating results are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Actual results could differ
materially
12
<PAGE>
based upon a number of factors including, but not limited to, the state of the
economy, competition, unanticipated business opportunities, availability of
financing, market acceptance, government regulation, dependence on key
personnel, limited public market and liquidity, shares eligible for future sale,
continuation and renewal of the Florida and North Carolina contracts and other
risks that may apply to the Company.
The following is a discussion of the financial condition and results of
operations of the Company as of the date of this Registration Statement. This
discussion and analysis should be read in conjunction with the accompanying
audited Consolidated Financial Statements of the Company including the Notes
thereto which are included elsewhere in this Form 10-SB.
GENERAL
The Company provides mobile surgical operating rooms and required
support staff (such as nurses and technicians) by means of a mobile surgical
unit on site at correctional facilities in Florida and North Carolina.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 1998
REVENUE
For the year ended December 31, 1999, revenues from continuing
operations, which are comprised exclusively of patient fees, was $2,041,034.
Total revenues from continuing operations increased by $386,016, or 23.3%, from
$1,655,018 for the year ended December 31, 1998. The primary reason for the
increase was the establishment of the Company's second mobile surgical unit in
North Carolina. The unit began operating in September 1999 and had revenues of
$394,645, or 78.9% of the increase in revenues for 1999. The Company reported
net income from continuing operations before income taxes of $616,134 in 1999
compared to net income of $705,915 in 1998. Until April 1999, AMSSI elected to
be taxed under provisions of Subchapter S of the Internal Revenue Code. As a
result, AMSSI's earnings in 1998 and through April 1999 were taxed for federal
income tax purposes directly to the shareholders of AMSSI. Under those
provisions, AMSSI did not pay federal and state corporate income taxes on its
taxable income. In April, 1999, AMSSI ceased operating as an S Corporation and
became subject to federal and state income taxes. As a result, USMGF's net
income after taxes for the year ended December 31, 1999 was $233,475.
COSTS AND EXPENSES
The Company's expenses from operations for the year ended December 31,
1999 increased $475,797, or 50.1% to $1,424,900 from $949,103 during the same
period in 1998. Selling, general and administrative expenses increased $472,385,
or 68.5% to $1,161,335 in 1999 from $688,950 in 1998. The increase is due to the
Company employing 3 additional employees during 1999 as compared to
13
<PAGE>
1998 and establishing a new mobile surgical center in North Carolina during the
last six months of 1999. The start-up costs incurred in connection with
establishing the new unit were as follows:
<TABLE>
<S> <C>
- Personnel.........................................$50,672
- Medical supplies and equipment.................... 49,278
- Meeting and convention............................ 14,772
- Professional fees................................. 6,800
</TABLE>
While the start-up costs and expenses of opening the Company's mobile
medical facility have decreased the Company's working capital in 1999, the
Company's management does not believe this trend will have a material impact on
the Company's short-term or long-term liquidity. Management expects to fund this
decrease in liquidity through the proceeds of loans from commercial banks,
significant shareholders, and internally generated funds. Management believes
revenues and income from continuing operations will not be materially impacted
by the start-up costs of opening the second mobile medical facility in North
Carolina.
As the Company continues to expand, the Company will incur additional
costs for personnel. In order for the Company to attract and retain quality
personnel, the Company anticipates it will continue to grant options to current
and future employees to purchase the Company's common stock. The Company intends
to grant options what will not have a material adverse impact on the Company's
future results of earnings.
Depreciation and amortization expense for 1999 was $182,003, an
increase of $20,624 from $161,379 in 1998. The Company began operating its North
Carolina surgical facility during the last six months of 1999, and accordingly,
began depreciating the assets acquired for the facility.
Interest expense for the year ended December 31, 1999 was $81,562, an
decrease of $17,212, or 17.4% from $98,774 in 1998. The decrease in interest
expense is due to the Company reducing its bank debts during 1999. While the
Company incurred additional bank debt of $2,190,000 to fund the acquisition of
the new surgical unit in North Carolina, the new financing was not in place
until the last quarter of 1999. As a result, the interest expense in 1999
decreased from the previous year.
The Company's statement of operations for the years ended December 31,
1998 reflects no provision for income taxes. As an S Corporation, the Company's
14
<PAGE>
earnings were taxed, with certain exceptions, for federal income tax purposes
directly to the Company's shareholders. The Company terminated its S Corporation
tax status in April 1999.
LIQUIDITY AND CAPITAL RESOURCES
15
<PAGE>
As of December 31, 1999, the Company had a working capital deficit of
$425,543 compared to a deficit of $380,797 at December 31, 1998, an increase in
the deficit of $44,746. The decrease in working capital was substantially due to
the Company's dependence on short term debt and the current maturities of
long-term debt of $801,602 which has historically been funded from the Company's
cash flow from operations. In addition, the Company experienced an increase in
accounts payable of $89,258 and an increase in current and deferred income taxes
payable of $81,406.
The increase in accounts payable is due to the Company opening its
second mobile medical facility in Raleigh, North Carolina in September, 1999 and
the increase in income taxes is a result of the Company terminating its S
Corporation status in April 1999.
While the Company has raised capital to meet its current and projected
working capital and equipment financing needs, additional financing will be
required in order to acquire additional surgical facilities. The Company is
seeking financing in the form of equity and debt in order to provide for these
expansions and for working capital. There are no assurances the Company will be
successful in raising the funds required.
The Company has borrowed funds from significant shareholders of the
Company in the past to satisfy certain obligations. In addition, all of the
Company's bank debt is guaranteed by Company officers and significant
shareholders.
The Company generated cash flow from operations of $611,725 for the
year ended December 31, 1999 and $776,834 for the year ended December 31, 1998.
Cash flow from operating activities for the year ended December 31, 1999 is
primarily attributable to the Company's net income from operations of $233,475,
adjusted for depreciation of $182,003, deferred taxes of $313,362 and common
stock issued for services of $57,500. Cash flow from operating activities for
the year ended December 31, 1998 is primarily attributable to the Company's net
income from operations of $705,915, adjusted for depreciation of $161,379.
Cash flows used in investing activities was $2,121,403 during the year
ended December 31, 1999 and $49,006 for the year ended December 31, 1998. During
1999, the Company invested $1,900,239 in the North Carolina mobile surgical
facility. During 1998, the Company invested $49,006 in surgical equipment in its
Florida facility.
Cash flow provided from financing activities was $1,483,256 during the
year ended December 31, 1999 and cash flows used in financing activities during
the year ended December 31, 1998 was $829,206. The principal source of financing
in 1999 was the receipt of a $2,190,000 bank loan, the proceeds of which were
utilized to acquire the North Carolina mobile surgical unit and related medical
equipment. In addition, during 1999, the Company repaid $682,488 of bank loans
and $89,256 of loans to Company shareholders. The principal use of funds in 1998
were the repayment of loans from banks in the amount of
16
<PAGE>
$723,485 and $145,721 of loans from Company shareholders.
