Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to
________.
Commission file number 0-19499
U.S. MEDICAL GROUP, INC.
-----------------------
(Name of Small Business as specified in its Charter)
NEVADA 88-0320389
------------------------------------------------------
(State or other (I. R. S. Employer
jurisdiction of incorporation or
Identification No.) organization)
1405 South Orange, Orlando, Florida 32806
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (407) 849-2288
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class in which Registered
-------------------
Common Stock, $.0001 per share OTC Bulletin Board
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [_]
Check if there is disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
Issuer's revenues for its most recent fiscal year were $3,448,515.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the closing sales
price of such stock as of March 15, 2001 was $1,327,500. As of such date,
13,575,380 shares of the Registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes [_] No [X]
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 freestanding, 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 markets 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.
1
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
2
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 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 freestanding 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
3
- PODIATRY
- Bunionectomy
- Removal of Toenail
- Plantar Fasiotomy
- 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
- Tonsillectomies
- Adenoidectomy
- EAR NOSE AND THROAT
- Excision of Nasal Polyps
- Repair of Deviated Septum
- Correction of Nasal Deformities
- Caldwell-Luc Procedures
- Myringoplasty
- Tympanoplasties
- Stapecdectomy
- Myringotomy
- Mastoidectomy
4
USMGF's historical experience from April 1997 to the present reflects
the following specialty breakdown and case mix:
BREAKDOWN BY SPECIALTY
----------------------
Podiatry 1
Ortho 17
Hand 5
Urology 19
ENT 8
General Surgery 50
======
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
======
100%
In Florida, as of June 30, 1999, there are a total of 68,599 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 average monthly caseload was 81 in 2000. The FDOC has indicated to the
Company that it plans to send more patients to the Company's mobile surgery unit
from outlying facilities but no assurance can be given that any such increase
will occur. The Company's agreement with the State of Florida ends on September
30, 2001. USMG requested in January 2001 that its contract be renewed for 5
years because management determined that it would be in the best interest of
USMG to obtain a 5-year contract, rather than 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.
5
In North Carolina, as of June 30, 1999, there are a total of 31,420
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.
Actual cases were 33 per month during the 12 months ending December 31, 2000.
The contract encompasses all specialties of surgery. The surgeons and
anesthesiologists are contracted by Central Prison.
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
6
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.
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.)
7
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 is
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 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 periods of times
including pre-trial and pre-sentencing periods.
At the end of 1995, 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:
State Federal
------ ------
North East 204 20
Mid-West 275 18
South 629 62
West 267 25
------ ------
Totals 1,375 125
====== ======
According to the U.S. Department of Justice Bureau of Statistics, as of
1999 more than 6.3 million people, or 2.6% of the U.S. population, were under
some form of correctional supervision.
8
Bureau of Justice Statistics - Correctional populations in the United
States, 1980-99 Number of persons:
Probation Jail Prison Parole Total
--------- --------- --------- --------- ---------
1980 1,118,097 182,288 319,598 220,438 1,840,400
1981 1,225,934 195,085 360,029 225,539 2,006,600
1982 1,357,264 207,853 402,914 224,604 2,192,600
1983 1,582,947 221,815 423,898 246,440 2,475,100
1984 1,740,948 233,018 448,264 266,992 2,689,200
1985 1,968,712 254,986 487,593 300,203 3,011,500
1986 2,114,621 272,736 526,436 325,638 3,239,400
1987 2,247,158 294,092 562,814 355,505 3,459,600
1988 2,356,483 341,893 607,766 407,977 3,714,100
1989 2,522,125 393,303 683,367 456,803 4,055,600
1990 2,670,234 403,019 743,382 531,407 4,348,000
1991 2,728,472 424,129 792,535 590,442 4,535,600
1992 2,811,611 441,781 850,566 658,601 4,762,600
1993 2,903,061 455,500 909,381 676,100 4,944,000
1994 2,981,022 479,800 990,147 690,371 5,141,300
1995 3,077,861 499,300 1,078,542 679,421 5,335,100
1996 3,164,996 510,400 1,127,528 679,733 5,482,700
1997 3,296,513 557,974 1,176,564 694,787 5,725,800
1998 3,670,591 584,372 1,224,469 696,385 6,126,300*
1999 3,773,624 596,485 1,284,894 712,713 6,318,900*
* Totals for 1998 and 1999 exclude probationers in jail or prison.
