U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
SURGICARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 58-1597246
00(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
12727 KIMBERLY LN., SUITE 200 HOUSTON, TX 77024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (713) 973-6675
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
COMMON STOCK, $.005 PAR VALUE THE AMERICAN STOCK EXCHANGE
SERIES A REDEEMABLE PREFERRED
STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained, and no disclosure will be contained in this form, 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. |_|
SurgiCare's revenues for fiscal year ended December 31, 2002: $11,552,439.
As of March 31, 2003, 24,752,171 shares of the registrant's common stock were
outstanding. The aggregate market value of the shares of common stock (based
upon the closing sale price of these shares as reported by the American Stock
Exchange) of the registrant held by non-affiliates on March 31, 2003 was
approximately $3,196,184, based upon a per share price of $0.36, the closing
price per share for the company's common stock on the American Stock Exchange on
that day.
SURGICARE, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I Page No.
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Item 1. Description of Business 3
Item 2. Description of Property 15
Item 3. Legal Proceedings 16
Item 4. Submission or matters to a Vote of Security Holders 17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters. 18
Item 6. Management's Discussion and Analysis or Plan of Operation 20
Item 7. Financial Statements 25
Item 8. Changes in and Disagreements with Accountants 50
PART III
Item 9. Directors, Executive Officers, Promoters,
and Control Persons; Compliance
With 16(a) of the Exchange Act. 50
Item 10. Executive Compensation 51
Item 11. Security Ownership of Certain Beneficial Owners and Management 53
Item 12. Certain Relationships and Related Transactions 56
Item 13. Exhibits and Reports on Form 8K 57
Item 14. Controls and Procedures. 57
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
SurgiCare, Inc. ("SurgiCare," "Company," "we," "us," or "our") was
incorporated in Delaware on February 24, 1984 as Technical Coatings
Incorporated. On September 10, 1984 its name was changed to Technical Coatings,
Inc. ("TCI"). Immediately prior to July 1999, TCI was an inactive company. On
July 11, 1999, TCI changed its name to SurgiCare Inc., and at that time changed
its business strategy to developing, acquiring and operating freestanding
ambulatory surgery centers ("ASC"). On July 21, 1999, SurgiCare acquired all of
the issued and outstanding shares of common stock of Bellaire SurgiCare, Inc. a
Texas corporation ("Bellaire"), in exchange for the issuance of 9,860,000 shares
of common stock, par value $.005 per share ("Common Stock") and 1,350,000 shares
of Series A Redeemable Preferred Stock, par value $.001 per share ("Series A
Preferred"), of SurgiCare to the holders of Bellaire's common stock. For
accounting purposes, this reverse acquisition was effective July 1, 1999. As of
December 31, 2002, the company owned a majority interest in three surgery
centers and a minority interest as general partner in two additional centers.
Four of SurgiCare's centers are located in Texas and one is located in Ohio.
SurgiCare is authorized to issue up to 50,000,000 shares of common stock,
par value $.005 per share, and 20,000,000 shares of preferred stock, par value
$.001 per share.
SurgiCare, Inc.'s principal executive offices are located at 12727 Kimberly
Lane, Suite 200, Houston, TX 77024, and its telephone number is 713-973-6675.
Bellaire SurgiCare, Inc.
Bellaire owns and operates an ambulatory surgery center located in Houston,
Texas. Bellaire has been in operation for 14 years, first as The Institute for
Eye Surgery, and since March of 1995, as Bellaire SurgiCare, Inc. ("Bellaire").
This center provides the venue for a wide range of high volume, lower-risk
surgical procedures within a multi-specialty environment. Surgeons specializing
in podiatry, orthopedics, pain management, gynecology, reconstructive, as well
as general surgery, utilize this facility. The surgeons performing surgery at
Bellaire generally charge their patients for the professional services they
provide, while Bellaire only charges the patients for the facility fee.
SurgiCare Memorial Village, L.P.
SurgiCare, through its wholly owned subsidiary Town & Country SurgiCare,
Inc., owns a 60% General Partnership interest in SurgiCare Memorial Village,
L.P. ("Memorial Village"). This center provides the venue for a wide range of
high volume, lower-risk surgical procedures within a multi-specialty
environment. Surgeons specializing in podiatry, orthopedics, pain management,
gynecology, reconstructive, as well as general surgery, utilize this facility.
The surgeons performing surgery at Memorial Village generally charge their
patients for the professional services they provide, while Memorial Village only
charges the patients for the facility fee.
San Jacinto Surgery Center, L.P.
SurgiCare through its wholly owned subsidiary Baytown SurgiCare, Inc. owns
a 10% General Partnership interest in San Jacinto Surgery Center, L.P. ("San
Jacinto"). This center provides the venue for a wide range of high volume,
lower-risk surgical procedures within a multi-specialty environment. Surgeons
specializing in podiatry, orthopedics, pain management, gynecology, plastics, as
well as general surgery, utilize this facility. The surgeons performing surgery
at San Jacinto generally charge their patients for the professional services
they provide, while San Jacinto only charges the patients for the facility fee.
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Physicians Endoscopy Center, Ltd., RLLP
SurgiCare, through its wholly owned subsidiary Town & Country SurgiCare,
Inc., owns a 10% General Partnership interest in Physicians Endoscopy Center,
Ltd., RLLP. ("Physicians Endoscopy"). This center is a single specialty center
equipped to do endoscopic procedures. The physicians performing procedures at
Physicians Endoscopy generally charge their patients for the professional
services they provide, while Physicians Endoscopy only charges the patients for
the facility fee.
Tuscawaras Ambulatory Surgery Center, LLC
In May 2002, the Company acquired a 51% interest in Tuscawaras Ambulatory
Surgery Center, LLC (Tuscawaras) located in Dover, Ohio. This center provides
the venue for a wide range of high volume, lower-risk surgical procedures within
a multi-specialty environment. Surgeons specializing in orthopedics, ENT and
general surgery utilize this facility. The surgeons performing surgery at the
center generally charge their patients for the professional services they
provide, while Tuscawaras only charges the patients for the facility fee.
INDUSTRY OVERVIEW
Freestanding ambulatory surgery centers are licensed outpatient surgery
centers, generally equipped and staffed for a wide variety of surgical
procedures. These procedures are generally lower-risk and considered appropriate
for the freestanding ambulatory setting. In recent years, government programs,
private insurance companies, managed care organizations and self-insured
employers have implemented various cost-containment measures to limit the growth
of healthcare expenditures. These cost-containment measures, together with
technological advances, have resulted in a significant shift in the delivery of
healthcare services away from traditional inpatient hospitals to more
cost-effective alternative sites, including ambulatory surgery centers.
According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery
Center Directory (June 2001), an industry publication, freestanding outpatient
surgery centers are one of the fastest growing segments of the healthcare
industry and are positioned well to become the premier provider of outpatient
surgery. The number of outpatient surgery cases increased 97% from 3.1 million
in 1993 to 6.1 million in 2000. As of December 2001, there were over 3,100
freestanding ambulatory surgery centers in the U.S., of which 70% were
independently owned.
SurgiCare believes that the following factors have contributed to the
growth of ambulatory surgery centers:
COST-EFFECTIVE ALTERNATIVE
Ambulatory surgical centers are not usually saddled with the high cost and
overhead of the ancillary services such as administration, laboratory,
radiology, or dietary, that are generally found in the hospital settings.
Therefore, surgery is generally less expensive than hospital inpatient surgery.
In addition, SurgiCare believes that surgery performed at a freestanding
ambulatory surgery center is also less expensive than hospital-based ambulatory
surgery for a number of reasons, including:
Lower facility development costs; More efficient of staffing and space
utilization; Specialized operating environment focused on cost
containment.
SurgiCare believes that interest in ambulatory surgery centers has grown as
managed care organizations have continued to seek a cost-effective alternative
to inpatient services.
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PHYSICIAN AND PATIENT PREFERENCE
Operating physicians, who have determined that their patients are in need
of a surgical procedure, generally choose in which facility the surgery will be
performed. In most cases, patients will have their surgery performed at the
facility that their doctor determines is most appropriate.
Freestanding ambulatory surgery centers subject neither doctors nor their
patients to the large institutional environment found at both acute care
inpatient hospitals, and outpatient surgery centers located within a hospital.
SurgiCare believes that because of the ease of admission and discharge,
many physicians prefer ambulatory surgery centers. SurgiCare believes that such
centers enhance physicians' productivity by providing them with greater
scheduling flexibility, more consistent nurse staffing and faster turnaround
time between cases. This allows the physician to perform more surgeries in a
defined period. In contrast, hospitals generally serve a broader group of
physicians, including those involved with emergency procedures, resulting in
postponed or delayed surgeries. Additionally, many physicians choose to perform
surgery in a freestanding ambulatory surgery center because their patients
prefer the simplified admissions and discharge procedures and the less
institutional atmosphere.
NEW TECHNOLOGY
The increased use of minimally invasive surgery, enhanced endoscopic
techniques and fiber optics, have reduced the trauma and recovery time
associated with many surgical procedures. Improved anesthesia has shortened
recovery time by minimizing postoperative side effects such as nausea and
drowsiness, thereby avoiding, in some cases, overnight hospitalization. These
new technologies and advances in anesthesia, which have been increasingly
accepted by physicians, have significantly expanded the types of surgical
procedures that are being performed in ambulatory surgery centers.
BUSINESS PHILOSOPHY
SurgiCare believes that physician owned and operated surgical centers are
typically profitable. This profitability results primarily from the fact that
physicians who own and operate an ambulatory surgical center are the center's
most significant source of patients and benefactors. Generally, it is the
operating physician, not the patient, who chooses the facilities where surgical
procedures are to be done. Because this decision is made at the physician level,
it is in fact the physicians bringing patients to the outpatient surgical
facility.
SurgiCare believes that ambulatory surgical centers receive their patient
referrals almost exclusively from the operating physicians. Therefore, it
becomes an extremely important role of a center's management to insure that the
operating physicians have everything they need, and that they are pleased with
the results that they are able to obtain at the center. If management and the
operating physicians are substantially the same, it becomes much easier to
insure that physician needs are meet, and that their experiences at the centers
are pleasant.
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Furthermore, SurgiCare believes that when operating physicians own and
operate an ambulatory surgical center, they become cost conscious. Without
allowing cost consciousness to become detrimental to the patients, it may still
have a significant positive effect on the overall profitability of the center.
SurgiCare believes that the profitability of freestanding ambulatory
surgery centers tends to make them attractive to acquirers. Nevertheless,
following the acquisition of a physician owned center, evidence suggests that
the typical center's profitability will significantly decrease. SurgiCare
believes that this typical decline in profitability can be explained, in part,
because in many of such acquisitions, the operating physicians lose control of
the center. After a typical acquisition of an ambulatory surgery center, the
control of the center is typically vested in non-physician management. The
factors motivating the physician users to insure the center's profitability are
therefore typically removed.
SurgiCare's management structure consists of physicians and healthcare
professionals. SurgiCare's management has substantial experience in the
operations and management of ambulatory surgical centers. SurgiCare also expects
that it will issue its own shares, or other equity interests to the physicians
who own and operate other centers in which SurgiCare may acquire an interest.
SurgiCare believes that it will thereby be able to substantially align the
interests of SurgiCare's management and shareholders with those of the physician
owners of centers in which SurgiCare may acquire an interest. SurgiCare also
presently intends to permit each surgery center to be substantially managed by
its own board, which is anticipated to consist of a majority of physicians
associated with the center and one or more representatives of SurgiCare. Based
upon this approach, SurgiCare expects that it will benefit from the substantial
unity of goals and motivations of its own management and shareholders with those
of physicians who have previously owned and operated a freestanding center
acquired, in whole or in part, by SurgiCare.
SurgiCare therefore expects that with goals and motivations substantially
aligned, the profitability of each center in which it acquires an interest can
be maintained. There are numerous factors that affect the profitability of
ambulatory surgery centers, including regulatory and liability matters.
Therefore, there can be no assurance that the profitability of any center or
SurgiCare as a whole will be maintained.
SurgiCare intends to apply its philosophy in the acquisition, development
and operation of physician owned / managed freestanding ambulatory surgery
centers.
6
STRATEGY.