On January 25, 2000, the Company, through its wholly owned subsidiary,
declared a dividend payable to the shareholders of record on the date of
termination of the S-Corporation tax status. The dividend of $441,700 is
approximately equal to the taxable income of USMGF from its inception through
termination of its S-Corporation tax status. The distribution was financed by
unsecured demand loans from significant shareholders at 8.5% interest payable
annually, and will be repaid from operations as cash flow permits. The Company's
management believes the debt service arising from the issuance of these notes
will not have a material impact on the Company's financial condition or results
of operations.
17
<PAGE>
The Company plans to continue to develop new sites for its mobile
surgical units and to introduce mobile dental and hyperbaric units in the near
future, placing one or more units in service by year-end. The Company plans to
obtain financing for these units through bank loans, private placements of its
securities, and equity financing through offerings in the secondary markets.
There can be no assurance that management will be successful in its efforts to
obtain the financing necessary to fund the Company's growth or that contracts
for future sites will be obtained.
The effect of inflaction on the Company's revenue and operating results
was not significant. The Company's operations are in the southeastern United
States and there are no seasonal aspects that would have a material adverse
effect on the Company's financial condition or results of operations.
OUTSTANDING OPTIONS
On April 20, 1999 the Company granted options to purchase 100,000
shares common stock of the Company to Ms. Rhonda Ahern, the Company's purchasing
coordinator and surgical technologist, at an exercise price of $.10 per share.
The options vest at a rate of 20,000 shares per year over 5 years commencing
June 1, 2000. The Company's management believes the exercise of these options
will not have a material adverse impact on the Company's income from continuing
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Company adopted the disclosure requirements under
Statement of Financial Accounting Standards No. 123 (SFAS No. 123) Accounting
for Stock-Based Compensation. See Note 1 in the Consolidated Financial
Statements of the Company, included in this Report on Form 10-SB, for the full
disclosure. In 1997, the Company was required to adopt Statement of Financial
Accounting Standards No. 121 (SFAS No. 121) Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed, which prescribes
accounting and reporting standards when circumstances indicate that the carrying
amount of a long-lived asset may be not recoverable. SFAS No. 121 had no impact
on the Company's financial statements.
The Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related information ("SFAS
131") in the year ended December 31, 1998. SFAS established standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also established
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The information disclosed
herein, materially represents all of the financial information related to the
Company's principal operating segment.
18
<PAGE>
The Company adopted Statement of Financial Accounting Standards No.
132, Employers' Disclosures about Pension and Other Post Employment Benefits
("SFAS 132") in the year ended December 31, 1999. SFAS No. 132 established
disclosure requirements regarding pension and post employment obligations. SFAS
No. 132 does not effect the Company as of December 31, 1999.
In March 1998, Statement of Position No. 98-1 was issued, which
specifies the appropriate accounting for costs incurred to develop or obtain
computer software for internal use. The new pronouncement provides guidance on
which costs should be capitalized, and over what period such costs should be
amortized and what disclosures should be made regarding such costs. This
pronouncement is effective for fiscal years beginning after December 15, 1998,
but earlier application is acceptable. Previously capitalized costs will not be
adjusted. The Company believes that it is already in substantial compliance with
the accounting requirements as set forth in this new pronouncement, and
therefore believes that adoption will not have a material effect on financial
condition or operating results.
In April 1998, Statement of Position No. 98-5 was issued which requires
that companies expense defined previously capitalized start-up costs including
organization costs and expense future start-up costs as incurred. Adoption of
this statement does not have an effect on financial condition or operating
results.
The Company adopted Statement of Financial Standards No. 133,
Accounting for Derivative Instruments and for Hedging Activities ("SFAS No.
133") in the year ended December 31, 1999. SFAS No. 133 requires that certain
derivative instruments be recognized in balance sheets at fair value and for
changes in fair value to be recognized in operations. Additional guidance is
also provided to determine when hedge accounting treatment is appropriate
whereby hedging gains and losses are offset by losses and gains related directly
to the hedged item. SFAS No. 133's impact on the Company's consolidated
financial statements is not expected to be material as the Company has not
historically used derivative and hedge instruments.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's corporate headquarters and executive offices are located
at 1405 South Orange Avenue, Suite 601, Orlando, Florida 32806.
The Company requires only a nominal amount of space to conduct its
operations because most of its business activity is conducted in its mobile
units. The Company occupies approximately 800 square feet in the offices of Tom
Winters, MD pursuant to a month-to-month agreement which may be terminated upon
30 days written notice by either party. The agreement also provides for use of
all common areas, parking and the use of miscellaneous office equipment. The
Company leases this space for an amount of $2,244.00 per month.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the stock of the Company as of April 28, 2000, by
each shareholder who is known by the
19
<PAGE>
Company to beneficially own more than five percent (5%) of the outstanding
Common Stock, by each Director and by all executive Officers and Directors as a
group. No shares of Preferred Stock have been issued or are outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
<S> <C> <C>
Dr. Thomas Winters 5,250,000 38.67%
1405 S. Orange Avenue, Suite 601
Orlando, Florida 32806
Richard Langley 2,100,000 15.47%
1405 S. Orange Avenue, Suite 601
Orlando, Florida 32806
Sandra L. Thompson 1,365,000 10.06%
1405 S. Orange Avenue, Suite 601
Orlando, Florida 32806
Daniel Williams 735,000 5.4%
1405 S. Orange Avenue, Suite 601
Orlando, Florida 32806
TOTAL OFFICERS AND DIRECTORS AS A GROUP (3 PERSONS) 8,715,000 64.2%
</TABLE>
-----------------------------
(1) All shares of the Company held by the above-referenced shareholders
are subject to the terms of a Lock-up Agreement pursuant to which such
shares may not be sold or transferred until June 1, 2000.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Officers and Directors of the Company as of April 28, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Thomas F. Winters, Jr., M.D. 47 Chairman of the Board and
Chief Executive Officer
Richard H. Langley 66 Director and President
Sandra L. Thompson 55 Director, Treasurer, Chief Operating
Officer and Secretary
</TABLE>
20
<PAGE>
Dr. Thomas Winters has served as the Chairman and CEO of AMSSI since
April 1997, as its President from January 1996 to March 1999 and as Chairman and
CEO of the Company since March 31, 1999. From August 1986 to January 1996 Mr.