Source: Bureau of Justice Statistics Correctional Surveys (The National
Probation Data Survey, National Prisoner Statistics, Survey of Jails,
and The National Parole Data Survey.)
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.
9
Included in the overall totals are the following states with inmate
populations exceeding 10,000 persons:
NUMBER NUMBER OF
STATE OF INMATES FACILITIES
-------------------- ---------- ----------
Alabama 24,283 12
Arizona 26,092 9
California 146,523 24
Connecticut 18,360 20
Florida 68,599 38
Georgia 41,665 32
Illinois 44,355 20
Indiana 19,361 15
Kentucky 15,055 13
Louisiana 33,463 11
Maryland 23,067 12
Massachusetts 11,715 11
Michigan 46,253 47
Missouri 25,159 11
New Jersey 31,962 11
New York 73,960 46
North Carolina 31,420 89
Ohio 47,084 19
Oklahoma 22,016 12
Pennsylvania 36,511 19
South Carolina 22,231 29
Tennessee 18,317 5
Texas 146,180 32
Virginia 29,761 17
Wisconsin 19,446 21
Inmate population numbers are from the American Correctional
Association 2000 Directory.
State Correctional Organizations
--------------------------------
The Company is currently operating only in Florida and North Carolina.
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, 2001. 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 five-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.
10
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, 2001. 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.
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 day's
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, 2001. 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.
11
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.
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 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.
12
- 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.
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. No
assurance can be given that any such expansion will occur or be successful.
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 caseloads exceed certain pre-determined levels.
Services utilizing the proposed mobile dental unit would be priced on a similar
discount basis to standard rate structures.
13
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 15 full time employees and 1 part time
employee.
ITEM 2. 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 $ 3,074 per month.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 three fiscal years as provided by the National
Quotation Bureau, Inc. The quotations shown reflect inter-dealer prices, without
retail mark-up, markdown, or commissions and may not represent actual
transactions.
BID PRICES
-------------
HIGH LOW
-------------- --------------
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 $6.125 $4.00
July 1 through Sept. 30 6.8124 3.50
Oct. 1 through Dec. 31 6.00 2.9375
2000
--------------
Jan. 1 through Mar. 31 5.62 1.8125
Apr. 1 through June 30 4.00 1.25
July 1 through Sept. 30 3.00 .625
Oct. 1 through Dec. 31 1.06 .125
2001
--------------
Jan. 1 through Mar. 26 .93 .187
-----------------------------
(1) Commencing May 24, 1999
As of March 23, 2000, the Company had issued 13,575,380 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. In 1999, the
Company issued 10,500,000 shares of Common Stock in connection with the AMSSI
merger. See Item 1-Description of Business. The Company has not paid any
dividends to date.
15
ITEM 6. 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 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-KSB.
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, 2000 Compared to Twelve Months Ended
---------------------------------------------------------------------
December 1999
-------------
Revenues
--------
The Company's total revenues were $3,448,515 for the twelve month
period ended December 31, 2000 compared to $2,041,034 for the same period ended
December 31, 1999, an increase of $1,407,481, or 70%. The increase is
attributable to patient fees derived from the addition of the North Carolina
State Department of Corrections contract, an increased caseload and subsequent
increase in patient fees from the Florida contract and unit, and proceeds from a
lease agreement for hyperbaric oxygen therapy equipment with American
Hyperbarics. The lease agreement became effective March 15, 2000. The Company
16
reported net income from continuing operations for the twelve month period ended
December 31, 2000 of $776,109 compared to $233,475 for the twelve month period
ended December 31, 1999, an increase in earnings of $542,634, or 232%. Net
income for the twelve-month period ended December 31, 2000 is attributed to the
addition of the North Carolina State Department of Corrections contract as well
as an increased caseload and subsequent increase in patient fees associated with
the Florida mobile surgery unit.