SurgiCare's market strategy is to accelerate penetration of key markets and
expand into new markets by:
- Attracting and retaining top quality, highly productive surgeons and
other physicians. Recognizing the importance of physician
satisfaction, SurgiCare operates its facilities and have designed its
operating model to encourage physicians to choose our facilities.
SurgiCare has identified and seeks to accommodate the key factors in a
physician's decision making process, which SurgiCare believes includes
quality of care, patient comfort, streamlined administrative
processes, efficient operation and overall opportunity for increased
physician productivity.
- Enhance physician productivity. SurgiCare intends to enhance physician
productivity and promote increased same-center volumes, revenues and
profitability by increasing physician involvement, and creating
operating efficiencies, including improved scheduling, group
purchasing programs and clinical efficiencies.
- Growth through selective domestic acquisitions and development of
surgical facilities. SurgiCare typically target the acquisition or
development of surgery centers that provide high volume,
non-emergency, lower risk procedures in several medical specialties.
Our focus is on under-performing centers where acquisition prices are
modest and the leverage returns for operational performance
improvements is high. SurgiCare's development staff first identifies
existing centers that are potential acquisition candidates. The
candidates are then evaluated against SurgiCare's project criteria
which may be expected to include several factors such as number of
procedures currently being performed by the practice, competition from
and the fees being charged by other surgical providers, relative
competitive market position of the physician practice under
consideration, ability to contract with payers in the market and state
certificate of need ("CON") requirements for development of a new
center. SurgiCare is in the process of identifying ambulatory surgical
centers as potential acquisition targets and has, in some cases,
conducted preliminary discussions with representatives of centers.
SurgiCare expects that the acquisition of other surgery centers will
take the form of mergers, stock-for-stock exchanges or
stock-for-assets exchanges and that in most instances, the target
company will wish to structure the business combination to be within
the definition of a tax-free reorganization under Section 338 of the
Internal Revenue Code of 1986, as amended. SurgiCare may, however, use
other acquisition structuring techniques including purchases of assets
or stock for cash or cash and stock, or through formation of one or
more limited partnerships or limited liability companies. SurgiCare
will typically acquire less than all of the interest in a particular
center.
- Enhance operating efficiencies. We use systems and protocols to
enhance operating efficiencies at both existing and newly acquired or
developed facilities. We believe that this focus on efficient
operations increases our own profitability and encourages physicians
to use our facilities by increasing their productivity. In addition,
efficient operations are critical to our lower cost model and our
competitive advantage in attracting and negotiating with payers.
7
- Creation of operationally efficient clusters of ASCs. We seek to build
a core management team in each geographical market which will gain
increased marketing and operational efficiencies as we add new centers
to the market. Spreading the overhead burdens across more operating
units not only reduces the total overhead per center but also allows
us to attract increasingly more competent operating managers.
- Diversification into complimentary healthcare businesses. SurgiCare
expects to diversify into related healthcare markets and are targeting
imaging centers, surgical hospitals, and practice management.
SurgiCare is looking to develop and/or acquire imaging centers that
are in conjunction with our surgery centers. This will strategically
position us to service medical outpatient needs and enhance the
practices of our physician partners. In addition, SurgiCare is
evaluating potential expansion of existing surgery centers into
surgical hospitals or acquisition or development of surgical
hospitals. This is a natural progression of growing centers, but
SurgiCare will be conservative in its growth in this area. Finally,
SurgiCare is considering expanding into practice management, which is
a core discipline that SurgiCare will need to continue to grow and be
profitable. In addition, servicing surgery centers with practice
management functions can be a source of potential acquisitions.
ACQUISITION AND DEVELOPMENT OF SURGERY CENTERS
SurgiCare's development staff works to identify existing centers that are
potential acquisition candidates and identify physician practices that are
potential partners for new center development in the medical specialties that
SurgiCare has targeted for development.
The candidates are then evaluated against SurgiCare's project criteria
which may be expected to include several factors such as number of procedures
currently being performed by the practice, competition from and the fees being
charged by other surgical providers, relative competitive market position of the
physician practice under consideration, ability to contract with payers in the
market and state CON requirements for development of a new center.
In presenting the advantages to physicians of developing a new freestanding
ambulatory surgery center in partnership with SurgiCare, SurgiCare anticipates
that the SurgiCare's development staff will emphasize the following factors,
among others:
1. SurgiCare's model of minority interest, allowing the physicians or limited
partners to own a majority of the center.
2. Simplified administrative procedures.
3. The ability to schedule consecutive cases without preemption by inpatient
or emergency procedures.
4. Rapid turnaround time between cases.
5. The high technical competency of the center's clinical staff that performs
only a limited number of specialized procedures, and state-of-the-art
surgical equipment.
8
SurgiCare expects that it will provide the following developmental
services: financial feasibility pro forma analysis; assistance in state CON
approval process; site selection; assistance in space analysis and schematic
floor plan design; analysis of local, state, and federal building codes;
negotiation of equipment financing with lenders; equipment budgeting,
specification, bidding, and purchasing; construction financing; architectural
oversight; contractor bidding; construction management; assistance with
licensing; assistance with Medicare certification and third party managed care
contracts.
Going forward, SurgiCare anticipates that its ownership interests in most
of its freestanding ambulatory surgery centers will be approximately 35%.
However, from time to time SurgiCare may identify centers where it is
advantageous to acquire a majority interest. Regardless of the percentage of
each center that SurgiCare acquires, the physicians who had owned and operated a
center acquired by SurgiCare, or who have newly developed a center in
partnership with SurgiCare, generally will become shareholders in SurgiCare. The
local physicians will continue to oversee their operations through an executive
committee that interacts with SurgiCare on a regular basis to provide feedback
and set policy.
SURGERY CENTER LOCATIONS
The following table sets forth information related to SurgiCare's
surgical centers in operation as of December 31, 2002.
SURGERY CENTER LOCATIONS
Acquisition SurgiCare
Name Location Date Ownership
Bellaire SurgiCare Houston, Texas July 1999 100%
SurgiCare Memorial Village Houston, Texas Oct. 2000 60%
San Jacinto Surgery Center Baytown, Texas Oct. 2000 10%
Physicians Endoscopy Center Houston, Texas Jan. 2002(1) 10%
Tuscawaras Ambulatory Surgery
Center Dover, Ohio June 2002 51%
(1) Opened in December 2002.
AAAHC ACCREDITATION
Three of SurgiCare's surgery centers are accredited by the Accreditation
Association for Ambulatory Health Care Inc. ("AAAHC"). Although not required,
SurgiCare believes that obtaining an AAAHC accreditation is useful in competing
for, and contracting with certain managed care organizations. SurgiCare, where
practical, will strive to obtain AAAHC accreditation.
REVENUES
SurgiCare's principal source of revenues is a surgical facility fee charged
to patients for surgical procedures performed in its surgery centers. SurgiCare
depends upon third-party programs, including governmental and private health
insurance programs to pay these fees on behalf of their patients. Patients are
responsible for the co-payments and deductibles when applicable. The fees vary
depending on the procedure, but usually include all charges for operating room
usage, special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians. In addition to the facility fee revenues,
SurgiCare also earns management fees from its operating facilities and
development fees from centers that it develops.
9
Freestanding ambulatory surgery centers such as those in which SurgiCare
owns and intends to acquire depend upon third-party reimbursement programs,
including governmental and private insurance programs, to pay for services
rendered to patients. SurgiCare derived approximately 15% of its gross revenues
from governmental healthcare programs, including Medicare and Medicaid, in 2002.
The Medicare program currently pays ambulatory surgery centers and physicians in
accordance with fee schedules, which are prospectively determined.
The Department of Health and Human Services ("DHHS") bases its
reimbursement system to ambulatory surgery centers on cost surveys. The current
payment system is based on a 1986 cost survey. Another survey was completed in
1994, and based on this survey, in 1998, DHHS proposed a new payment methodology
for surgery centers. If implemented, this new payment methodology would have
adversely affected our revenues by approximately 2%. In May 2002, DHHS listed
this proposal as a "discontinued action." However, DHHS may propose a new rule
at any time that could adversely impact surgery center reimbursement and
therefore our financial condition, results of operations and business prospects.
In January 2003, the Medicare Payment Advisory Commission, or MedPac, voted
to recommend to Congress that the reimbursement by Medicare for procedures
performed in surgery centers be no higher than the reimbursement rate for the
same procedures performed in hospital outpatient departments. Also, in January
2003, the Office of Inspector General, or OIG, issued a report that included a
similar recommendation, and a recommendation that DHHS conduct a new cost
survey. It is uncertain if Congress will act on either or both recommendations.
While the majority of procedures are reimbursed at a higher rate in hospital
outpatient departments than in ambulatory surgery centers, several procedures
are reimbursed at a higher rate in ambulatory surgery centers. Although there is
no certainty that these recommendations will be implemented, we have determined
that, based on our current procedure mix, the MedPac recommendation, if
implemented, would have an immaterial effect on revenues.
In addition to payment from governmental programs, ambulatory surgery
centers derive a significant portion of their net revenues from private
healthcare reimbursement plans. These plans include both standard indemnity
insurance programs as well as managed care structures such as PPOs, HMOs and
other similar structures.
The strengthening of managed care systems nationally has resulted in
substantial competition among providers of services, including providers of
surgery center services. This competition includes companies with greater
financial resources and market penetration than SurgiCare. In some cases
national managed care systems require that a provider, in order to participate
in a specific plan, be able to cover an expanded geographical area.
SurgiCare believes that all payers, both governmental and private, will
continue their efforts over the next several years to reduce healthcare costs
and that their efforts will generally result in a less stable market for
healthcare services. While no assurances can be given concerning the ultimate
success of SurgiCare's efforts to contract with healthcare payers, SurgiCare
believes that its position as a low-cost alternative for certain surgical
procedures should enable its current centers, and additional centers which it
may acquire, to compete effectively in the evolving healthcare marketplace.
COMPETITION
There are several companies, many in niche markets, that acquire existing
freestanding ambulatory surgery centers. Many of these competitors have greater
resources than SurgiCare. The principal competitive factors that affect the
ability of SurgiCare and its competitors to acquire surgery centers are price,
experience, reputation, and access to capital.
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MANAGED CARE CONTRACTS
SurgiCare's participation in managed care contracts, often referred to as
HMOs and PPOs, in most cases simply makes it more convenient and cost effective
for a potential patient to allow their doctor to choose a SurgiCare facility.
Participation in most managed care contracts is helpful, but not material to
SurgiCare's business. SurgiCare believes that its current centers can provide
lower-cost, high quality surgery in a more comfortable environment for the
patient in comparison to hospitals and to hospital-based surgery centers with
which SurgiCare competes for managed care contracts. SurgiCare intends that any
additional center, which it may acquire, will be similarly situated. In
competing for Managed Care contracts, it is important that SurgiCare be able to
show insurance companies that it provides quality healthcare at affordable,
competitive prices.
GOVERNMENT REGULATION
The healthcare industry is subject to extensive regulation by a number of
governmental entities at the federal, state and local levels. Regulatory
activities affect the business activities of SurgiCare by controlling its
growth, requiring licensure and certification for its facilities, regulating the
use of SurgiCare's properties, and controlling reimbursement to SurgiCare for
the services it provides.
Certificates of Need and State Licensing. CON regulations control the
development of ambulatory surgery centers in certain states. CONs generally
provide that prior to the expansion of existing centers, the construction of new
centers, the acquisition of major items of equipment or the introduction of
certain new services, approval must be obtained from the designated state
health-planning agency. State CON statutes generally provide that, prior to the
construction of new facilities or the introduction of new services, a designated
state health-planning agency must determine that a need exists for those
facilities or services. SurgiCare expects that its development of ambulatory
surgery centers will generally focus on states that do not require CONs.
However, acquisitions of existing surgery centers, even in states that require
CONs for new centers, generally do not require CON regulatory approval.
State licensing of ambulatory surgery centers is generally a prerequisite
to the operation of each center and to participation in federally funded
programs, such as Medicare and Medicaid. Once a center becomes licensed and
operational, it must continue to comply with federal, state and local licensing
and certification requirements in addition to local building and life safety
codes. In addition, each center is also subject to federal, state and local laws
dealing with issues such as occupational safety, employment, medical leave,
insurance regulations, civil rights and discrimination, and medical waste and
other environmental issues.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of healthcare providers. SurgiCare believes that its operations are
in compliance with these laws in the states in which it currently does business.