Winters was a partner with Matthews Orthopedic in Orlando, Florida. Dr. Winters
graduated from Brown University and thereafter in 1980 received his medical
degree from the University of Connecticut. He has completed fellowships in
Trauma, Sports Medicine and Adult Reconstructive Surgery at the Brigham and
Women's Hospital of Harvard Medical School. He has worked in free-standing
surgery centers since the late 1980's and was instrumental in the start-up of
such a surgery center in Orlando, Florida prior to the formation of USMGF.
Richard Langley has served as a Director and the President of the
Company since March 31, 1999 and as Director and Vice President of AMSSI since
January 13, 1997. From 1964 to the present, Mr. Langley has bought, sold and
developed residential properties, grown citrus crops and operated a cattle
ranch. From 1992 to 1995 he served as the District School Board Attorney in Lake
County, Florida. Mr. Langley is a University of Florida graduate with B.S.,
L.L.B. and Juris Doctor degrees and has maintained a legal practice in
Claremont, Florida since graduation in 1964. Mr. Langley has 22 years of public
service experience. He was elected to the Florida House of Representatives in
1972 and re-elected in 1974 and 1976. In 1980, he was elected to the Florida
Senate. He served as Minority Whip in the House and as Republican Whip and
Republican Leader in the Senate.
Sandra Thompson has served as a Director, Treasurer and Secretary of
the Company since March 31, 1999 and as Director, Treasurer and Secretary of
USMGF since January 13, 1997. From 1992 to 1997, Ms. Thompson was the Director
of Nursing of the Orlando Center for Outpatient Surgery in Orlando, Florida
where she coordinated all nursing functions for the Center. She has worked as a
Registered Nurse in a number of Florida hospitals and held positions of Staff
Nurse and Operating Room Supervisor. She has designed pre-op and post-op
facilities for a Florida hospital and was Educational Coordinator at the Same
Day Surgery Center in Orlando. Prior to the founding of USMGF, Ms. Thompson was
Director of Nursing and Risk Manager for four years, commencing in 1993, at the
Orlando Center for Outpatient Surgery. Ms. Thompson is a 1980 Valencia Community
College graduate and received her Licensed Healthcare Risk Manager license from
the University of Central Florida.
ITEM 6. EXECUTIVE COMPENSATION
No compensation in excess of $100,000 was awarded to, earned by, or
paid to any executive Officer or Director of the Company during the fiscal years
ended December 31, 1999, 1998 and 1997. The Company's Directors have not
received any other remuneration for serving as directors. The following tables
describe the compensation of the Company's Chief Executive Officer and President
for the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Thomas Winters, M.D. 1999 $ 0 $ 0 $ 0
Chief Executive Officer
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1998 $ 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0
Mike M. Mustafoglu (1) 1999 $ 0 $ 0 $ 0
President
1998 $ 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0
</TABLE>
- -----------------------------
(1) Mr. Mustafoglu was President and a director of the Company from October
1995 to March 1999.
LONG TERM COMPENSATION(*)
<TABLE>
<CAPTION>
SECURITIES
ALL OTHER NAMES AND RESTRICTED UNDERLYING
COMPENSATION STOCK OPTIONS/
PRINCIPAL POSITION YEAR AWARD(S)($) SARS($) LTIP PAYOUTS($)
<S> <C> <C> <C> <C>
Thomas Winters, M.D.(1) Chief Executive 1999 -- -- --
Officer
1998 -- -- --
1997 -- -- --
Mike M. Mustafoglu President 1999 -- -- --
1998 -- -- --
1997 -- -- --
</TABLE>
- ------------------------------
(*) The Company currently does not have an Incentive Stock Option Plan or
Non-Qualified Stock Option Plan. The Company is considering adopting such Plans
at a future date. The Company has agreed to grant options to purchase 100,000
shares of common stock of the Company to Ms. Rhonda Ahern the Company's
purchasing coordinator and a surgical technologist exercisable at a price of
$.10 per share and vesting at a rate of 20,000 shares per year over 5 years
commencing June 2000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1999, the Company entered into a Consulting Agreement with
TransGlobal Financial Corporation ("TFC") pursuant to which TFC agreed to
provide certain consulting, advisory and other services to the Company. Other
services include strategic planning services and assisting in identifying,
evaluating and structuring mergers and acquisitions, consolidations, joint
ventures, strategic alliances and fundraising. The Company engaged TFC to
provide such services on an exclusive basis during the three-year period ending
April 25, 2002, provided, however, that the term of the agreement will be
renewed automatically in 12-month increments unless either party notifies the
other 90 days prior to the expiration of the term of the cancellation of the
agreement. Mr. Mike Mustafoglu is the President of TFC.
The agreement provides that TFC waive its retainer fee because the
Company issued TFC 575,000 shares of Common Stock for its services in connection
with the AMSSI acquisition. TFC subsequently transferred 287,500 of such shares
to Richard Langley, Jr. (the son of Richard H. Langley who is a Director and the
President of the Company) in consideration of services rendered with respect to
the merger of USMGF and AMSSI.
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<PAGE>
With respect to transaction fees, the agreement provides that:
(i) for financing from sources identified by TFC the
Company will pay TFC a seven percent (7%) fee for equity
financing and a three and one-half percent (3.5%) fee for debt
financing of any and all funds from such transactions that are
committed and available to the Company;
(ii) in the event that TFC represents the Company with
respect to a merger, acquisition, investment, exchange, or
other securities or assets transaction of the Company, then
the Company will pay TFC a fee equal to ten percent (10%) of
the total market value on the day of the closing of stock,
cash, assets and all other property (real or personal)
exchanged or received, directly or indirectly, by the Company,
or any of its security holders, in connection with any such
transaction; and
(iii) in the event TFC introduces the Company to a joint
venture partner or customer and sales develop as a result of
the introduction, the Company will pay a fee of two percent of
the net sales revenue generated directly from this
introduction.
To date, TFC has provided general financial advisory services to the
Company pursuant to the Consulting Agreement. Such services have included
financial planning and review, business plan development, identification of
financing sources and evaluation of strategic partner opportunities. TFC has
informed the Company that it does not engage in the business of buying and
selling securities for others or for its own account or advising others, for
compensation, as to the value of securities or the advisability of investing in,
purchasing or selling, securities. TFC has further informed the Company that it
is not currently licensed as a broker-dealer or investment advisor and that TFC
is not required to be so licensed to perform the activities called for under the
Consulting Agreement. TFC has agreed with the Company that if any such
activities are required to be performed by a licensed broker-dealer or
investment advisor, TFC will take the appropriate steps to obtain such licenses
or will inform the Company that it must retain a licensed broker-dealer or
investment company, as appropriate, to perform such activities.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
Holders of the Company's Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the security holders.