The Company has contracts with the Florida and North Carolina State
Department of Corrections. Both state contracts are a series of four one-year
options. Both Florida and North Carolina State Department of Corrections have
exercised the second year option in the series of one-year options. Both
one-year option contract renewals expire September 30, 2001.
Costs And Expenses
------------------
The Company's 70% increase in revenues for 2000 compared to the same
period ended December 31, 1999 resulted in higher total costs. Expenses from
operations increased $764,903 from $1,424,900 for the twelve month period ended
December 31, 1999 compared to $2,189,803 for the same period ended December 31,
2000, or 53.7%. Selling, general and administrative expenses for the
twelve-month period ended December 31, 2000 increased $540,109 from $1,161,335
to $1,701,444, or 46.5%. Operations expenditures increased due to the costs
associated with the operations activities of the North Carolina mobile surgical
unit for the entire period, which commenced operations in October of 1999. The
North Carolina unit incurs similar operating costs as the Florida surgical unit,
such as medical equipment, supplies, and staff wages. Operations expenditures
associated with the mobile hyperbaric oxygen therapy unit also contributed to
the expense increase. Selling, general and administrative expenses increased
from the additional allocation of financial resources necessary to support the
North Carolina mobile surgery unit contract and the mobile hyperbaric oxygen
therapy unit lease agreement. The selling, general and administrative expenses
increase is also attributed to the support of the Company's active pursuit of
new business. Wage expense increased $266,248, or 108%, from $247,386 for the
period ended December 31, 1999 to $513,634 for the period ended December 31,
2000. Wage expense increase is attributable to the necessary support due to the
increased activity with existing operations as well as the support of new
business development.
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 offer competitive
salaries and grant Company stock options to current and future employees.
Medical Supplies expenditures increased 30.6% from $278,456 for the
twelve-month period ended December 31, 1999 to $363,600 for the twelve-month
period ended December 31, 2000. The increase in medical supplies purchases is
solely attributable to the increased caseload performed during the period. Both
the Florida and North Carolina mobile surgical facilities experienced caseload
increases during the period.
17
Legal and Accounting fees charged to the Company increased 335% from
$27,845 for the twelve-month period ended December 31, 1999 to $121,185 for the
twelve-month period ended December 31, 2000. The increase in fees for the period
is attributed to the Company's requirement to obtain legal and accounting
services and resources associated to compliance with respect to the Securities
and Exchange Commission.
Advertising expenses increased 54% to $39,602 for the twelve-month
period ended December 31, 2000. The Company advertises mainly in corrections
industry trade publications, and feels that advertising is a necessary component
of its goal to maximize revenue and shareholder value. The Company expects to
continue to advertise in corrections industry trade publications in the future.
Depreciation and amortization expense for the twelve month period ended
December 31, 2000 was $323,964, an increase of $141,961, or 78%, from the same
period in 1999. The increase is attributable to the addition of a new mobile
surgical unit in North Carolina. Both of the Company's mobile surgical units
were depreciated over the entire period of twelve months ended December 31,
2000.
Interest expense for the twelve-month period ended December 31, 2000
was $164,395, an increase of $82,833, or 102%, from $81,562 for the same period
ended December 31, 1999. The increase in interest expense is due to the
repayment of bank loans needed to finance the construction and purchase of the
North Carolina mobile surgical unit.
For the twelve-month period ended December 31, 2000, an income tax
provision of $483,895 was charged to recognize federal, Florida and North
Carolina state income tax liabilities. For the twelve-month period ended
December 31, 1999, an income tax provision of $382,659 was charged.
Liquidity And Capital Resources
-------------------------------
As of December 31, 2000, the Company had a working capital deficit of
$248,061 compared to a deficit of $425,543 at December 31, 1999, a deficit
decrease of $177,482, or 41%. The decrease in working capital deficit is
attributed to a $158,530 increase in current assets and a current liability
decrease of $18,952.