The National Association of Insurance Commissioners (the "NAIC") recently
endorsed a policy proposing the state regulation of risk assumption by
healthcare providers. The policy proposes prohibiting providers from entering
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
healthcare providers will be precluded from entering into capitated contracts
directly with employers and benefit plans other than HMOs and insurance
companies.
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SurgiCare and its affiliated groups may in the future enter contracts with
managed care organizations, such as HMOs, whereby SurgiCare and its affiliated
groups would assume risk in connection with providing healthcare services under
capitation arrangements. If SurgiCare or its affiliated groups are considered to
be in the business of insurance as a result of entering into such risk sharing
arrangements, they could become subject to a variety of regulatory and licensing
requirements applicable to insurance companies or HMOs, which could have a
material adverse effect upon SurgiCare's ability to enter into such contracts.
With respect to managed care contracts that do not involve capitated
payments or some other form of financial risk sharing, federal and state
antitrust laws restrict the ability of healthcare provider networks such as
SurgiCare's specialty physician networks to negotiate payments on a collective
basis.
Reimbursement. SurgiCare depends upon third-party programs, including
governmental and private health insurance programs; to reimburse it for services
rendered to patients in its ambulatory surgery center. In order to receive
Medicare reimbursement, each ambulatory surgery center must meet the applicable
conditions of participation set forth by DHHS relating to the type of facility,
its equipment, personnel and standard of medical care, as well as compliance
with state and local laws and regulations, all of which are subject to change
from time to time. Ambulatory surgery centers undergo periodic on-site Medicare
certification surveys. SurgiCare's existing center is certified as a Medicare
provider. Although SurgiCare intends for its current center and those, which it
may acquire, to participate in Medicare and other government reimbursement
programs, there can be no assurance that these centers will continue to qualify
for participation.
Since performing surgery is a fundamental part of any surgical practice,
the facilities where a surgeon chooses to operate is considered to be an
extension of the surgical practice. It is acceptable for certain surgical
procedures to be done in a doctor's office; other procedures require a more
clinical environment such as that of an ambulatory surgical center, or a
hospital. Regardless of the location, when a surgeon performs a procedure, the
surgical procedure is part of the surgical practice, and therefore the location
is considered to be an extension of the practice.
If an operating physician has a financial interest in a facility through a
partnership interest, or as a shareholder, the operating physician has the
potential to benefit from the profitability of the facility. Since the facility
where a surgeon performs surgery is considered an extension of the surgical
practice, profiting from an ownership interest is not considered to be in
violation of the anti-kickback statutes of the Medicare-Medicaid Illegal
Remuneration Provisions.
Medicare-Medicaid Illegal Remuneration Provisions. The anti-kickback
statute makes unlawful knowingly and willfully soliciting, receiving, offering
or paying any remuneration (including any kickback, bribe, or rebate) directly
or indirectly to induce or in return for referring an individual to a person for
the furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Violation is
a felony punishable by a fine of up to $25,000 or imprisonment for up to five
years, or both. The Medicare and Medicaid Patient Program Protection Act of 1987
(the "1987 Act") provides administrative penalties for healthcare practices
which encourage over utilization or illegal remuneration when the costs of
services are reimbursed under the Medicare program. Loss of Medicare
certification and severe financial penalties are included among the 1987 Act's
sanctions. The 1987 Act, which adds to the criminal penalties under preexisting
law, also directs the Inspector General of the DHHS to investigate practices
which may constitute over utilization, including investments by healthcare
providers in medical diagnostic facilities and to promulgate regulations
establishing exemptions or "safe harbors" for investments by medical service
providers in legitimate business ventures that will be deemed not to violate the
law even though those providers may also refer patients to such a venture.
Regulations identifying safe harbors were published in final form in July 1991
(the "Regulations").
12
The Regulations set forth two specific exemptions or "safe harbors" related
to "investment interests": the first concerning investment interests in large
publicly traded companies ($50,000,000 in net tangible assets) and the second
for investments in smaller entities. The corporate structure of SurgiCare and
its centers meet all of the criteria of either existing "investment interests"
safe harbor as announced in the Regulations.
While several federal court decisions have aggressively applied the
restrictions of the anti-kickback statute, they provide little guidance as to
the application of the anti-kickback statute to SurgiCare or its subsidiaries.
SurgiCare believes that it is in compliance with the current requirements of
applicable federal and state law.
Notwithstanding SurgiCare's belief that the relationship of physician
partners to SurgiCare's surgery center should not constitute illegal
remuneration under the anti-kickback statute, no assurances can be given that a
federal or state agency charged with enforcement of the anti-kickback statute
and similar laws might not assert a contrary position or that new federal or
state laws might not be enacted that would cause the physician partners'
ownership interest in SurgiCare to become illegal, or result in the imposition
of penalties on SurgiCare or certain of its facilities. Even the assertion of a
violation could have a material adverse effect upon SurgiCare.
Prohibition on Physician Ownership of Healthcare Facilities. The "Stark II"
provisions of the Omnibus Budget Reconciliation Act of 1993 amend the federal
Medicare statute to prohibit a referral by a physician for "designated health
services" to an entity in which the physician has an investment interest or
other financial relationship, subject to certain exceptions. A referral under
Stark II that does not fall within an exception is strictly prohibited. This
prohibition took effect on January 1, 1995. Sanctions for violating Stark II can
include civil monetary penalties and exclusion from Medicare and Medicaid.
Ambulatory surgery is not identified as a "designated health service", and
SurgiCare therefore, does not believe that ambulatory surgery is otherwise
subject to the restrictions set forth in Stark II. Proposed regulations pursuant
to Stark II that were published on January 9, 1998 specifically provide that
services provided in any ambulatory surgery center and reimbursed under the
composite payment rate are not designated health services.
However, unfavorable final Stark II regulations or subsequent adverse court
interpretations concerning similar provisions found in recently enacted state
statutes could prohibit reimbursement for treatment provided by the physicians
affiliated with SurgiCare or its current or future centers to their patients.
Neither SurgiCare nor its subsidiaries are engaged in the corporate
practice of medicine. SurgiCare does not employ any physicians to practice
medicine on its behalf. SurgiCare and its subsidiaries merely provide the venue
for its physicians to perform surgical procedures. SurgiCare submits claims and
bills to patients, for the facility fee only, and in no way are involved with
the billing or submission of claims for any professional medical fees.
13
Administrative Simplification and Privacy Requirements. There are currently
numerous legislative and regulatory initiatives at the state and federal levels
addressing patient privacy concerns. In particular, on December 28, 2000, DHHS
released final health privacy regulations implementing portions of the
Administrative Simplification Provisions of HIPAA, and in August 2002 published
revisions to the final rules. These final health privacy regulations generally
require compliance by April 14, 2003 and extensively regulate the use and
disclosure of individually identifiable health-related information. In addition,
HIPAA requires DHHS to adopt standards to protect the security of health-related
information. DHHS released final security regulations on February 20, 2003. The
security regulations will generally become mandatory on April 20, 2005. These
security regulations will require healthcare providers to implement
administrative, physical and technical practices to protect the security of
individually identifiable health-related information that is electronically
maintained or transmitted. Further, as required by HIPAA, DHHS has adopted final
regulations establishing electronic data transmission standards that all
healthcare providers must use when submitting or receiving certain healthcare
transactions electronically. Compliance with these regulations became mandatory
on October 16, 2002. However, entities that filed for an extension before
October 16, 2002 have until October 16, 2003 to comply with the regulations.
SurgiCare filed extensions for its centers before October 16, 2002, and we
anticipate that we will be in compliance with the standards by October 16, 2003.
We believe that the cost of compliance with these regulations will not have a
material adverse effect on our business, financial position or results of
operations. If we fail to comply with these regulations, we could suffer civil
penalties up to $25,000 per calendar year for each provision violated and
criminal penalties with fines of up to $250,000 per violation. In addition, our
facilities will continue to remain subject to any state laws that are more
restrictive than the privacy regulations issued under HIPAA. These statutes vary
by state and could impose additional penalties.
SurgiCare cannot predict whether other regulatory or statutory provisions
will be enacted by federal or state authorities which would prohibit or
otherwise regulate relationships which SurgiCare has established or may
establish with other healthcare providers or the possibility of material adverse
effects on its business or revenues arising from such future actions. SurgiCare
believes, however, that it will be able to adjust its operations to be in
compliance with any regulatory or statutory provision, as may be applicable.
SurgiCare is subject to state and federal laws that govern the submission
of claims for reimbursement. These laws generally prohibit an individual or
entity from knowingly and willfully presenting a claim (or causing a claim to be
presented) for payment from Medicare, Medicaid or other third party payers that
is false or fraudulent. The standard for "knowing and willful" often includes
conduct that amounts to a reckless disregard for whether accurate information is
presented by claims processors.
Penalties under these statutes include substantial civil and criminal
fines, exclusion from the Medicare program, and imprisonment. One of the most
prominent of these laws is the federal False Claims Act, which may be enforced
by the federal government directly, or by a qui tam plaintiff on the
government's behalf. Under the False Claims Act, both the government and the
private plaintiff, if successful, are permitted to recover substantial monetary
penalties, as well as an amount equal to three times actual damages. In recent
cases, some qui tam plaintiffs have taken the position that violations of the
anti-kickback statute and Stark II should also be prosecuted as violations of
the federal False Claims Act. SurgiCare believes that it has procedures in place
to ensure the accurate completion of claims forms and requests for payment.
14
However, the laws and regulations defining the proper parameters of proper
Medicare or Medicaid billing are frequently unclear and have not been subjected
to extensive judicial or agency interpretation. Billing errors can occur despite
SurgiCare's best efforts to prevent or correct them, and no assurances can be
given that the government will regard such errors as inadvertent and not in
violation of the False Claims Act or related statutes.
EMPLOYEES
As of December 31, 2002, SurgiCare and its subsidiaries employed
approximately 125 persons, 98 of who were full-time employees and 27 of who were
part-time employees. Of the above, 12 were employed at SurgiCare's corporate
office in Houston, Texas and the remaining employees were employed by
SurgiCare's surgery centers. SurgiCare believes its relationship with its
employees to be good. SurgiCare does not have any employment or labor contracts,
except for its Chief Executive Officer and Chief Financial Officer (see Note 18
to the accompanying financial statements). Additionally, SurgiCare does not
currently plan on having any such contracts with any operating physician on
staff at any of its facilities. At this time, SurgiCare believes that all of its
nurses and other employees have at will employment relationships with the
company.
PHYSICIAN SHAREHOLDERS
SurgiCare has never entered into any arrangement, nor does it plan on
entering into any arrangement with any physicians that operate at any of its
facilities, to assure their continued use of its companies facilities. However,
many of the surgeons operating in SurgiCare facilities own either SurgiCare's
common stock, preferred stock, or both. Depending on SurgiCare's profitability,
the potential exists for all shareholders, both physician and non-physician, to
benefit financially.
Surgeons specializing in podiatry, orthopedics, pain management,
gynecology, ophthalmology, reconstructive, as well as general surgery, utilize
SurgiCare's facilities. SurgiCare is not dependent on the revenue generated by
patients brought by any single operating physician. At certain facilities,
SurgiCare derives a large portion of its revenue from procedures performed
within specific specialties. Currently, podiatry and pain management are the
dominant specialties at Bellaire. Since Bellaire has over twenty podiatrist and
three pain management physicians bringing patients to the surgery center, none
are considered to be a major customer.
ITEM 2. DESCRIPTION OF PROPERTY
SurgiCare's principal office is located at 12727 Kimberly Lane, Suite 200,
Houston, Texas, 77024. This property is approximately 3,900 square feet, located
on the 2nd floor of the Kimberley Medical Office Building above our Memorial
Village surgery center. The property is leased from an unaffiliated third party
for an initial term that expires in August 2006, but with an option to renew for
an additional five years thereafter. Annual rental of $55,272.96 is payable
monthly in the amount of $4,606.08. SurgiCare maintains tenant fire and casualty
insurance on its property located in such building in an amount deemed adequate
by SurgiCare. The other five surgery centers in operation at December 31, 2002,
lease space ranging from 10,000 to 14,000 square feet with remaining lease terms
ranging from 6 months to 6 years.