There are currently 100,000,000 shares of common stock authorized of which
13,575,280 shares are issued and outstanding. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. There are currently
20,000,000 shares of Preferred Stock authorized, none of which are issued and
outstanding. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
other securities. The Common Stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding
23
<PAGE>
shares of Common Stock are duly authorized. The Company's Transfer Agent is
Pacific Stock Transfer.
SHAREHOLDER RIGHTS PLAN
Under the terms of the Merger Agreement, the Company is obligated to
declare a dividend distribution of one Right for each outstanding share of the
Company's Common Stock to shareholders of record at the close of business on a
record date to be set by the Board of Directors (the "Record Date"). The terms
of such Rights are summarized in an exhibit to the Merger Agreement and are
described below. Each Right entitles the registered holder to purchase from the
Company one unit (a "Unit"), consisting initially of one share of Common Stock,
at a Purchase Price of $50.00 in cash per Unit, subject to adjustment. The
Company will enter into a Rights Agreement (the "Rights Agreement") with Pacific
Stock Transfer Company, as Rights Agent, as soon as practicable, substantially
upon the terms described below.
The Rights will be attached to all Common Stock certificates
representing outstanding shares, and no separate Rights Certificates will be
distributed. The Rights will separate from the Common Stock upon the date which
is the earlier of (i) 10 days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the "Stock Acquisition Date"), or (ii) 10
business days following the commencement of a tender offer or exchange offer
that would result in a person or group beneficially owning 15% or more of such
outstanding shares of Common Stock (the earlier of said dates being called the
"Distribution Date").
Until the Distribution Date, (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such Common
Stock certificates, (ii) new Common Stock certificates issued after the Record
Date will contain a notation incorporating the Rights Agreement by reference,
and (iii) the surrender for transfer of any certificates for Common Stock
outstanding also will constitute the transfer of the Rights associated with the
Common Stock represented by such certificate.
The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the declaration of
the Rights, unless earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights.
With certain exceptions, in the event that at any time following the
Distribution Date,
(i) the Company is the surviving corporation in a merger
with an Acquiring Person
24
<PAGE>
(ii) and its Common Stock is not changed or exchanged;
(iii) a Person becomes the beneficial owner of 15% or more
of the then outstanding shares of Common Stock (except
pursuant to an offer for all outstanding shares of Common
Stock which the Continuing Directors (as defined below)
determine to be fair and otherwise in the best interests of
the Company and its shareholders (other than the Acquiring
Person));
(iv) an Acquiring Person engages in one or more
"self-dealing" transactions as set forth in the Rights
Agreement; or
(v) during such time as there is an Acquiring Person, an
event occurs which results in such Acquiring Person's
ownership interest being increased by more than 1% (e.g., a
reverse stock split);
each holder of a Right will thereafter have the right to receive, upon exercise,
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company, subject to certain limitations) having a value equal to two
times the exercise price of the Right. Notwithstanding any of the foregoing,
following the occurrence of any of the events set forth in this paragraph, all
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will be null and
void. However, Rights are not exercisable following the occurrence of any of the
events set forth above until such time as the Rights are no longer redeemable by
the Company as set forth below.
For example, at an exercise price of $50.00 per Right, each Right not
owned by an Acquiring Person (or by certain related parties) following an event
set forth in the preceding paragraph would entitle its holder to purchase
$100.00 worth of Common Stock (or other consideration, as noted above) for
$50.00. Assuming that the Common Stock had a per share value of $20.00 at such
time, the holder of each valid Right would be entitled to purchase five shares
of Common Stock for $50.00.
With certain exceptions, in the event that, at any time following the
Stock Acquisition Date,
(i) the Company is acquired in a merger or other
business combination transaction in which the Company is not
the surviving corporation or where the Company is the
surviving corporation and all or part of the outstanding
shares of Common Stock are changed into or exchanged for stock
or other securities of any other person or cash or any other
property (other than a merger described in sub clause (i) of
the second preceding paragraph or a merger which follows an
offer described in the parenthetical in sub clause (ii) of the
second preceding paragraph); or
(ii) 50% or more of the Company's assets or earning power
is sold or transferred; each holder of a Right (except rights
which previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise,
25
<PAGE>
common stock of the acquiring company having a value equal to
two times the exercise price of the Right.
For example, at an exercise price of $50.00 per Right, each Right
following an event set forth in the preceding paragraph would entitle its holder
to purchase $100.00 worth of common stock of the acquiring company for $50.00.
Assuming that the common stock of the acquiring company had a per share value of
$20.00 at such time, the holder of each issued Right would be entitled to
purchase five shares of the common stock of the acquiring company for $50.00.
The Purchase Price payable, and the number of shares of Common Stock
(or the number and kind of other securities or property, as the case may be)
issuable, upon exercise of the Rights would be subject to adjustment from time
to time to prevent dilution,
(i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Common
Stock;
(ii) if holders of the Common Stock are granted certain
rights or warrants to subscribe for Common Stock or
convertible securities at less than the current market price
of the Common Stock; or
(iii) upon the distribution to holders of the Common Stock
of evidences of indebtedness or assets (excluding regular
quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. The Company will not be required to issue fractional shares of Common
Stock and in lieu thereof an adjustment in cash will be made. For fractional
shares of Common Stock, the adjustment will be based on the market price of the
Common Stock on the last trading date prior to the date of exercise.
In general, the Company may redeem the Rights in whole, but not in
part, at any time until ten days following the Stock Acquisition Date, at a
price of $.01 per Right (payable in cash, Common Stock or other consideration
deemed appropriate by the Board of Directors). Under certain circumstances set
forth in the Rights Agreement, the decision to redeem requires the concurrence
of a majority of the Continuing Directors. After the redemption period has
expired, the Company's right of redemption may be reinstated, with the
concurrence of a majority of the Continuing Directors,
(i) if an Acquiring person reduces its beneficial
ownership to five percent (5%) or less of the outstanding
shares of Common Stock in a transaction or series of
transactions not involving the Company; or
(ii) provided that such redemption is incidental to a
merger or other business combination transaction or series of
transactions involving the Company but not involving an
Acquiring Person or any person who was an Acquiring Person or
any affiliate or associate thereof.
26
<PAGE>
Immediately upon the action of the Board of Directors ordering
redemption of the Rights with, where required, the concurrence of the Continuing
Directors, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 per Right redemption price.
The term "Continuing Directors" means any member of the Board of
Directors of the Company who was a member of the Board prior to the date of the
Rights Agreement, and any person who is subsequently elected to the Board if
such person is recommended or approved by a majority of the Continuing
Directors, but shall not include an Acquiring Person or an affiliate or
associate of an Acquiring Person or any representative of the foregoing
entities.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of an acquiring company as set forth above.