The Company's accounts payable balance as of December 31, 2000 was
$87,145, a $40,152, or 31.5% decrease from the balance as of December 31, 1999.
Shareholder loans outstanding increased to $283,537 from $55,000 as of December
31, 1999. Proceeds from shareholder loans were used for working capital
purposes. The Company plans to continue to repay shareholder loans in the
twelve-month period ended December 31, 2000, subject to the Company's liquidity.
Current maturities of long-term debt decreased 20% to $641,828 as of December
31, 2000 from $801,602 as of December 31, 1999.
The Company generated cash flows from operations of $1,401,069 for the
twelve-month period ended December 31, 2000 and $611,725 for the twelve-month
period ended December 31, 1999, an increase of 129%. Increased cash flow from
operating activities for the twelve-month period ended December 31, 2000 is
18
primarily attributable to the Company's net income from operations of $776,109
adjusted for depreciation of $318,107 and income taxes of $191,248.
Cash flows used in investing activities for the twelve-month period
ended December 31, 2000 consisted primarily of the acquisition of $235,129 of
surgical and medical equipment. The equipment was placed in the Company's North
Carolina and Florida facilities.
Cash flows used in financing activities was $1,293,392 during the
twelve-month period ended December 31, 2000 compared to $1,483,256 that was
provided to the Company in 1999. The Company repaid $647,520 in bank loans
during this period. Payments in the amount of $441,739 were made to Company
shareholders to satisfy loan proceeds of $ 441,739 from Company shareholders.
The Company has contracts with the Florida and North Carolina State
Department of Corrections. Both state contracts are a series of four one-year
options. Both Florida and North Carolina State Department of Corrections have
exercised the second year option in the series of one-year options. Both
one-year option contract renewals expire September 30, 2001.
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 offer competitive
salaries and grant Company stock options to current and future employees.
While the Company has raised capital to meet its current working
capital and facility 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, Company
officers and significant shareholders guarantee all of the Company's bank debt.
The Company plans 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 inflation 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.
19
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.
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.
On February 28, 2000 the Company granted options to purchase 100,000
shares common stock of the Company to Mr. Charles Baumann, the Company's finance
and business development director, at an exercise price of $1.50 per share. The
options vest at a rate of 20,000 shares per year over 5 years commencing
February 28, 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
20
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, 2000. SFAS No. 132 established
disclosure requirements regarding pension and post employment obligations. SFAS
No. 132 does not affect the Company as of December 31, 2000.
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, 2000. 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which will become effective December 31, 2000. The Company does not
expect the standard to have a material effect on its financial condition or
operating results.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB
No. 25 for (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2, 2000
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The adoption of FIN 44 did not have an affect on
the Company's financial statements but may impact the accounting for grants or
awards in future periods.
ITEM 7. FINANCIAL STATEMENTS
The financial statements attached to this Report on Form 10-KSB as
pages F-1 to F-17 are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Officers and Directors of the Company as of March 30, 2001 are as
follows:
NAME AGE POSITION
---- --- --------
Thomas F. Winters, Jr., M.D. 48 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
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 freestanding
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, Chief Operating
Officer and Secretary of the Company since March 31, 1999 and as Director,
Treasurer, Chief Operating Officer 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
22
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 10. EXECUTIVE COMPENSATION
No compensation in excess of $100,000 was awarded to, earned by, or
paid to any executive Officer or Director of the Company during the fiscal years
ended December 31, 2000, 1999, 1998 and 1997. The Company's Directors have not
received any other remuneration for serving as directors. The following tables
describe the compensation of the Company's Chief Executive Officer and President
for the last four fiscal years.