15
In June 2002, SurgiCare acquired five properties from American
International Industries, Inc., Texas Real Estate Enterprises, Inc. and MidCity
Houston Properties, Inc. in exchange for 1,200,000 shares of Series AA
Redeemable Preferred Stock. The land holdings are undeveloped properties.
SurgiCare is currently marketing the properties for sale. The properties include
735.66 acre tract of vacant land located on the east side of a shell paved road
leading to the Anahuac National Wildlife Refuse, approximately two miles South
of FM 1985, in Chambers County, Texas; a 22.36 acre tract of land located on the
east side of US 59 at the Old Humble/Atascocita Road exit, and an adjacent 14.80
acre tract of land on the west side of Homestead Road in Houston, Harris County,
Texas; a 22,248 square foot tract of land located on the northeast corner of
Almeda Road and Riverside Drive, in Houston, Harris County, Texas; four tracts
of land totaling 26.856 acres located on the southeast, northwest, and northeast
corners of Airport Boulevard and Sims Bayou and east side of 4th Street south of
Airport Boulevard in Houston, Harris County, Texas; and a 12.216 net acre tract
of land located on the southwest corner of Airport Boulevard and Sims Bayou,
Houston, Harris County, Texas.
ITEM 3. LEGAL PROCEEDINGS
In September 2002, SurgiCare was named as a defendant in a suit entitled
Charles Cohen vs. SurgiCare, Inc. and David Blumfield, in the 234th Judicial
District Court of Harris County, Texas. Mr. Cohen sued SurgiCare for breach of
contract and both defendants for defamation. Mr. Cohen claims that SurgiCare
breached his employment agreement when it terminated his employment (although he
remains a Director of SurgiCare as of the date of this filing) and that Mr.
Blumfield and SurgiCare made defamatory statements about him. Mr. Cohen has made
claims for $562,000 for breach of the employment agreement plus additional
damages for the defamation claim. SurgiCare intends to vigorously defend this
suit.
In February 2003, SurgiCare was named as a defendant in a suit entitled
S.E. Altman, individually, and d/b/a Altman & Associates vs. SurgiCare, Inc., in
the County Court at Law No. 1, Harris County, Texas. Altman has sued SurgiCare
for breach of contract based on a finders fee contract in which Altman claims
SurgiCare has not performed. Altman has made claims in the amount of $217,000
plus attorney's fees. SurgiCare intends to vigorously defend this suit.
In March 2003, SurgiCare Memorial Village, L.P. and Town & Country
SurgiCare, Inc. were named as defendants in a suit entitled MarCap Corporation
vs. Health First Surgery Center-Memorial, Ltd.; HFMC, L.C.; SurgiCare Memorial
Village, L.P.; and Town & Country SurgiCare, Inc. MarCap has sued for default
under a promissory note and refusing to remit payment on a promissory note in
the amount of $215,329.36. SurgiCare has paid $53,832.34 of this balance and is
attempting to arrange for a payment plan to pay the remaining balance.
In April 2003, SurgiCare was named as a defendant in a suit entitled
International Diversified Corporation, Limited vs. SurgiCare, Inc. International
Diversified Corporation (IDC) has sued for breach of contract in which IDC
invested $1,000,000 into SurgiCare. IDC has sued for the rescission of the
contract and the return of $1,000,000 or the deliverance of 2,439,024 shares.
SurgiCare intends to vigorously defend this suit.
In April 2003, SurgiCare was named as a defendant in a suit entitled
Jackson Walker, LLP vs. SurgiCare, Inc. Jackson Walker is claiming damages of
$52,247.18 in unpaid invoices for services rendered. SurgiCare is currently
attempting to settle the account.
16
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
In April 2000, the company began trading on the OTC Bulletin Board. In July
2001, SurgiCare qualified for listing on the American Stock Exchange and began
trading on this exchange at that time. The following table sets forth the high
and low sales prices relating to SurgiCare's common stock for the last two
fiscal years, and, with respect to prices during the period when it was traded
on the OTC Bulletin Board, reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions:
FISCAL 2002
HIGH LOW
Quarter ended March 31, 2002 $ 2.50 $ 1.90
Quarter ended June 30, 2002 $ 3.70 $ 1.76
Quarter ended September 30, 2002 $ 2.68 $ 0.30
Quarter ended December 31, 2002 $ 0.93 $ 0.22
FISCAL 2001
HIGH LOW
Quarter ended March 31, 2001 $ 5.88 $ 3.88
Quarter ended June 30, 2001 $ 5.50 $ 2.20
Quarter ended September 30, 2001 $ 4.95 $ 1.85
Quarter ended December 31, 2001 $ 2.93 $ 1.75
HOLDERS
SurgiCare believes that as of March 31, 2003, there were approximately 416
holders of record of the Company's Common Stock, 14 holders of the Company's
Series A Preferred Stock and one holder of the Company's Series AA Preferred
Stock.
DIVIDENDS
SurgiCare has not paid dividends on shares of its Common Stock within
the last two years, and does not expect to declare or pay any cash dividends on
its common shares in the foreseeable future
18
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning issuances of securities
by SurgiCare during the quarter ended December 31, 2002 and earlier transactions
not previously reported during the year ended December 31, 2002, that were not
registered under the Securities Act.
On December 11, 2002, SurgiCare issued 3,658,537 shares of common stock to
an accredited investor upon the conversion of shares of Series AA Preferred
Stock pursuant to the exemption provided by Regulation D and Section 4(2) of the
Securities Act. Also on December 11, 2002, SurgiCare issued 2,439,024 shares of
common stock to an accredited investor for an aggregate consideration of
$1,000,000 pursuant to the exemption provided by Regulation D and Section 4(2)
of the Securities Act.
On February 4, 2002, SurgiCare issued 91,000 shares of common stock to an
accredited investor upon the conversion of shares of Series A Redeemable
Preferred Stock pursuant to the exemption provided by Regulation D and Section
4(2) of the Securities Act.
In March 2002, the Company issued 400,000 shares of its common stock to TCI
Voting Trust for $532,000 in a transaction that it believed was exempt from
registration pursuant to Section 4(2) of the Securities Act. Management believes
that TCI Voting Trust previously sold 400,000 shares to third parties and
utilized the sales proceeds there from to purchase these shares from the
Company. These two transactions could be deemed a simultaneous transaction, in
which case, one could assert that a Section 5 violation occurred under the
Securities Act. The existence of such a violation could give rise to a
rescission right to the purchaser of the common stock, and could adversely
affect other private offerings completed by the Company during the six-month
period preceding and following the possible violation.
In March 2002, the Company issued 125,000 shares of common stock upon the
exercise of $0.10 warrants by a sophisticated investor for services rendered in
connection with a financing pursuant to the exemption provided by Section 4(2)
of the Securities Act.
On April 10, 2002, the Company issued 1,500 shares of common stock to a
sophisticated investor for services rendered pursuant to the exemption provided
by Section 4(2) of the Securities Act.
In May 2002, the Company issued 56,000 shares of common stock to a
sophisticated investor in connection with a financing pursuant to the exemption
provided by Section 4(2) of the Securities Act.
In May 2002, the Company issued 200,000 shares of its common stock to TCI
Voting Trust for $439,000 in a transaction that it believed was exempt from
registration pursuant to Section 4(2) of the Securities Act. Management believes
that TCI Voting Trust then sold 200,000 shares to a third party and utilized the
sales proceeds there from to purchase these shares from the Company. These two
transactions could be deemed a simultaneous transaction, in which case, one
could assert that a Section 5 violation occurred under the Securities Act. The
existence of such a violation could give rise to a rescission right to the
purchaser of the common stock, and could adversely affect other private
offerings completed by the Company during the six-month period preceding and
following the possible violation.
19
On May 30, 2002, the Company issued 75,000 shares of common stock to a
sophisticated investor as partial payment for the acquisition of Aspen
Healthcare pursuant to the exemption provided by Section 4(2) of the Securities
Act.
On June 14, 2002, the Company issued 88,000 shares of common stock to
sophisticated investors for services rendered pursuant to the exemption provided
by Section 4(2) of the Securities Act.
On September 13, 2002, the Company issued 40,000 shares of common stock to
a sophisticated investor for services rendered in connection with a financing
pursuant to the exemption provided by Section 4(2) of the Securities Act.
No underwriters were involved in any of the foregoing sales or issuance of
securities. Such sales or issuance were made in reliance upon an exemption from
the registration provisions of the Securities Act set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering, or the
rules and regulations there under. Each recipient either received adequate
information about SurgiCare or had access, through employment or other
relationships, to such information, and SurgiCare determined that each recipient
had such knowledge and experience in financial and business matters that they
were able to evaluate the merits and risks of an investment in SurgiCare. All of
the foregoing securities are deemed restricted securities for the purposes of
the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
The information contained herein contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward looking statements involve risks and uncertainty,
including, without limitation, the ability of SurgiCare to continue its
expansion strategy, changes in federal or state healthcare laws and regulations
or third party payer practices, SurgiCare's historical and current compliance
with existing or future healthcare laws and regulations and third party payer
requirements, changes in costs of supplies, labor and employee benefits, as well
as general market conditions, competition and pricing. Although SurgiCare
believes that the assumptions underlying the forward looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward looking statements
included in this Form 10-KSB will prove to be accurate. In view of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by SurgiCare or any other person, that the objectives and plans
of SurgiCare will be achieved. SurgiCare undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes to future operating results over time.
OVERVIEW
SurgiCare's principal business strategies are to (a) increase physician
utilization of existing facilities, (b) increase both the revenue and profits
from current cases and procedures being performed in existing facilities (c)
achieve growth and expand revenues by pursuing strategic acquisitions of
existing, and the development of new, physician owned ambulatory surgical
centers, and (d) expand into related healthcare facilities, including imaging,
surgical hospitals and practice management.
20
Surgical supply costs are the single largest cost component of any
ambulatory surgical center. Therefore, SurgiCare's goal is to minimize the cost
of surgical supplies. Through participation in national buying groups, SurgiCare
has been able to negotiate discounts on most of the commonly used surgical
supplies. SurgiCare has also implemented a "Just in Time" approach to inventory.
This allows the center to minimize the amount of supplies that it is required to
keep in inventory.
SurgiCare is in the process of identifying ambulatory surgical centers,
imaging centers, surgical hospitals and practice management companies as
potential acquisition targets and has, in some cases, conducted preliminary
discussions with representatives of these organizations. Although there are no
commitments, understandings, or agreements with any other potential acquisition
targets, talks are ongoing for the acquisition of additional entities. All of
such discussions have been tentative in nature and there can be no assurance
that SurgiCare will acquire any center with whom discussions have been
conducted.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
revenues represented by income statement items.
2002 2001
Revenues, net 100.00% 100.00%
Expenses:
Direct Cost of Services 46.55% 34.82%
General & Administrative Expenses 106.86% 39.19%
Total Operating Expenses 153.42% 74.01%
Operating Income -53.42% 25.99%
Other Income (Loss) -37.12% -15.75%
Earnings (Loss) Before Federal Income Tax Expense -90.54% 10.24%
Federal Income Tax Expense (Benefit):
Current -1.94% .02%
Deferred -11.99% 4.78%
Net Earnings (Loss) -76.60% 5.73%
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 (2002) vs. YEAR ENDED DECEMBER 31, 2001 (2001)
Net Revenue. On a consolidated basis, SurgiCare performed 7,374 cases in
2002 compared to 5,010 cases in 2001, an increase of 47.2%. On a same store
basis (which includes unconsolidated centers and pre-acquisition cases), total
cases in 2002 were 12,603 compared to 10,926 in 2001, an increase in utilization
of 15.3%. New centers accounted for $1,369,696 in revenue in 2002. However,
revenue declined 10.5% from $12,912,301 in 2001 to $11,552,439 in 2002 due to a
reduction in the Company's estimates for reimbursement from third-party payers.
The reduction in reimbursement resulted in the Company increasing its insurance
contractual allowances, which offset revenue. Such adjustments were necessary
based on the Company's assessment of recent reimbursement activity.