Any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company prior to the Distribution Date, but amendments
of those provisions relating to the principal economic terms of the Rights
require approval of a majority of the Continuing Directors. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board (in certain circumstances, with the concurrence of the continuing
Directors) in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
27
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
(a) Market Information
(1) The common stock of the Company is presently traded on the NASDAQ OTC
Bulletin Board, under the symbol "USMG".
The following represents the high and low bid prices of the Company's
Common Stock during the last two fiscal years and the current fiscal year
through April 27, 2000, as provided by the National Quotation Bureau, Inc. The
quotations shown reflect inter-dealer prices, without retail mark-up, mark-down,
or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES
HIGH LOW
<S> <C> <C>
1998
Jan. 1 through Mar. 31 -- --
Apr. 1 through June 30 -- --
July 1 through Sept. 30 -- --
Oct. 1 through Dec. 31 -- --
1999
Jan. 1 through Mar. 31 -- --
Apr. 1 through June 30(1) $6.125 $4.00
July 1 through Sept. 30 6.8125 3.50
Oct. 1 through Dec. 31 6.00 2.9375
2000
Jan. 1 through March 31 5.625 1.8125
April 1 through April 27 4.00 1.50
</TABLE>
-----------------------------
(1) Commencing May 24, 1999
(b) Shareholders
As of April 27, 2000, the Company had issued 13,575,680 shares of
Common Stock, all of which were still outstanding and held by individual
shareholders and brokerage firms and/or clearing houses in "street name" for
their clients. The Company believes that there are approximately 450 beneficial
owners of its common stock, including shares held in street name.
(b) Dividends
28
<PAGE>
The Company has not paid any dividends to date.
ITEM 2. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceeding nor does
it have knowledge of any threatened litigation. On February 4, 2000, however,
the Company received a letter from counsel to Dr. Brian Levine indicating that
Dr. Levine is the owner of all right, title and interest in United States Letter
Patent No. 4,915,435 (the "Patent") entitled "Mobile Operating Room With Pre and
Post Operational Areas. In his letter, Dr. Levine's counsel alleged that the
mobile medical operating room contemplated under the Company's contract with
North Carolina infringes one or more of the claims included in the Patent.
Consequently, Dr. Levine's counsel requested that the Company review the Patent
and inform Dr. Levine as to why the Company believes that its mobile operating
room product does not infringe one or more of the claims in the Patent.
Alternatively, Dr. Levine's counsel requested that the Company initiate contact
to negotiate a non-exclusive license under the Patent. The Company has initiated
contact with Dr. Levine and on April 10, 2000 Dr. Levine and the Company jointly
signed a letter acknowledging that the Company has recognized Dr. Levine as the
sole owner of the Patent. The letter also states that the Company and Dr. Levine
wished to enter into negotiations regarding compensation with respect to the
subject matter of the Patent. The Company and Dr. Levine are currently
conducting such negotiations. In the event the Company and Dr. Levine do not
reach an agreement with respect to a license under the Patent, the Company's
business and financial condition may be materially and adversely affected (if
Dr. Levine successfully establishes that the Company has infringed upon the
Patent and if the Patent is found to be enforceable). No assurance can currently
be given as to whether or not the Patent would be found to be enforceable.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On April 26, 1999, in connection with the merger of AMSSI and USMGF,
the Company issued an aggregate amount of 10,500,000 shares of Common Stock to
the persons who were shareholders of AMSSI immediately prior to the merger in
consideration for all the issued and outstanding shares of Common Stock of
AMSSI. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), as an exemption from the registration requirements of the
Act because the merger did not involve any public offering of the Company's
stock. Specifically, the Company issued shares to six individuals who were
closely familiar with the business of AMSSI and the Company, the transfer of
such shares was restricted, and there was no public offer, solicitation of
offers or advertising with respect to the issuance of such shares.
On or about April 26, 1999, the Company issued 575,000 shares of Common
Stock to TFC in consideration of TFC's agreement to waive its retainer fee
pursuant to the terms of a Consulting Agreement between the Company and TFC
dated April 26, 1999. The Company and
29
<PAGE>
TFC also agreed that such shares were issued as payment to TFC for its merger
and acquisition services in the amount of 57,500 with respect to the merger of
AMSSI and USMGF. The Company relied on Section 4(2) of the Act as an exemption
from registration under the Act because the issuance did not involve a public
offering of shares. Specifically, the issuance was to one entity, involved a
restriction on the transfer of the shares and there was no solicitation of
offers from the public or advertising regarding the issuance. In accordance with
Financial Accounting Standard No. 123, paragraph 8, the value of the shares
issued was based upon the fair value of the services the Company received from
TFC.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws and certain sections of the Nevada Revised
Statutes provide for indemnification of the Company's officers and directors in
certain situations where they might otherwise personally incur liability,
judgments, penalties, fines and expenses in connection with a proceeding or
lawsuit to which they might become parties because of their position with the
Company. To the extent that indemnification may be related to liability arising
under the Securities Act, the Securities and Exchange Commission takes the
position that indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
30
<PAGE>
PART F/S--FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1999 AND 1998
F-1
<PAGE>
U.S. MEDICAL GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheet at December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the two years
ended December 31, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the two years
ended December 31, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the two years
ended December 31, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8 - F14
</TABLE>
F-2
<PAGE>
STEFANOU & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
1360 Beverly Road
Suite 305
McLean, VA 22101-3621
703-448-9200
703-448-3515 (fax)
[email protected]
Philadelphia, PA
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
U.S. Medical Group , Inc.
Orlando, Florida
We have audited the accompanying consolidated balance sheet of U.S.