SUMMARY COMPENSATION TABLE
ANNUAL OTHER ANNUAL
COMPENSATION COMPENSATION ($)
------------ ----------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($)
--------------------------- ---- ------ ---------
Thomas Winters, M.D 2000 $0 $0
Chief Executive Officer 1999 $0 $0
1998 $0 $0
1997 $0 $0
Mike M. Mustafoglu(1) 1999 $0 $0
President 1998 $0 $0
1997 $0 $0
-----------------------------------------
(1) Mr. Mustafoglu was President and a director of the Company from October
1995 to March 1999.
LONG TERM COMPENSATION(*)
SECURITIES
RESTRICTED UNDERLYING LTIP
STOCK OPTIONS/ PAYOUTS
AWARD(S)($) SARS($) ($)
----------- ------------ -------
Thomas Winters, M.D. 2000 - - -
Chief Executive Officer 1999 - - -
1998 - - -
1997 - - -
Mike M. Mustafoglu 1999 - - -
President 1998 - - -
1997 - - -
-------------------------------
(*) The Company has adopted its 2000 Stock Incentive Plan (the "Option
Plan"), subject to Shareholder approval at the Company's Annual Meeting
May 14, 2001. The Company has reserved 500,000 shares for issuance
under the terms of the Option Plan.
23
As of January 1, 2001, Mr. Winters, Mr. Langley and Ms. Thompson
receive annual salaries of $120,000, $110,000, and $100,000, respectively.
ITEM 11. 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 March 23, 2001, by each
shareholder who is known by the 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.
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
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 1,295,000(1) 9.54%
1405 S. Orange Avenue, Suite 601
Orlando, Florida 32806
Daniel Williams 727,500 5.36%
1405 S. Orange Avenue, Suite 601
Orlando, Florida 32806
TOTAL OFFICERS AND DIRECTORS AS A 8,645,000 63.68%
GROUP (3 PERSONS)
-------------------------------
(1) Excludes 70,000 shares gifted to children and grandchildren of Ms.
Thompson with respect to which Ms. Thompson denies beneficial
ownership.
ITEM 12. 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.
24
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.
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.
25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Report.
(B) Reports On Form 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 and 15(2) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2001
U.S. MEDICAL GROUP, INC.
By: /s/ Thomas F. Winters
---------------------
Thomas F. Winters
Chief Executive Officer and
Chairman of the Board
27
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas F. Winters, as his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this annual report on Form 10-KSB and any documents
related to this report and filed pursuant to the Securities and Exchange Act of
1934, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agent, or their substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Date
--------- ---------
/s/ Thomas F. Winters
---------------------------------------------
Thomas F. Winters
Chief Executive Officer and Chairman of the Board March 30, 2001
/s/ Richard H. Langley
---------------------------------------------
Richard H. Langley
President and Director March 30, 2001
/s/ Sandra L. Thompson
---------------------------------------------
Sandra L. Thompson
Chief Operating Officer, Chief Accounting Officer,
Treasurer and Director March 30, 2001
28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Articles of Incorporation dated May 13, 1994, as amended (incorporated
by reference to the Company's Amendment No. 1 to Form 10-SB filed with
the Commission on April 13, 2000).
3.2 By-Laws (incorporated by reference to the Company's Amendment No. 1 to
Form 10-SB filed with the Commission on April 13, 2000).
11. Computation of Earnings per Common and Common Share Equivalents
21. Subsidiaries of the Registrant.
U.S. MEDICAL GROUP, INC.
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 2000 AND 1999
FORMING A PART OF ANNUAL REPORT
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
U.S. MEDICAL GROUP, INC.
Index to Financial Statements
--------------------------------------------------------------------------------
Page
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheet at December 31, 2000 and 1999 F-4
Consolidated Statements of Operations for the two years ended December F-5
31, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the two years ended F-6
December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the two years ended December F-7
31, 2000 and 1999
Notes to Consolidated Financial Statements F-8 - F17
STEFANOU & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
1360 Beverly Road
Suite 305
McLean, VA 22101-3621
703-448-9200
703-448-3515 (fax)
mclean@stefanou.com
-------------------
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 sheets of U.S.