21
Direct Surgical Expenses. Total direct surgical costs increased to 46.6% of
revenue in 2002 from 35.0% in 2001. The increase as a percentage is primarily
due to the decrease in revenue dollars resulting from the Company increasing its
estimates of insurance contractual allowances and, to a lesser extent, the
write-down of obsolete inventory.
General and Administrative Expenses. General and administrative costs
increased to 106.9% of revenue in 2002 compared to 40.2% of revenue in 2001. The
increased costs are directly related to the increase in our provision for
doubtful accounts and additional professional fees incurred in merger and
acquisition activities and capital raising efforts. In addition, salaries, rent
and other administrative costs increased due to increased infrastructure and the
acquisition of Tuscarawas.
Total Operating Expenses. As a percent of revenue, total expenses increased
to 153.4% of revenue in 2002 from 75.2% in 2001. The increased costs, expressed
both in dollars and as a percentage of revenue, are directly related to the
increase in our contractual allowances and provision for doubtful accounts,
inventory write-downs and additional professional fees incurred in merger and
acquisition activities and capital raising efforts.
Other Income (Loss). Total Other Loss increased to $5,107,748, or 37.1% of
revenue in 2002 from $731,655, or 15.0% of revenue in 2001 primarily due to the
following:
The loss on sale of assets in 2002 includes the loss of $169,934 incurred
on the sale of our 20% interest in Bayside Surgical Partners, LP.
The loss on terminated acquisition includes $1,977,382 of costs associated
with the Aspen Healthcare acquisition, which was not completed.
The Company incurred an impairment of its investment in land of $1,500,000
during the third quarter of 2002 to reflect the investment's estimated
valuation. The Company is actively marketing this investment for sale within the
next twelve months. It is the Company's policy to periodically evaluate
impairment of its assets. If the Company is unable to sell the properties for
$4,500,000, we may be required to take an additional impairment charge. The
maximum charge would be $500,000 due to the guarantee by American International
Industries, Inc. of a $4,000,000 resale price.
In 2002, the Company's equity in earnings (losses) from limited
partnerships was $(103,874) compared to $76,580 in 2001. The losses incurred are
directly attributable to the increase in our contractual allowances, inventory
write-downs and increase in our provision for doubtful accounts, which are
discussed above.
Interest expense increased to 11.8% of revenue compared to 6.3% of revenue
in 2001. This increase is the due to additional borrowings to complete an
acquisition, to attempt to acquire Aspen Healthcare, and to finance the
Company's working capital.
Minority Interest in Earnings (Losses) of Partnerships. In 2002, the
minority interest in (earnings) losses of partnerships was $782,386 compared to
$(1,210,674) in 2001. The losses incurred by the partnerships are directly
attributable to the increase in our contractual allowances, inventory
write-downs and increase in our provision for doubtful accounts discussed above.
22
Federal Income Tax. In 2002, the Company recorded a tax benefit of
$1,609,576, or 15.3% of its pre-tax loss of $10,459,194. The percentage is less
than the normally expected rate due to a valuation allowance of $2,679,000
recorded against the Company's deferred tax assets. In 2001, the Company
recorded income tax expense of $593,000. or 46.9% of pre-tax income.
Net Earnings (Loss). Net Earnings (Loss) in 2002 decreased to a loss of
$8,849,618 compared to earnings of $670,360 in 2001. The losses incurred are
primarily attributable to the increases in the Company's provision for doubtful
accounts, professional fees incurred in merger and acquisition activities, the
expensing of the costs incurred on the acquisition of Aspen Healthcare, the land
impairment and the loss on the sale of our interest in Bayside Surgical
Partners, L.P.
LIQUIDITY and CAPTIAL RESOURCES
Net cash used in operating activities was $462,422 in 2002 compared to cash
provided by operating activities of $381,747 in 2001. The primary reason for the
decrease in cash from operations was the loss from operations.
Net cash used in investing activities increased to $1,667,443 in 2002 from
$103,978 in 2001. The increased use of cash was primarily for the investment in
Tuscarawas Surgery Center and Aspen Healthcare.
Net cash provided by (used in) financing activities increased to $2,315,918
in 2002 from $(223,161) in 2001. The increase in cash was primarily due to
proceeds received from bank financing and the sale of common stock.
As of December 31, 2002, the Company had cash and cash equivalents of
$262,327 and negative working capital of $8,473,955. SurgiCare has a total of
$6,043,254 in long-term debt and an additional $1,665,657 in revolving lines of
credit currently in default. SurgiCare has defaulted on certain provisions of
its Loan and Security Agreement with its senior lender, DVI Business Credit
Corporation (DVI). However, DVI has agreed to forbear from taking any action to
foreclose on any collateral or place the Company into receivership until June
30, 2003. SurgiCare is in the process of refinancing these agreements as well as
its other debt arrangements, but can provide no assurance that it will be
successful in its efforts.
In July 2002, the Company closed a $1,000,000 funding which was primarily
used to fund the initial payments for the Aspen Healthcare acquisition. The
Company issued convertible debentures in the principal amount of $1,000,000
maturing July 14, 2003, bearing interest at a rate of 25% per annum, with
principal and interest due upon maturity. The debentures are convertible into
common stock at a floor price equal to $1.50 per share.
The Company has financed its growth primarily though the issuance of
equity, secured and/or convertible debt. As of December 31, 2002, the Company
does not have any credit facilities available with financial institutions or
other third parties to provide for working capital shortages. Although the
Company believes it will generate cash flow from operations in future quarters,
due to its debt load, it is not able to fund its current operations solely from
its cash flow.
23
On March 6, 2003, the Company received a $1.2 million investment from
existing physician shareholders, local Houston physicians, and select Houston
individuals. The investment was made via a private placement, under which
3,419,137 shares of the company's common stock were issued. The shares are
restricted under Rule 144. In addition, the investors received a warrant for
every two shares of common stock purchased. The warrants are exercisable for one
year and are priced at $0.35. The proceeds of the financing are being used for
working capital purposes.
The Company believes that additional sales of debt and/or equity
securities will be required to continue operations. The Company is continuing to
pursue additional financing of debt and/or equity, but does not currently have
firm commitments for the additional sales of debt or equity securities. Any such
sales will be made on a best efforts basis. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support its operations, or fund acquisitions for
its anticipated growth. In the event that any future financing efforts are not
successful, the Company will be forced to liquidate assets and/or curtail
operations.
24
ITEM 7. FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page Number
Independent Auditors' Report 26
Consolidated Balance Sheets 27
Consolidated Statements of Operations 29
Consolidated Statements of Shareholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 34
25
Independent Auditors' Report
The Board of Directors
SurgiCare, Inc.
Houston, Texas
We have audited the accompanying Consolidated Balance Sheets of SurgiCare, Inc.
and Subsidiaries as of December 31, 2002 and 2001, and the related Consolidated
Statements of Operations, Shareholders' Equity, and Cash Flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SurgiCare, Inc. and Subsidiaries as of December 31, 2002 and 2001 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that SurgiCare, Inc. and Subsidiaries will continue as a going concern. As
described more fully in Note 2 , the Company has incurred operating losses, cash
deficits from operations and is in default of certain loan agreements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan in regards to these matters is also described
in Note 2. The consolidated financial statements do not reflect any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
March 19, 2003
26
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
-------------------- -------------------
ASSETS
Current Assets
Cash and cash equivalents $ 262,327 $ 76,274
Accounts Receivable:
Trade (less allowance for contractual adjustments and doubtful
accounts of $6,496,000 and $4,851,000 at December 31, 2002 and
2001, respectively)
1,324,944 6,236,455
Other 398,834 12,750
Note receivable 223,178
Inventory 397,772 583,575
Prepaid expenses 69,380 174,082
Other current assets 76,313 261,872
------------------- -------------------
Total Current Assets 2,752,748 7,345,008
------------------- -------------------
Property and Equipment
Office furniture and equipment 378,901 221,277
Medical and surgical equipment 3,576,721 2,388,879
Leasehold improvements 941,440 834,795
Computer equipment 377,495 188,108
Transportation equipment 19,015 49,157
------------------- -------------------
5,293,572 3,682,216
Less: Accumulated depreciation and amortization 2,468,662 1,212,167
------------------- -------------------
2,824,910 2,470,049
Goodwill (net of amortization of $650,207) 8,045,735 7,023,433
Real Estate 4,579,385
Investment in Limited Partnerships 306,654 346,325
Prepaid Limited Partner Distributions 403,748
Loan Fees (net of amortization of $108,321 and $34,470 in 2002 and
2001, respectively) 193,716 128,030
------------------- -------------------
$ 19,106,896 $ 17,312,845
=================== ===================
27
December 31,
2002 2001
-------------------- -------------------
LIABILITIES
Current Liabilities
Current maturities of long-term debt $ 6,295,389 $ 1,789,441
Lines of credit 1,665,657 2,140,546
Current portion of capital leases 313,725 124,437
Accounts payable 2,362,378 1,177,682
Accrued expenses 472,645 133,232
Payable to related party 116,909
Federal income tax payable 224,576
Deferred federal income tax 1,385,000
------------------- -------------------
Total Current Liabilities 11,226,703 6,974,914
Long-Term Capital Lease Obligations 236,247
Long-Term Debt 454,328 2,989,865
Minority Interest in Partnerships 915,584
------------------- -------------------
11,681,031 11,116,610
SHAREHOLDERS' EQUITY
Preferred Stock, Series A, par value $.001, 1,650,000 authorized; 1,225,100 and
1,316,100 issued and outstanding at December 31, 2002 and 2001; respectively;
redemption and liquidation value $6,125,500
1,225 1,316
Preferred Stock, Series AA, par value $.001, 1,200,000 authorized; 900,000
issued and outstanding at December 31, 2002
900
Common Stock, par value $.005, 50,000,000 shares authorized; 21,327,131 issued
at December 31, 2002; 14,089,320 issued and outstanding at December 31, 2001
106,635 70,446
Additional Paid-In Capital 15,065,801 4,991,301
Retained Earnings (Deficit) (7,708,196) 1,141,422
Less: Treasury Stock - at cost, 75,000 shares (32,250)
Less: Shareholder receivables (8,250) (8,250)
------------------- -------------------
7,425,865 6,196,235
------------------- -------------------
$ 19,106,896 $ 17,312,845
=================== ===================
See notes to consolidated financial statements.
28
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
2002 2001
------------------- -------------------
Revenues:
Surgical, net $ 11,164,043 $ 12,278,502
Management fees 388,396 362,424
Development fees 271,375
------------------- -------------------
11,552,439 12,912,301
------------------- -------------------
Direct Cost of Revenues:
Surgical costs 2,714,809 2,572,373
Clinical salaries and benefits 1,702,718 1,448,688
Other 960,671 501,497
------------------- -------------------
5,378,198 4,522,558
------------------- -------------------
General and Administrative Expenses:
Salaries and benefits 1,604,562 909,666
Management and affiliation fees 130,979 159,966
Rent 741,124 485,466
Depreciation and amortization 745,731 1,038,644
Professional fees 2,223,374 1,181,111
Taxes 12,020 125,118
Provision for doubtful accounts 5,753,734 576,724
Other 1,096,549 707,359
------------------- -------------------
12,308,073 5,184,054
------------------- -------------------
Total Operating Expenses 17,686,271 9,706,612
------------------- -------------------
Operating Income (Loss) (6,133,832) 3,205,689
------------------- -------------------
Other Income (Expense)
Miscellaneous income 4,651 863
Loss on sale of assets (172,083)
Loss on terminated acquisition (1,977,382)
Impairment on investment in land (1,500,000)
Equity in earnings (loss) of limited partnerships (103,874) 76,580
Interest expense (1,359,060) (809,098)
------------------ -------------------
(5,107,748) (731,655)
------------------- -------------------
See notes to consolidated financial statements.