Medical Group , Inc. and its subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based upon 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 financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 U.S. Medical Group ,
Inc. and its subsidiary as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ STEFANOU & COMPANY, LLP
Stefanou & Company, LLP
Certified Public Accountants
McLean, Virginia
April 3, 2000
F-3
<PAGE>
U.S. MEDICAL GROUP , INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 22,763 $ 49,185
Accounts receivable, net of allowance of doubtful
accounts 548,669 218,347
Prepaid expenses 13,330 5,623
---------- ----------
Total current assets 584,762 273,155
Property and equipment-at cost:(Notes A and B)
Mobile unit and medical equipment 3,642,467 1,525,771
Furniture and fixtures 61,075 56,368
---------- ----------
3,703,542 1,582,139
Less accumulated depreciation 410,389 228,387
3,293,153 1,353,752
Other assets:
Financing fees, less amortization of $2,548 and
$2,548 in 1999 and 1998, respectively 12,236 5,096
---------- ----------
$3,890,151 $1,632,003
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note B) $ 801,602 $ 615,913
Deferred tax liability 81,406 --
Accounts payable and accrued expenses 127,297 38,039
Total current liabilities 1,010,305 653,952
Long-term debt, less current maturities (Note B) 1,447,045 149,478
Deferred tax liability (Note C) 301,253 --
Stockholders' equity (Note A):
Preferred stock, par value , $.001 per share; authorized at
December 31, 1999: 20,000,000 shares; none issued ;
none authorized at December 31, 1998 -- --
Common stock, par value, $.001 per share; 100,000,000 authorized at
December 31, 1999; 13,575,380 issued; 100 shares authorized at December
31, 1998, par value
$10 per share; 100 shares issued at December 31, 1998 13,575 1,000
Additional paid-in-capital
80,925 24,000
Retained earnings 1,037,048 803,573
---------- ----------
1,131,548 828,573
---------- ----------
$3,890,151 $1,632,003
========== ==========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
U.S. MEDICAL GROUP , INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Patient fees $ 2,041,034 $ 1,655,018
Operating Expenses:
Selling, general and administrative 1,161,335 688,950
Interest expense 81,562 98,774
Depreciation expense 182,003 161,379
----------- -----------
Operating expenses 1,424,900 949,103
Net income before taxes 616,134 705,915
Provision for income taxes (Note C) 382,659 --
----------- -----------
Net income $ 233,475 $ 705,915
=========== ===========
Earnings per common share $ .02 $ .05
=========== ===========
(basic and assuming dilution)
Weighted average shares outstanding
Basic 13,575,380 13,575,380
Diluted 13,633,665 13,633,665
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
U.S. MEDICAL GROUP , INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Additional Retained
Shares Amount Paid-in-capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 100 $ 1,000 $ 24,000 $ 97,638 $ 122,658
Net income -- -- -- 705,915
----------- ----------- ----------- ----------- -----------
705,915
Balance at December 31, 1998 100 1,000 24,000 803,573 828,573
Shares issued in connection
with merger of AMSSI and USMG 10,500,000 10,500 -- -- 10,500
Retirement of AMSSI shares (100) (1,000) -- -- (1,000)
Shares issued to consultant in exchange for services 575,000 575 56,925 -- 57,500
Shares retained by former USMG shareholders 2,500,380 2,500 -- -- 2,500
Net income -- -- -- 233,475 233,475
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 13,575,380 $ 13,575 $ 80,925 $ 1,037,048 $ 1,131,548
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
U.S. MEDICAL GROUP , INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income for the year $ 233,475 $ 705,915
Adjustments to reconcile
net income to net cash:
Depreciation and amortization 182,003 161,379
Common stock issued in connection with services
rendered 57,500 --
(Increase) decrease in:
Accounts receivable (330,332) (62,487)
Prepaid expenses and other assets (14,847) (210)
Deferred taxes and other 313,263 --
Accounts payable and accrued expenses 170,663 (28,213)
----------- -----------
Net cash provided by operating activities 611,725 776,384
Cash flows used in investing activities:
Capital expenditures, net (2,121,403) (49,006)
----------- -----------
Net cash used in investing activities (2,121,403) (49,006)
Cash flows (used) provided in financing activities:
Proceeds from bank loans 2,190,000 --
Proceeds from shareholder loans 65,000 40,000
Repayments of loans from banks (682,488) (723,485)
Repayments of loans from shareholders (89,256) (145,721)
----------- -----------
Net cash (used) provided in financing activities 1,483,256 (829,206)
----------- -----------
Net increase (decrease) in cash (26,422) (101,828)
Cash at beginning of year 49,185 151,013
----------- -----------
Cash at end of year $ 22,763 $ 49,185
=========== ===========
Supplemental disclosure of Cash Flows Information
Cash paid during the year for interest $ 76,789 $ 98,244
Common stock issued for services 57,500 --
Acquisition:
Assets acquired 31,385 --
Accumulated deficit 11,075 --
Liabilities assumed (36,585) --
Common stock issued (5,875) --
-----------
Net cash paid for acquisition $ --
===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.
Business, Basis of Presentation and Merger
BUSINESS, BASIS OF PRESENTATION AND CHANGE IN CAPITALIZATION
On April 26, 1999, American Mobile Surgical Services, Inc., an operating
corporation (or "AMSSI"), completed a merger with U.S. Medical Group
(Florida), Inc., (or "USMGF"), a wholly-owned subsidiary of U.S. Medical
Group, Inc., (or "USMG" or "Company"), an inactive Nevada corporation with no
significant assets or operations in a transaction accounted for as a
capitalization of AMSSI. As a result of the merger, AMSSI changed its name to
U.S. Medical Group (Florida) Inc. Effective with the merger, USMG was
re-capitalized and issued 10,500,000 shares of its common stock in exchange
for all of the all previously outstanding common stock of AMSSI. As a result
of the transaction, the shareholders of AMSSI received stock representing
approximately 81% of the voting stock of USMG.
The total purchase price and carrying value of net assets acquired of USMG was
$5,875. The net assets acquired were as follows:
<TABLE>
<S> <C>
Net current assets $31,385
Accumulated deficit 11,075
Net current liabilities (36,585)
-------
$ 5,875
=======
</TABLE>
As USMG was an inactive corporation with no significant operations, AMSSI
recorded the carryover historical basis of net tangible assets acquired, which
did not differ materially from their fair values.
The consolidated financial statements include the accounts of the Company , and
its wholly-owned subsidiary, U. S. Medical Group (Florida), Inc., formerly
American Mobile Surgical Services, Inc. In accordance with APB Opinion 16, the
consolidated financial statements include the accounts of AMSSI as the acquiring
entity and USMG as the wholly-owned subsidiary. Significant intercompany
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recognized at the time services are provided.
PROPERTY AND EQUIPMENT
For financial statement purposes, property and equipment are depreciated using
the straight-line method over their estimated useful lives (five years for
furniture, fixtures and equipment and 10 years for the mobile surgical unit and
related medial equipment). Financing costs are amortized over the term of the
respective loan. Depreciation and amortization expense for 1999 and 1998 was
$182,003 and $ 161,379 respectively. An accelerated method of depreciation is
used for tax purposes.
F-8
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
Intangible assets consist of financing fees related to notes payable. Financing
costs are amortized over the term of the respective loan.
INCOME TAXES
Until April 26, 1999 ,the Company's predecessor, U. S. Medical Group (Florida),
Inc. (formerly American Mobile Surgical Services, Inc.) ("USMGF"), elected to be
taxed under the provision of Subchapter S of the Internal Revenue Code. As a
result, the USMGF's 1997, 1998 and 1999 earnings through the day preceding the
merger have been taxed, with certain exceptions, for federal income tax purposes
directly to the stockholders of USMGF. Under those provisions, USMGF did not pay
federal and state corporate income taxes on its taxable income. Instead, the
USMGF stockholders were liable for individual federal and state income taxes on
their respective share of the USMGF's net income.