Medical Group, Inc. and its subsidiary as of December 31, 2000 and 1999 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, 2000 and 1999, 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
February 28, 2001
F-3
U.S. MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
Current assets:
Cash and equivalents $ 337,050 $ 22,763
Accounts receivable,
net of allowance of doubtful accounts 361,833 548,669
Prepaid expenses 44,409 13,330
------------ ------------
Total current assets 743,292 584,762
Property and equipment-at cost: (Notes A and B) 3,827,196 3,642,467
Furniture and fixtures- at cost 77,383 61,075
------------ ------------
3,904,579 3,703,542
Less accumulated depreciation 728,496 410,389
------------ ------------
3,176,083 3,293,153
Other assets:
Patents and trademarks, at cost less amortization of
$5,832 39,168 -
Financing fees, less amortization of
$10,597 and $5,521 in 2000 and 1999, respectively 7,160 12,236
------------ ------------
46,328 12,236
------------ ------------
$ 3,965,703 $ 3,890,151
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note B) $ 641,828 $ 801,602
Current portion of deferred tax liability (Note C) 106,344 81,406
Income taxes payable 156,036 -
Accounts payable and accrued expenses 87,145 127,297
------------ ------------
Total current liabilities 991,353 1,010,305
Long-term debt, less current maturities (Note B) 1,196,905 1,447,045
Deferred tax liability (Note C) 330,096 301,253
Stockholders' equity (Note A):
Preferred stock, par value, $.001 per share;
20,000,000 authorized; none issued at
December 31, 2000 or 1999 - -
Common stock, par value, $.001 per share;
100,000,000 authorized: 13,575,380 issued at
December 31, 2000 and December 31, 1999 13,575 13,575
Additional paid-in-capital 80,925 80,925
Retained earnings 1,371,419 1,037,048
Common stock held in treasury, at cost
(46,850 shares in 2000 and none in 1999) (18,570) -
------------ ------------
Total stockholders' equity 1,447,349 1,131,548
------------ ------------
$ 3,965,703 $ 3,890,151
============ ============
See accompanying notes to financial statements
F-4
U.S. MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Revenues:
Patient fees $ 3,420,015 $ 2,041,034
Hyperbaric Fees 28,500 -
------------ ------------
Total revenues 3,448,515 2,041,034
Operating Expenses:
Selling, general and administrative 1,701,444 1,161,335
Interest expense 164,395 81,562
Depreciation and amortization expense 323,964 182,003
------------ ------------
Total operating expenses 2,189,803 1,424,900
------------ ------------
Operating income 1,258,712 616,134
Other income:
Interest income 1,231 -
Other income 61 -
------------ ------------
Total other income 1,292 -
------------ ------------
Net income before taxes 1,260,004 616,134
Provision for income taxes (Note C) 483,895 382,659
------------ ------------
Net income $ 776,109 $ 233,475
============ ============
Earnings per common share (basic and
assuming dilution) $ .06 $ .02
============ ============
Weighted average shares outstanding
Basic 13,575,380 13,575,380
Diluted 13,575,380 13,633,665
See accompanying notes to financial statements.