29
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
For the Year Ended
December 31,
2002 2001
------------------- -------------------
Earnings (Loss) Before Minority Interest and Federal Income Tax Expense (11,241,580) 2,474,034
Minority Interest in (Earnings) Loss of Partnerships 782,386 (1,210,674)
------------------- -------------------
Earnings (Loss) Before Federal Income Tax Expense (10,459,194) 1,263,360
------------------- -------------------
Federal Income Tax Expense (Recovery)
Current (224,576) 3,000
Deferred (1,385,000) 590,000
------------------- -------------------
(1,609,576) 593,000
------------------- -------------------
Net Earnings (Loss) $ (8,849,618) $ 670,360
=================== ===================
Net Earnings (Loss) Per Share - Basic $ (.56) $ .05
=================== ===================
Net Earnings (Loss) Per Share - Diluted $ (.56) $ .04
=================== ===================
Weighted Average Common Shares Outstanding
Basic 15,831,748 14,030,570
=================== ===================
Diluted 15,831,748 15,541,565
=================== ===================
See notes to consolidated financial statements.
30
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002 and 2001
$.001 Series A $.001 Series AA $.005 Par Value Additional
------------------------ ------------------------ Common Stock ----------
Preferred Stock Preferred Stock ------------------- Paid-In Treasury
Shares Amount Shares Amount Shares Amount Capital Stock
Balance - December 31, 2000 1,450,000 $ 1,450 13,954,320 $ 69,771 $4,710,907
Sale of preferred stock 50,000 50 22,450
Collections on shareholder
receivables
Conversion of preferred stock (135,000) (135) 135,000 675 (540)
Redemption of preferred stock (48,900) (49) (21,516)
Issuance of warrants 280,000
Net earnings
----------- --------- ----------- ---------- ----------- ----------- --------- ---------
Balance - December 31, 2001 1,316,100 1,316 14,089,320 70,446 4,991,301
Issuance of preferred stock 1,200,000 $ 1,200 5,998,800
for land
Sale of common stock 3,039,024 15,195 1,955,805
Conversion of preferred stock (91,000) (91) (300,000) (300) 3,749,537 18,748 (18,357)
Exercise of warrants 125,000 625 11,875
Issuances of stock for 136,250 681 220,360
consulting services
Issuances of stock and
warrants for acquisitions 188,000 940 770,313
Issuances of warrants 923,114
Beneficial conversion feature 212,590
of debt
Purchase of treasury stock $ (32,250)
Net loss
----------- ---------- ----------- ----------- ----------- ----------- ---------- ---------
Balance - December 31, 2002 1,225,100 $ 1,225 900,000 $ 900 21,327,131 $ 106,635 $15,065,801 $ (32,250)
=========== ========== =========== =========== =========== =========== =========== =========
Retained
Earnings Shareholder Total
(Deficit) Receivables Equity
Balance - December 31, 2000 $ 693,997 $ (8,250) $ 5,467,875
Sale of preferred stock (13,000) 9,500
Collections on shareholder
receivables 13,000 13,000
Conversion of preferred stock
Redemption of preferred stock (222,935) (244,500)
Issuance of warrants 280,000
Net earnings 670,360 670,360
----------- ---------- -----------
Balance - December 31, 2001 1,141,422 (8,250) 6,196,235
Issuance of preferred stock 6,000,000
for land
Sale of common stock 1,971,000
Conversion of preferred stock
Exercise of warrants 12,500
Issuances of stock for 221,041
consulting services
Issuances of stock and
warrants for acquisitions 771,253
Issuances of warrants 923,114
Beneficial conversion feature 212,590
of debt
Purchase of treasury stock (32,250)
Net loss (8,849,618) (8,849,618)
----------- ----------- -----------
Balance - December 31, 2002 $(7,708,196) $ (8,250) $ 7,425,865
=========== =========== ===========
See notes to consolidated financial statements.
31
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
2002 2001
------------------- -------------------
Cash Flows From Operating Activities
Net earnings (loss) $ (8,849,618) $ 670,360
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Equity in earnings (loss) of limited partnerships 103,874 (76,580)
Minority interest in earnings (loss) of partnership (782,386) 1,210,674
Depreciation and amortization 745,731 1,038,644
Deferred federal income tax (benefit) (1,385,000) 590,000
Loss on sale of assets 172,083
Loss on terminated acquisition 1,977,382
Impairment on investment in land 1,500,000
Stock and warrants issued for consulting and
professional fees 404,314
(Increase) Decrease in:
Accounts receivable 4,586,800 (3,160,289)
Inventory 230,804 36,575
Prepaid expenses 113,350 225,960
Other current assets (163,170) (234,685)
Loan fees (139,537)
Increase (Decrease) in:
Accounts payable 1,150,760 512,922
Federal income tax payable (224,576) (197,865)
Accrued expenses 96,767 (233,969)
------------------- -------------------
Net Cash Provided by (Used in) Operating Activities (462,422) 381,747
------------------- -------------------
Cash Flows From Investing Activities
Purchase of Memorial Village (47,096)
Purchase of Tuscarawas (426,859)
Capital expenditures (226,203) (119,005)
Distributions from partnerships 81,000 111,600
Investment in limited partnerships (14,865) (49,477)
Proceeds from sale of assets 19,484
Investment in terminated acquisition (1,100,000)
-------------------
Net Cash Used in Investing Activities (1,667,443) (103,978)
------------------- -------------------
Cash Flows From Financing Activities
Proceeds from debt 3,867,689 267,528
Payments on debt (2,527,036) (965,466)
Net proceeds from (payments on) lines of credit (474,889) 1,056,045
Principal payments on capital lease (113,991) (106,078)
Collections on shareholder receivable 13,000
See notes to consolidated financial statements.
32
For the Year Ended
December 31,
2002 2001
------------------- -------------------
Cash Flows From Financing Activities (continued)
Distributions to limited partners (536,946) (497,690)
Sale of preferred stock 9,500
Issuance of warrants with debt 149,841
Purchase of treasury stock (32,250)
Exercise of warrants 12,500
Sale of common stock 1,971,000
-------------------
2,315,918 (223,161)
------------------- -------------------
Net Cash Provided by (Used in) Financing Activities
Net Increase in Cash and Cash Equivalents 186,053 54,608
Cash and Cash Equivalents - Beginning of Period 76,274 21,666
------------------- -------------------
Cash and Cash Equivalents - End of Period $ 262,327 $ 76,274
=================== ===================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 1,205,353 $ 724,816
=================== ===================
Income taxes $ 200,865
===================
Supplemental Schedule of Non-Cash Investing and Financing Activities
Redemption of preferred stock with shareholder receivable $ 244,500
===================
Purchase of land with preferred stock $ 6,000,000
===================
Issuance of shares for investment $ 74,750
===================
Equipment acquired with capital lease obligation $ 67,032 $ 348,996
=================== ===================
During 2002, the Company acquired the following assets of Tuscarawas Ambulatory
Surgery Center, LLP.
Accounts receivable $ 161,373
Inventory 45,001
Prepaid expenses 8,648
Property and equipment 834,494
Goodwill 1,022,302
Accounts payable (150,845)
Accrued expenses (61,766)
Debt (842,348)
Warrants issued (590,000)
-------------------
Net cash paid $ 426,859
===================
See notes to consolidated financial statements.
33
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
Note 1 - Organization and Accounting Policies
SurgiCare, Inc. and Subsidiaries (the Company) maintains their accounts on the
accrual method of accounting in accordance with accounting principles generally
accepted in the United States of America. Accounting principles followed by the
Company and the methods of applying those principles which materially affect the
determination of financial position, results of operations and cash flows are
summarized below:
Description of Business
Bellaire SurgiCare, Inc. (Bellaire) was formed in January, 1995 as a Texas
corporation to operate a day surgery center in Houston, Texas. Effective
July 1, 1999, Bellaire acquired SurgiCare, Inc. (formerly Technical
Coatings, Inc.) in a reverse acquisition. Bellaire SurgiCare, Inc. is now a
wholly-owned subsidiary of SurgiCare, Inc.
In September, 2000, Town & Country SurgiCare, Inc. was formed as a Texas
corporation and a wholly-owned subsidiary of SurgiCare, Inc. Town & Country
SurgiCare, Inc. is a 60% general partner in Healthfirst Memorial Village
Surgery, L.P., which operates a day surgery center in Houston, Texas.
During 2002, Town & Country SurgiCare, Inc. acquired a 10% general partner
interest in Physicians Endoscopy Center, Ltd., L.L.P. (Physicians
Endoscopy), which operates a day surgery center in Houston, Texas.
In October, 2000, Baytown SurgiCare, Inc. was formed as a Texas corporation
and a wholly-owned subsidiary of SurgiCare, Inc. Baytown SurgiCare, Inc. is
a 10% general partner of San Jacinto Surgery Center, Ltd., which operates a
day surgery center in Baytown, Texas.
In May 2001, Southeast SurgiCare, Inc. was formed as a Texas corporation
and a wholly-owned subsidiary of SurgiCare, Inc. Southeast SurgiCare, Inc.
is a 20% general partner of Bayside Surgical Partners, L.P. (Bayside),
which operates a day surgery center in Pasadena, Texas. During 2002,
Southeast SurgiCare, Inc. sold their 20% interest in Bayside. See Note 3.
In June 2002, SurgiCare, Inc. acquired a 51% ownership in Tuscarawas
Ambulatory Surgery Center, LLC (Tuscarawas), an Ohio limited liability
company, which operates a day surgery center in Dover, Ohio. See Note 3.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Bellaire SurgiCare, Inc., Southeast
SurgiCare, Inc., Town & Country SurgiCare, Inc., Baytown SurgiCare, Inc.
and Tuscarawas Ambulatory Surgery Center, LLC. (51% owned) All material
intercompany balances and transactions have been eliminated in
consolidation.
34
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized on the date the procedures are performed, and
accounts receivable are recorded at that time. Revenues are reported at the
estimated realizable amounts from patients and third-party payers. If such
third-party payers were to change their reimbursement policies, the effect
on revenue could be significant. Earnings are charged with a provision for
contractual adjustments and doubtful accounts based on fee schedules,
contracts and collection experience. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account.
Inventory
Inventory consists of medical and pharmaceutical supplies which are stated
at the lower of cost or market. Cost is determined under the first-in,
first-out method.
Property and Equipment
Property and equipment are presented at cost. Medical and surgical
equipment, of approximately $493,000, under capital lease is recorded at
the present value of future minimum lease payments. Depreciation and
amortization are computed at rates considered sufficient to amortize the
cost of the assets, using the straight-line method over their estimated
useful lives as follows:
Office furniture and equipment 7 years
Medical and surgical equipment 5 years
Leasehold improvements 5 - 10 years
Computer equipment 5 years
Transportation equipment 5 years
Investment in Limited Partnerships
The investments in limited partnerships are accounted for by the equity
method. Under the equity method, the investment is initially recorded at
cost and is subsequently increased to reflect the Company's share of the
income of the investee and reduced to reflect the share of the losses of
the investee or distributions from the investee.
As of December 31, 2002 and 2001, the Company has a 10% general partnership
interest in San Jacinto Surgery Center, Ltd., a Texas limited partnership.
As of December 31, 2002, the difference in the carrying amount of the
investment and the
35
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
underlying equity in net assets of San Jacinto was approximately $237,000.
This amount is considered goodwill and is not being amortized. As of
December 31, 2002, there is no impairment to this goodwill. As of December
31, 2002, San Jacinto had a $1,000,000 draw note payable to a bank with an
outstanding balance of $948,961, which is guaranteed by the Company. The
note bears interest at the prime rate plus 1% and is secured by the
accounts receivable of San Jacinto.
As of December 31, 2001, the Company had a 20% general partnership interest
in Bayside, a Delaware limited partnership. As described in Note 3, the
Company sold its 20% interest during 2002.
As of December 31, 2002, the Company has a 10% general partnership interest
in Physicians Endoscopy Center, Ltd., L.L.P., a Texas limited partnership.
As of December 31, 2002, Physicians Endoscopy had a $1,387,000 note payable
to a bank, of which $187,000 was guaranteed by the Company.
Goodwill
Goodwill arises from the acquisition of assets at an amount in excess of
their fair market value. Amortization was computed in 2001 by the
straight-line method over 15 years. See Note 5.
Real Estate
Real estate is presented at the lower of cost or current market value based
on a current appraisal.
Loan Fees
Fees paid in connection with obtaining debt financing are being amortized
over the terms of the loans.
Federal Income Taxes
The Company computes federal income tax based upon prevailing rates at year
end.