Effective with the merger, USMGF ceased operating as an S Corporation and became
subject to federal and State corporate income taxes. USMGF accounts for income
taxes in accordance with Statement of Financial Accounting Standards No. 191,
"Accounting for Income Taxes." Under the method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets, and liabilities are measured using the enacted tax
rates expected to be in effect when the differences are settled. A deferred tax
liability of $202,600 ($184,400 federal and $18,200 State) was recorded at the
time of the merger to reflect the expected tax effect of accumulated differences
on that date.
CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under the provision of Statement
of Financial Accounting Standards No. 121 Accounting for the Impairment of
Long-Lived assets and for Long-Lived Assets to be Disposed of (SFAS 121).
The Company's long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses, or a forecasted
inability to achieve break-even operating results over an extended period. The
Company evaluates the recoverability of long-lived assets based upon forecasted
undercounted cash flows. Should an impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset.
F-9
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principle Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" with respect to options and warrants granted to
employees.
ADVERTISING
The Company follows the policy of charging the costs of advertising to expenses
incurred. Advertising costs charged to expenses for 1999 and 1998 was $25,786
and $9,469, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly actual results
could differ from those estimates.
Concentrations of Credit Risk
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with high credit quality institutions. At times, such investments may be in
excess of the FDIC insurance limit. The Company's two customers are the Florida
Department of Corrections and the North Carolina Department of Corrections. (see
Note G). The Company periodically reviews its trade receivables in determining
its allowance for doubtful accounts. The allowances for doubtful accounts was $0
at December 31, 1999 and 1998, respectively.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," specifying the computation, presentation and disclosure
requirements of earnings per share information. Basic earnings per share has
been calculated based upon the weighted average number of common shares
outstanding. Stock options and warrant's have been excluded as common stock
equivalents in the diluted earnings per share because they are either
antidilutive, or their effect is not material. There is no effect on earnings
per share information for the years ended December 31, 1999 and 1998 relating to
the adoption of this standard.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No.130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 during the year ended
December 31, 1998 and has no items of comprehensive income to report.
F-10
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")
in the year ended December 31, 1998. SFAS establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. The information disclosed herein,
materially represents all of the financial information related to the Company's
principal operating segment.
The Company adopted Statement of Financial Accounting Standards No. 132,
Employers' Disclosures about Pension and Other Post Employment Benefits (SFAS
132") in the year ended December 31, 1999. SFAS No. 132 establishes disclosure
requirements regarding pension and post employment obligations. SFAS No. 132
does not effect the Company as of December 31, 1999.
In March 1998, Statement of Position No. 98-1 was issued, which specifies the
appropriate accounting for costs incurred to develop or obtain computer software
for internal use. The new pronouncement provides guidance on which costs should
be capitalized, and over what period such costs should be amortized and what
disclosures should be made regarding such costs. This pronouncement is effective
for fiscal years beginning after December 15, 1998, but earlier application is
acceptable. Previously capitalized costs will not be adjusted. The Company
believes that it is already in substantial compliance with the accounting
requirements as set forth in this new pronouncement, and therefore believes that
adoption will not have a material effect on financial condition or operating
results.
In April 1998, Statement of Position No. 98-5 was issued which requires that
companies expense defined previously capitalized start-up costs including
organization costs and expense future start-up costs as incurred. Adoption of
this statement does not have an effect on financial condition or operating
results.
The Company adopted Statement of Financial Standards No. 133, Accounting for
Derivative Instruments and for Hedging Activities ("SFAS No. 133") in the year
ended December 31, 1999. SFAS No. 133 requires that certain derivative
instruments be recognized in balance sheets at fair value and for changes in
fair value to be recognized in operations. Additional guidance is also provided
to determine when hedge accounting treatment is appropriate whereby hedging
gains and losses are offset by losses and gains related directly to the hedged
item. SFAS No. 133's impact on the Company's consolidated financial statements
is not expected to be material as the Company has not historically used
derivative and hedge instruments.
NOTE B - LONG TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Bank loan payable in monthly installments of $13,194,
plus interest at the Lender's prime rate, secured by
equipment and guaranteed by certain Company shareholders $ 79,167 $ 237,500
F-11
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE B - LONG TERM DEBT (CONTINUED)
Bank loan payable in monthly installments of $42,685,
including interest at 8.4% per annum, secured by
mobile unit and guaranteed by certain Company shareholders - 291,201
Bank loan payable in monthly installments of $24,436
plus interest at Lenders' prime rate , secured by
mobile unit and guaranteed by certain Company shareholders 1,947,046 -
Bank loan payable in monthly installments of interest
only at the Lender's prime rate, secured by medical
equipment and guaranteed by certain Company shareholders 150,000 140,000
Shareholder notes payable in monthly installments of
$2,249.46, including interest at 8.5% per annum, unsecured 17,435 41,690
Shareholder notes payable, interest at 8.5% per annum, unsecured 55,000 55,000
----------- -----------
2,248,648 765,391
Less: Current portion of long term debt (801,602) (615,913)
----------- -----------
$ 1,447,046 $ 149,478
=========== ===========
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
2001 $ 500,000
2002 500,000
2003 447,046
-----------
$ 1,447,046
===========
</TABLE>
NOTE C - INCOME TAXES
Provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Currently payable $ 73,612 $ 7,794 $ 81,406
Deferred provision
Timing differences existing on merger date 184,400 18,200 202,600
Timing differences occurring after merger 88,009 10,644 98,653
-------- -------- --------
272,409 28,844 301,253
-------- --------
$346,021 $ 36,638 $382,659
======== ======== ========
</TABLE>
As the result of the merger (See Note A), the Company's tax status changed from
a non-taxable S-Corporation to a C-Corporation subject to both federal tax and
Florida franchise tax on income. Accordingly, the deferred tax liability of
$202,600 at the date the merger was effective and the deferred tax liability for
timing differences in recording revenues and expenses for the period since the
merger have been recorded as a charge to the deferred tax provision.
The following summarizes the significant differences between the expected
federal and state income tax and the Company's tax provision for financial
statement purposes.
F-12
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE C - INCOME TAXES (continued)
<TABLE>
<CAPTION>
Federal State
------- -----
<S> <C> <C> <C> <C>
Expected tax provision $ 209,485 (34%) $ 22,180 (3.6%)
Permanent differences:
Benefit of graduated tax rates (11,750) ( 250)
Non-deductible expenses 22,273 2,070
Income prior to merger taxed to S-Corp
shareholders (74,539) (7,892)
Timing differences
Deferred tax related to tax basis timing
differences at time of merger 200,552 20,530
---------- --------
$ 346,021 $ 36,638
========== ========
</TABLE>
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company sub-leases office space on a month-to-month basis from an entity
owned by a Company stockholder.