F-5
U.S. MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Additional Paid Retained Treasury
Shares Amount In Capital Earnings Stock Total
----------- ------------ ------------ ------------ ---------- -----------
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
Dividends paid (Note L) - - - (441,738) - (441,738)
Common stock repurchased for
treasury- 46,850 shares - - - - (18,570) (18,570)
Net income - - - 776,109 - 776,109
----------- ------------ ------------ ------------ ---------- -----------
Balance at December 31, 2000 13,575,380 $ 13,575 $ 80,925 $ 1,371,419 $ (18,570) $1,447,349
=========== ============ ============ ============ ========== ===========
See accompanying notes to financial statements
F-6
U.S. MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the year $ 776,109 $ 233,475
Adjustments to reconcile net income to net cash:
Depreciation and amortization 323,946 182,003
Common Stock issued in connection
with services rendered - 57,500
(Increase) Decrease in:
Accounts Receivable 186,836 (330,332)
Prepaid expenses and other assets (31,079) (14,847)
Deferred taxes and other 170,649 313,263
Accounts payable and accrued expenses (40,152) 170,663
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,386,309 611,725
CASH FLOWS (USED) PROVIDED IN INVESTING ACTIVITIES:
Capital expenditures, net (201,799) (2,121,403)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (201,799) (2,121,403)
------------ ------------
CASH FLOWS (USED) PROVIDED IN FINANCING ACTIVITIES:
Proceeds from bank loans - 2,190,000
Proceeds from shareholder loans 441,739 65,000
Repayments of loans from banks (647,520) (682,488)
Repayments of loans from shareholders (204,133) (89,256)
Purchase of Treasury Stock (18,570)
Dividend Payment (441,739) -
------------ ------------
Net Cash (used) provided in financing activities (870,223) 1,483,256
------------ ------------
Net increase (decrease) in cash 314,287 (26,422)
Cash at beginning of year 22,763 49,185
------------ ------------
Cash at end of year $ 337,050 $ 22,763
------------ ------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 142,816 $ 76,789
Cash paid during the year for taxes 271,500 -
Common stock issued for services - 57,500
Dividends Paid 441,739 -
Acquisition:
Assets acquired - 31,385
Accumulated Deficit - 11,075
Liabilities assumed - (36,585)
Common stock issued - (5,875)
------------
Net cash paid for acquisition $ - $ -
============ ============
See accompanying notes to financial statements.
F-7
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
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
------------------------------------------
On April 26, 1999, American Mobile Surgical Services, Inc., a Florida
corporation (or "AMSSI"), completed a merger with U. S. Medical Group (Florida),
Inc., a Florida corporation (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 using
the purchase method of accounting. As a result of the merger, AMSSI changed its
name to U. S. Medical Group (Florida) Inc. Effective with the merger, all
previously outstanding common stock of AMSSI was exchanged for common stock of
USMG resulting in the previous security holders of AMSSI owning approximately
81% of the voting stock of USMG, in an exchange ratio of 1 share of AMSSI common
stock for 105,000 shares of the USMG common stock.
The total purchase price and carrying value of net assets acquired of USMG was
$5,875. The net assets acquired were as follows:
Net current assets $ 31,385
Accumulated deficit 11,075
Net current liabilities (36,585)
---------
$ 5,875
=========
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 results of operations
subsequent to the date of acquisition are included in the Company's consolidated
statement of operations.
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.
F-8
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 7 to 15 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 2000 and 1999 was $323,964 and
$182,003 respectively. An accelerated method of depreciation is used for tax
purposes.
Intangible Assets
-----------------
Intangible assets consist of financing fees related to notes payable. Financing
costs are amortized over the term of the respective loan. Organization costs
incurred after December 31, 1999 have been expensed as incurred in accordance
with AICPA Statement of Position 98-5.
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. 109,
"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.
F-9
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
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 2000 and 1999 was $39,603
and $25,786, 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.
F-10
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 warrants 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, 2000 and 1999 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.
Segment Information
-------------------
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131") 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.
F-11
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Pension Plans and Other Post Employment Benefits
------------------------------------------------
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pension and Other Post Employment Benefits (SFAS 132") establishes
disclosure requirements regarding pension and post employment obligations. SFAS
No. 132 does not affect the Company as of December 31, 2000 and 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (" SAB 101"), Revenue Recognition in Financial Statements,
which will become effective December 31, 2000. The Company does not expect the
standard to have a material effect on its financial condition or operating
results.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 2, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The adoption of FIN 44 did not have an affect on the Company's
financial statements but may impact the accounting for grants or awards in
future periods.