The Company provides deferred income taxes for the expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
36
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Reclassifications
Certain reclassifications have been made in the 2001 financial statements
to conform to the reporting format in 2002. Such reclassifications had no
effect on previously reported earnings.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2 - Going Concern
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has incurred substantial operating losses during 2002. In
addition, the Company has used substantial amounts of working capital in their
operations and is in default of certain loan agreements. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has financed its growth primarily through the issuance of equity,
secured and/or convertible debt. As of December 31, 2002, the Company does not
have any credit facilities available with financial institutions or other third
parties to provide for working capital shortages. Although the Company believes
it will generate cash flow from operations in the future, due to its debt load,
it is not able to fund its current operations solely from its cash flow. As
such, additional sales of debt and/or equity securities will be required to
continue operations.
On March 6, 2003, the Company received a $1.2 million investment from existing
physician shareholders, local Houston physicians, and select Houston
individuals. The investment was made via a private placement, under which
3,419,137 shares of the Company's common stock were issued. The shares are
restricted under Rule 144. In addition, the investors received a warrant for
every two shares of common stock purchased. The warrants are exercisable for one
year and are priced at $.35. The proceeds of the financing are being used for
working capital purposes.
The Company is continuing to pursue additional financing of debt and/or equity
but does not currently have firm commitments for the additional sales of debt or
equity securities. Any such sales will be made on a best efforts basis. The
Company can provide no assurance that it will be successful in any future
financing effort to obtain the necessary working capital to support its
operations, or fund acquisitions for its anticipated growth. In the event that
any future financing efforts are not successful, the Company will be forced to
liquidate assets and/or curtail operations.
Note 3 - Acquisitions
On May 31, 2002, the Company acquired a 51% interest in Tuscarawas, located in
Dover, Ohio for an aggregate of $426,859 cash and warrants to purchase 200,000
shares of the Company common stock at an exercise price of $.01 per share
expiring May 31, 2007. The warrants were valued at $590,000. The Company has
also entered into a Management Agreement with Tuscarawas to act as exclusive
manager of Tuscarawas in exchange for 5% of the net monthly collected revenue.
37
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
The Company acquired five tracts of real estate in a transaction valued at
$6,000,000 plus legal and other transaction fees, which closed on June 4, 2002,
from American International Industries, Inc., Texas Real Estate Enterprises,
Inc., and Midcity Houston Properties, Inc. During September 2002, the land
acquired June 4, 2002 was appraised at a value less than the acquisition cost.
An impairment loss of $1,500,000 has been recognized to reflect the current
market value.
The Company issued 1,200,000 shares of Series AA Preferred Stock to fund the
transaction. The terms of the Series AA Stock, as modified in a binding letter
of intent dated November 15, 2002, are as follows: 300,000 shares convert
immediately to 3,658,537 shares of common stock. On June 1, 2004, June 1, 2005
and June 1, 2006, 300,000 shares convert to a number of common shares equivalent
to $1,500,000 divided by the average closing price over the previous 20 trading
days. The Company has the option to redeem the Series AA Preferred shares on the
above dates for $5 per share. Holders of Series AA Preferred Stock are entitled
to one vote for each share of Series AA Preferred Stock held at all shareholders
meetings for all purposes.
Effective January 2, 2002, the Company acquired a 10% general partnership
interest in Physicians Endoscopy Center, Ltd., L.L.P. for $14,865.
Effective August, 2001, the Company acquired a 20% general partnership interest
in Bayside for $49,477 in cash.
Note 4 - Dispositions and Loss on Investments
In August 2002, the Company sold its 20% interest in Bayside for a $223,178 note
receivable and recognized a loss on the sale of $169,964. The Company's total
investment in the project which consisted of cash, loans and development fees
was $393,142.
In August 2002, the Company entered into an agreement to acquire Aspen
Healthcare, Inc. (Aspen), a Colorado corporation, which required the Company to
make non-refundable installment payments totalling $1,000,000 in June, July, and
August 2002. In addition, the Company issued 163,000 shares of common stock
valued at $472,051 and warrants to purchase 136,786 shares of common stock at a
price of $2.24 which were valued at $161,407. The 163,000 shares of common stock
could be put back to the Company at $2.24 per share. The put option was valued
at $25,000.
The final cash payment of $5,756,000 was due September 14, 2002. The Company was
unable to make the final payment and defaulted on the agreement. On October 15,
2002, the Company negotiated a settlement agreement with the shareholders of
Aspen. The settlement released the Company from remaining obligations under the
acquisition agreement in consideration of the following:
38
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
(a) Aspen retained all non-refundable deposits totaling $1,000,000; (b) Aspen
exercised their put on 91,400 shares of common stock for cash of $204,736; (c)
The existing warrants were re-priced to $.40 per share ($15,046) (d) New
warrants to purchase 200,000 shares of common stock at $.40 were issued
($48,000) (e) $100,000 in cash
In September 2002, the Company expensed its investment in Aspen and recognized a
loss on its investment of $1,977,382 which included cash, stock, warrants and
all charges related to the settlement agreement.
Note 5 - Goodwill
Goodwill represents the excess of cost over the fair value of net assets of
companies acquired in business combinations accounted for using the purchase
method. Goodwill acquired in business combinations prior to June 30, 2001 had
been amortized using the straight-line method over an estimated useful life of
20 years. In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill
no longer be amortized but instead be reviewed periodically for possible
impairment. The Company has adopted SFAS No. 142 effective January 1, 2002 and
will no longer amortize goodwill.
The following is a reconciliation of goodwill:
Beginning balance, December 31, 2001 $ 7,023,433
Acquisition 1,022,302
-------------------
Ending balance, December 31, 2002 $ 8,045,735
===================
Comparative Proforma results of adopting SFAS 142 follow:
2002 2001
Net Income (Loss):
Reported net income (loss) $ (8,849,618) $ 670,360
Goodwill amortization 498,107
------------------- -------------------
Proforma net income (loss) $ (8,849,618) $ 1,168,467
=================== ===================
39
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Earnings (Loss) Per Share:
Basic:
Reported net income (loss) $ (.56) $ .05
Goodwill amortization .03
------------------- ------------------
Proforma net income (loss) $ (.56) $ .08
================== ==================
Diluted:
Reported net income (loss) $ (.56) $ .04
Goodwill amortization .03
------------------- ------------------
Proforma net income (loss) $ (.56) $ .07
=================== ==================
Under SFAS 142, the Company must have completed its initial assessment of
goodwill for possible impairment no later than December 31, 2002. The Company
has completed the first phase of this impairment test and, based on an
independent valuation performed by a third party, believes that there was no
impairment of goodwill as of January 1, 2002.
Due to the significant losses incurred during 2002, and the decline in the
quoted market price of the common shares, the Company believed that a second
impairment test as of December 31, 2002 was necessary. Using the same
methodology (mainly the market method) as employed in the transitional
valuation, the Company concluded that no impairment had occurred as of December
31, 2002.
Note 6 - Earnings Per Share
Basic earnings per share are calculated on the basis of the weighted average
number of shares outstanding. The 2001 diluted earnings per share, in addition
to the weighted average determined for basic earnings per share, include common
stock equivalents which would arise from the exercise of stock options and
warrants using the treasury stock method, and assumes the conversion of the
Company's preferred stock for the period outstanding, since their issuance.
For the Year Ended
December 31,
2002 2001
Basic Earnings Per Share:
Net Earnings (Loss) $ (8,849,618) $ 670,360
Weighted average shares outstanding 15,831,748 14,030,570
Dilutive stock options and warrants (A) 161,495
Conversion of preferred shares (B) 1,349,500
Conversion of debt (C)
Weighted average common shares outstanding
for diluted net earnings per share 15,831,748 15,541,565
Net earnings (loss) per share - Basic $ (.56) $ .05
================== ==================
Net earnings (loss) per share - Diluted $ (.56) $ .04
================== ==================
40
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
The following potentially dilutive securities are not included in the 2002
calculation of common shares outstanding for diluted net earnings per share,
because their effect would be anti-dilutive due to the net loss for the year:
(A) 8,896,171 options and warrants outstanding at December 31, 2002.
(B) 900,000 shares of Series AA Preferred stock are convertible into $4,500,000
of common shares. 1,225,100 shares of Series A Preferred stock are
convertible into 1,225,100 common shares.
(C) $1,000,000 of debentures are convertible into common stock at a price equal
to $1.50 per share.
Note 7 - Lines-of-Credit
Lines-of-credit for the years ended December 31, 2002 and 2001, are as follows:
2002 2001
------------------- -------------------
$2,500,000 revolving lines-of-credit with a financial institution, secured by
accounts receivable, bearing interest at prime (4.25% at December 31, 2002)
plus 2%, interest payable monthly, due October, 2002
$ 1,665,657 $ 2,140,546
=================== ===================
Note 8 - Long-Term Debt
Long-term debt as of December 31, 2002 and 2001, is as follows:
2002 2001
------------------- -------------------
Note payable to a financial institution, secured by all assets of the Company,
due in monthly installments of $81,068 including interest at 11.5%, due
April, 2006
$ 2,845,407 $ 3,306,942
Note payable to a financial institution, secured by all assets of the Company
and 400,000 shares of SurgiCare, Inc. common stock pledged by certain
shareholders, $375,000 due February, 2002, remaining principal refinanced,
due in monthly installments of $11,060 including interest at 12%, due January
2006
355,730 750,000
Note payable to a financial institution, secured by inventory and equipment, due
in monthly installments of $44,482 including interest at 11.5%, due November,
2002
175,122 465,921
41
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
2002 2001
------------------- ------------------
Note payable to a financial institution, secured by inventory and equipment, due
in monthly installments of $3,280 including interest at 9.5%, due November,
2002
12,865 34,427
Note payable to a financial institution, secured by inventory and equipment, due
in monthly installments of $1,739 including interest at 11.1%, due November,
2002
6,847 18,244
Note payable to a bank, secured by an automobile, due on demand or in monthly
installments of $691 including interest at 9.5%
20,012
Note payable to a financial institution, secured by an automobile, due in
monthly installments of $550 including interest at 7.99%, due
November, 2004 12,147 17,093
Note payable to a bank, secured by land, due in monthly installments of $29,740
including interest at the prime rate (4.25% at December 31, 2002) plus 1.5%,
due December, 2007
1,500,000
Note payable to a shareholder, unsecured, interest at the prime rate (4.25% at
December 31, 2002) plus 2% due upon maturity
50,000
Note payable to a limited partnership, unsecured, due in monthly payments of
$4,303 including interest of 6%, due October, 2003
50,000
Note payable to a financial institution, secured by accounts receivable,
inventory and equipment, due in monthly installments of $3,297 including
interest of 15.9%, due December, 2003
32,966
$1,000,000 convertible debentures, bearing interest at 25%, maturing
June, 2003 (see below) 918,836
Note payable to a financial institution, secured by equipment, furniture and
fixtures, due in monthly installments of $25,955 including interest of 10%,
due July, 2005
706,463
Note payable to a bank, due on demand or in monthly installments of $6,944 plus
interest at the prime rate (4.25% at December 31, 2002) plus 1%, until
December, 2003
83,334 166,667
------------------- -------------------
6,749,717 4,779,306
Less: Current maturities 6,295,389 1,789,441
------------------- -------------------
$ 454,328 $ 2,989,865
=================== ===================
42
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Long-term debt is payable in the future as follows:
For the Year Ending
December 31,
2003 $ 6,295,389
2004 278,552
2005 175,776
-------------------
$ 6,749,717
Loan agreements relating to the majority of the notes payable above contain
requirements for maintenance of defined minimum financial ratios. The Company is
not in compliance with all such provisions as of December 31, 2002. Further, the
Company is delinquent in payments on the majority of the notes. All notes in
default have been shown as current in these financial statements. The Company
has obtained a letter of forbearance through June 30, 2003, in connection with
these loans in default.
In July 2002, the Company closed a $1,000,000 funding which was primarily used
to fund the initial payments for the Aspen acquisition. The debentures are
convertible into common stock at a price equal to $1.50 per share. In connection
with the debentures, the Company issued warrants to purchase 235,000 shares of
common stock for $2.12. Based on the relative fair value of the warrants,
beneficial conversion feature and the debenture, discounts of $149,841 and
$212,590 were recorded to reflect the value of the warrants and the beneficial
conversion, respectively. The discounts will be amortized to interest expense
over one year and four months, respectively. As of December 31, 2002, this note
was in default.