The Company leases a furnished apartment in Raleigh, North Carolina. The lease,
which has a one year term and expires in September, 2000, provides for monthly
payments of $1,232.
The Company's rental expense for 1999 and 1998 is $ 40,316 and $21,359,
respectively.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000 $11,088
</TABLE>
NOTE E-CAPITAL STOCK
American Mobile Surgical Services, Inc. ("AMSSI") was incorporated in March,
1996 and formed under the laws of the State of Florida. In 1996, AMSSI issued a
total of 100 shares of its common stock to its founders in exchange for $25,000.
In April, 1999, AMSSI completed a merger with U. S. Medical Group (Florida),
Inc. , a wholly-owned subsidiary of U. S. Medical Group, Inc.("USMG"), a Nevada
corporation with no material operations. The shareholders of AMSSI exchanged all
of the outstanding shares of common stock of AMSSI in an exchange ratio of 1
share of AMSSI common stock for 105,000 shares in USMG common stock.
Immediately following the merger, AMSSI was renamed U. S. Medical Group
(Florida), Inc..
Share amounts presented in the consolidated balance sheets and consolidated
statements of stockholders' equity reflect the actual share amounts outstanding
for each period presented.
NOTE F - INTEREST COSTS
Interest expense for 1999 and 1998 is $81,562 and $98,774, respectively.
Interest expense is charged to operations in the period incurred.
F-13
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE G - MAJOR CUSTOMERS
The Company's sole customers for 1999 was the State Florida and the State of
North Carolina. The Company's sole customer for 1998 was the State of Florida
(See Note B).
NOTE H - NET INCOME PER COMMON SHARE
The following table present the computation of basic and diluted net income per
share:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income available for common shareholders $ 233,475 $ 705,915
Basic and fully diluted net income per share $ .02 $ .05
Weighted average common shares outstanding -basic 13,575,380 13,575,380
========== ==========
Weighted average common shares outstanding-diluted 13,633,665 13,633,665
========== ==========
</TABLE>
Net income per share is based upon the weighted average number of shares of
common stock outstanding. In April, 1999, AMSSI shareholders exchanged for
common stock of USMG 1 share of AMSSI common stock for 105,000 shares of the
USMG common stock (See Note A). Accordingly, all historical weighted average
share and per share amounts have been restated to reflect this merger.
NOTE I- PENSION PLAN
In October, 1999, USMG established a SIMPLE IRA retirement plan for its
employees. Under the plan, the Company is required to make matching
contributions up to 3% of eligible employee's salary up to certain statutory
limits.
Plan expense for 1999 was $1,441.
NOTE J-STOCK OPTIONS AND WARRANTS
The Company has a nonqualified stock option plan to provide key employees and
non-employees the opportunity to participate in equity ownership. Options may be
granted at or below the fair market value of the stock and have a five-year life
. Options granted to certain individuals vest ratably over five years. The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company's common stock issued to a key employee of
the Company.
<TABLE>
<CAPTION>
Number Weighted Average Number of
of Shares Exercise Price Shares Exercisable
<S> <C> <C> <C>
Outstanding at December 31, 1998 - -
-------
Granted 100,000 .10 -
Exercised- - - -
Cancelled -
- - -
------- ------- --------
Outstanding at December 31, 1999 100,000 - 20,000
======= ======= =======
</TABLE>
The Company granted the stock option to the key employee prior to the merger
between AMSSI and USMG. Accordingly, the Company at the time the option was
granted was a nonpublic entity, and for disclosure purposes the fair value of
each stock option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: annual dividend of $0.00, expected volatility of 0%, risk free
interest rate of 6.0% an expected life of five years for all grants. The minimum
value of the stock options granted during the year ended December 31, 1999 was $
.03. There were no adjustments made in calculating the fair value to account for
vesting provisions or for non-transferability or risk of forfeiture.
F-14
<PAGE>
U.S. MEDICAL GROUP , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE J-STOCK OPTIONS AND WARRANTS (CONTINUED)
If the Company recognized compensation cost for the employee stock option plan
in accordance with SFAS No. 123, the Company's pro forma net income and net
income per share would have been $ 230,475 and $ .02, respectively in 1999.
NOTE K - SUBSEQUENT EVENTS
On January 25, 2000, the Company , through its wholly owned subsidiary, USMG
(Florida), Inc. declared a dividend payable to the shareholders of record on the
date of termination of the S-corporation tax status (See Note C). The dividend
of $441,700 is approximately equal to the taxable income of USMG (Florida), Inc,
from its inception through termination of its S-corporation tax status. The
distribution was financed by unsecured demand loans from significant
shareholders at 8.5% interest payable annually, and will be repaid from
operations as cash flow permits.
Subsequent to the date of the financial statements, the Company was advised
by the owner of a patent covering the manufacture and use of mobile medical
operating rooms that the Company was allegedly infringing on its patent. Due
to the considerable uncertainties that exist, the Company's management cannot
estimate the amount of a probable loss, if any, to the Company that might
result from some adverse aspects of this matter against the Company.
Accordingly, no provision for this matter has been made in the Company's
consolidated financial statements.
F-15
<PAGE>
PART III -- EXHIBITS
Index to Exhibits. Exhibits required to be attached hereto are listed in
the Index to Exhibits of this Amendment No. 1 to Form 10-SB, which is
incorporated herein by reference.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
U.S. Medical Group, Inc.
/s/ Thomas Winters
---------------------------
Dr. Thomas Winters
Chairman of the Board and
Chief Executive Officer
Date: April 28, 2000
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
2.1 Agreement and Plan of Merger dated March
31, 1999 by and between the Company
USMGF, Inc. and AMSSI(1)
3.1 Articles of Incorporation of the
Company(1)
3.2 Certificate of Amendment of the Articles
of Incorporation of the Company(1)
3.3 Certificate of Amendment of the Articles
of Incorporation of the Company(1)
3.4 By-laws of the Company(1)
10.1 Consulting Agreement dated April 26, 1999
by and between the Company and
TransGlobal Financial Corporation(1)
10.2 Form of Stockholder Lock up Agreement
dated March, 25 1999 by and between
USMG and AMSSI(1)
10.3 Agreement by and between USMGF and the
Florida Department of Corrections dated
April 2, 1997(1)
10.4 Agreement by and between USMGF and the
North Carolina Department of Corrections
dated October 15, 1999(1)
11.1 Computation of Earnings per Common and
Common Share Equivalents(1)
21.1 Subsidiaries of the Company(1)
27.1 Financial Data Schedule(1)
</TABLE>
- -----------------------------
(1) Filed previously.