F-12
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE B - LONG TERM DEBT
2000 1999
----------- -----------
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
Bank loan payable in monthly installments of $24,436, plus
interest at Lender's prime rate, secured by mobile unit and
guaranteed by certain Company shareholders 1,528,692 1,947,046
2000 1999
------------ ------------
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
Shareholder notes payable in monthly installments of $2,249.46,
including interest at 8.5% per annum, unsecured 26,504 17,435
Shareholder notes payable, interest at 8.5% per annum, unsecured
(See Note L) 283,537 55,000
------------ ------------
1,838,733 2,248,648
Less: Current portion of long term debt (641,828) (801,602)
------------ ------------
$ 1,196,905 $ 1,447,046
============ ============
Aggregate maturities of long-term debt as of December 31, 2000 are as follows:
Year Amount
---- ----------
2001 $ 641,828
2002 278,793
2003 387,670
2004 384,113
2005 146,329
----------
$1,838,733
==========
F-13
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE C - INCOME TAXES
Provision for income taxes consists of the following components:
2000 1999
--------- ---------
Current:
Federal $370,600 $ 73,612
State 56,936 7,794
--------- ---------
427,536 81,406
Deferred:
Federal 54,593 272,409
State 1,766 28,844
--------- ---------
56,359 301,253
--------- ---------
Provision for Income Taxes $483,895 $382,659
--------- ---------
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.
The primary components of the Company's current and long term deferred tax
assets and liabilities are as follows:
2000 1999
---------- ----------
Current:
Gross deferred tax assets:
Accounts payable $ 29,075 $ 44,802
Gross deferred tax liabilities:
Accounts receivable and other timing difference 136,149 126,208
---------- ----------
Net current deferred income tax liability $ 106,344 $ 81,406
========== ==========
Long-term:
Gross deferred liabilities:
Depreciation and amortization $ 330,096 $ 301,253
========== ==========
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.
F-14
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE D - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 2000 and 1999 is $42,137 and $ 40,316,
respectively.
Future minimum lease payments are as follows:
2001 $26,928
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.
During the year ended December 31, 2000, the Company purchased 46,850 shares of
the Company's common stock at a cost of $ 18,570 pursuant to its stock purchase
program authorized by the Board of Directors in 2000.
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 2000 and 1999 is $ 164,395 and $81,562, respectively.
Interest expense is charged to operations in the period incurred.
NOTE G - MAJOR CUSTOMERS
The Company's sole customers for 2000 and 1999 were the State Florida and the
State of North Carolina.
F-15
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE H - NET INCOME PER COMMON SHARE
The following table presents the computation of basic and diluted net income per
share:
2000 1999
-------- --------
Net income available for common shareholders $ 776,109 $ 233,475
=========== ===========
Basic and fully diluted net income per share $ .06 $ .02
=========== ===========
Weighted average common shares outstanding - basic
13,575,380 13,575,380
=========== ===========
Weighted average common shares outstanding - diluted
13,575,380 13,633,665
=========== ===========
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 the years ended December 31, 2000 and 1999 2000 was $
4,254 and $1,441, respectively.
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.
Number of Weighted Average Number of Shares
Shares Exercise Price Exercisable
------------ ------------ ------------
Outstanding at December 31, 1998 - - -
============
Granted 100,000 .10 -
Exercised- - - -
Cancelled - - -
------------ ------------ ------------
Outstanding at December 31, 1999 100,000 - 20,000
============ ============ ============
Granted 100,000 1.50 -
Exercised- - - -
Cancelled - - -
------------ ------------ ------------
Outstanding at December 31, 2000 200,000 - 20,000
============ ============ ============
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, 2000 was
$.07. There were no adjustments made in calculating the fair value to account
for vesting provisions or for non-transferability or risk of forfeiture.
F-16
U.S. MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
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 $766,531 and $.06, respectively in 2000.
NOTE K - RELATED PARTY TRANSACTIONS
The Company leases office space from its Chief Executive Officer on a
month-to-month basis. Rental expense relative to this arrangement totaled
$36,642 for the year 2000 and $ 26,928 for the year 1999. Shareholders of the
Company have loaned money to the company and have also guaranteed various
Company obligations (see Note B).
NOTE L - DIVIDENDS
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 A). 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 (See Note B).
F-17