Note 9 - Long-Term Capital Leases
The Company leases certain equipment from third parties. The leases expire
through 2006. The stockholders have guaranteed the leases. As of December 31,
2002, the leases were in default and have been classified as current in these
financial statements.
The following is a schedule of future minimum lease payments under the capital
leases, together with the present value of the net minimum lease payments as of
December 31, 2002:
For the Year Ending
December 31,
2003 $ 377,792
Less: Amount representing interest (64,067)
--------------------
Present value of minimum lease payments 313,725
Less: Current obligations 313,725
-------------------
Long-term obligations under capital lease $ 0
===================
43
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Note 10 - Operating Leases
The Company leases its treatment facilities and corporate office space under
operating leases which expire in various years through 2008. The leases provide
for annual operating expense increases. The Company also leases medical
equipment under an operating lease which expires in 2006. Base rental payments
under these lease agreements are as follows:
For the Year Ending December 31,
2003 $ 784,269
2004 678,363
2005 678,363
2006 483,442
2007 405,145
Thereafter 214,263
-------------------
$ 3,243,845
Note 11 - Management Fees
The Company has contracted with affiliated outpatient surgical centers to manage
the operation of the treatment facilities. Under the contracts, the Company
receives fees ranging from 2% to 5% of revenues collected by the facilities
under contract. The Company recorded the following fees during 2002 and 2001:
2002 2001
------------------- -------------------
SurgiCare Memorial Village, L.P. $ 102,630 $ 120,170
San Jacinto Surgery Center, Ltd. 219,918 212,939
Bayside Surgical Partners, L.P. 37,500 29,315
Tuscarawas Ambulatory Surgery Center 28,348
------------------- -------------------
$ 388,396 $ 362,424
=================== ===================
The contract with Bayside was terminated in 2002 with the sale of the investment
in Bayside.
Note 12 - Related Party Transactions
As of December 31, 2002 and 2001, the Company had a non-interest-bearing
receivable from a shareholder of $8,250 for the purchase of stock.
As of December 31, 2001, the Company had a receivable from Bayside Surgical
Partners of $67,857.
As of December 31, 2002, the Company had a payable to San Jacinto of $126,086.
As of December 31, 2001, the Company had a receivable from San Jacinto of
$24,229.
44
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
As of December 31, 2002, the Company had a receivable from Physicians' Endoscopy
of $9,177.
Bellaire leases space for its offices in a medical office building owned by a
partnership in which Dr. Mineo, a director and shareholder, has a 25% interest.
The lease expires in 2003. During fiscal 2002, Bellaire paid approximately
$195,000 as rent to the partnership. During fiscal 2001, Bellaire paid
approximately $194,000 as rent to the partnership.
Note 13 - Federal Income Taxes
A reconciliation of the statutory federal income tax rate to the effective tax
rate at December 31, 2002 and 2001, is as follows:
2002 2001
------------------- -------------------
Federal income tax expense at statutory rate $ (3,474,002) $ 429,543
Increase in valuation allowance 2,679,000
Correction of prior year accrual (814,574) 150,000
Other 13,457
------------------- -------------------
$ (1,609,576) $ 593,000
===================- ===================
The components of the deferred tax liability as of December 31, 2002 and 2001, were as follows:
2002 2001
Deferred tax liability:
Accrual to cash conversion $ (595,000) $ (1,385,000)
------------------- -------------------
Net deferred tax liability (595,000) (1,385,000)
Deferred tax asset:
Net operating loss 3,274,000
-------------------
Net deferred tax asset (liability) 2,679,000 (1,385,000)
Valuation allowance (2,679,000)
-------------------
Net deferred taxes $ 0 $ (1,385,000)
=================== ===================
The Company has a net operating loss carryforward of approximately $9.6 million,
which will expire in 2022.
Note 14 - Preferred Stock
The Series A preferred stock is convertible at a rate of one share of preferred
stock into one share of $.005 par value common stock. The Company can redeem the
stock at $5 per share. The stock also has a liquidation preference of $5 per
share. Holders of Series A preferred stock are entitled to one vote for each
share of Series A preferred stock held.
As noted in Note 3, during 2002, the Company issued 1,200,000 shares of Series
AA Preferred Stock to fund the acquisition of land. The terms of the Series AA
Stock, as modified in an agreement dated December 11, 2002, are as follows:
300,000 shares convert immediately to 3,658,537 shares of common stock. On June
1, 2004, June 1, 2005 and June 1, 2006, 300,000 shares convert to a number of
common shares equivalent to $1,500,000 divided by the average closing price over
the previous 20 trading days. The Company has the option to redeem the Series AA
Preferred shares on the above dates for $5 per share. Holders of Series AA
Preferred Stock are entitled to one vote for each share of Series AA Preferred
Stock held at all shareholders meetings for all purposes.
45
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Note 15 - Warrants and Options
Transactions with Other Than Employees
The Company accounts for equity instruments issued to non-employees based on the
fair value of the equity instruments issued.
During 2002 the Company issued warrants as follows:
Number of Exercise In connection
Shares Price Expiration Value with
----------------------- ------------ ------------------------------ --------------------- ---------------------
$ 2.12 July 15, 2005 $ 149,841 Debt
235,000
200,000 2.95 June 1, 2007 590,000 Acquisition
50,000 1.00 March 1, 2005 47,500 Consulting
336,786 .32 September 15, 2007 224,453 Acquisition
526,531 .35 November 12, 2007 135,773 Consulting
-----------------------
1,348,317
=======================
During 2001, warrants to purchase 125,000 shares of common stock at $.10 per
share were issued to a consultant and were valued at $280,000 or $2.24 per
share. These warrants were exercised during 2002.
2002 2001
----------------------------------- -----------------------------------
Price Per Price Per
Warrants Share Warrants Share
----------------- ---------------- ----------------- ----------------
Outstanding on January 1, 325,000 $ .10 - 3.00 200,000 $ 3.00
Issued 1,348,317 .32 - 2.95 125,000 .10
Exercised (125,000) .10
------------------ -----------------
Outstanding on December 31 1,548,317 $ .32 - 3.00 325,000 $ .10 - 3.00
================= =================
Weighted average exercise price $ .93 $ 1.88
=================== ===================
Weighted average fair value of warrants
granted during the year $ .85 $ 2.24
=================== ===================
Weighted average remaining life of
warrants at December 31 4.26 years 3.37 years
=================== ===================
The fair value of the warrants at date of issuance was estimated using the
Black-Scholes Model with the following weighted average assumptions:
2002 2001
--------------- ---------------
Risk-free interest rate 3.01% 3.91%
Expected life 2.7 years 5 years
Expected dividends None None
Expected volatility 74% 77%
46
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
Transactions with Employees
The Company accounts for its employee stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," for which no
compensation expense is recognized for employee stock options if there is no
intrinsic value at the date of grant.
In October 2001, the Company established a stock option plan which authorized
1,400,000 shares of common stock to be made available through an incentive
program for employees. The options are granted at an exercise price equal to the
fair market value of the common stock at the date of grant. The options have a
ten year term. There were 81,955 options granted under this plan in 2002. There
were none granted under this plan in 2001.
During 2002, the Company granted options to an employee to purchase 175,000
shares of common stock with an exercise price of $2.00 and a term of 5 years.
The options are fully vested.
During 2002, the Company also granted options to executives to purchase
6,489,232 shares of common stock with an exercise price of $.32 and a term of 10
years. One fourth of these options vest immediately, with the remainder vesting
over 3 years.
On October 5, 2001, the Company granted options to purchase 860,000 shares of
common stock to employees. The options vest over various periods, have an
exercise price of $1.90 and a term of 10 years.
Information with respect to employee stock options for December 31, 2002, is as
follows:
2002 2001
----------------------------------- -----------------------------------
Price Per Price Per
----------------- ---------------- ----------------- ----------------
Options Share Options Share
Outstanding on January 1 860,000 $ 1.90
Granted 6,746,187 .32 - 2.05 860,000 $ 1.90
Forfeited (258,333) 1.90
----------------- -----------------
Outstanding on December 31 7,347,854 $ .32 - 2.05 860,000 $ 1.90
================= =================
Exercisable on December 31 2,657,853 $ .32 - 2.05 361,668 $ 1.90
================= =================
Weighted average fair value of options
granted during the year $ .18 $ .61
=================== ===================
Weighted average exercise price
Outstanding $ .51 $ 1.90
=================== ===================
Exercisable $ .84 $ 1.90
=================== ===================
Weighted average remaining life of
options at December 31
9.64 years 9.75 years
================= =================
Outstanding
Exercisable 9.23 years 9.75 years
================= =================
47
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002 and 2001
The fair value of the options at date of grant was estimated using the
Black-Scholes Model with the following weighted average assumptions:
2002 2001
---------------- ----------------
Risk-free interest rate 3.00% 3.91%
Expected life 3.14 years 5 years
Expected dividends None None
Expected volatility 57% 77%
Had the Company elected to apply Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation," using the fair value based
method, the Company's net income would have been reduced to the following pro
forma amounts:
2002 2001
------------------ ------------------
Net income (loss) - as reported $ (8,849,618) $ 670,360
================== ==================
Net income (loss) - pro forma
$ (9,591,652) $ 524,027
================== ==================
Basic earnings (loss) per share - as reported
$ (.56) $ .05
Basic earnings (loss) per share - pro forma ================== ==================
$ (.61) $ .04
================== ==================
Diluted earnings (loss) per share - as reported
$ (.56) $ .04
Diluted earnings (loss) per share - pro forma ================== ==================
$ (.61) $ .03
================== ==================
Note 16 - 401(k) Plan
The Company has an employee benefit plan under Section 401(k) of the Internal
Revenue Code for all eligible employees. Participants are permitted to defer
compensation up to a maximum of 15% of their income. The Company matches 25% of
the employees' deferrals up to 4% of their income. The Company contributions
vest 20% after two years of service and 20% each year thereafter, being fully
vested after six years of service. During 2002 and 2001, the Company contributed
approximately $7,000 and $4,000, respectively, to the Plan.
48
Note 17 - Litigation
In September 2002, the Company was named as a defendant in a suit entitled
Charles Cohen vs. SurgiCare, Inc. and David Blumfield, in the 234th Judicial
District Court of Harris County, Texas. Mr. Cohen sued the Company for breach of
contract and both defendants for defamation. Mr. Cohen claims that the Company
breached his employment agreement when it terminated his employment and that Mr.
Blumfield and the Company made defamatory statements about him. Mr. Cohen has
made claims for $562,000 for breach of the employment agreement plus additional
damages for the defamation claim. The Company intends to vigorously defend this
suit.
In February 2003, the Company was named as a defendant in a suit entitled S.E.
Altman, individually, and d/b/a Altman & Associates vs. SurgiCare, Inc., in the
County Court at Law No. 1, Harris County, Texas. Altman has sued the Company for
breach of contract based on a finders fee contract in which Altman claims the
Company has not performed. Altman has made claims in the amount of $217,000 plus
attorney's fees. The Company intends to vigorously defend this suit.
In March 2003, SurgiCare Memorial Village, L.P. and Town & Country SurgiCare,
Inc. were named as a defendants in a suit entitled MarCap Corporation vs. Health
First Surgery Center-Memorial, Ltd.; HFMC, L.C.; SurgiCare Memorial Village,
L.P.; and Town & Country SurgiCare, Inc. MarCap has sued for default under a
promissory note and refusing to remit payment on a promissory note in the amount
of $215,329. The Company has paid $53,832 of this balance and is attempting to
arrange for a payment plan to pay the remaining balance.
Note 18 - Commitments
Effective November 10, 2002, the Company has entered into employment agreements
with its executives. The term of the agreements is three years. These agreements
provide for annual salaries and incentive bonuses of up to 30% of the employee's
base compensation. The criteria for earning the bonus will be established by the
Board of Directors at the beginning of each 12-month period. In addition, the
agreements provide for payments of two times annual base salary if the
executives are terminated without cause. All options would also vest at that
time. The Company's aggregate base salary commitment under the employment
agreements through their respective terms is $1,588,000.
Note 19 - Subsequent Events
Under the terms of the agreement completed December 11, 2002 to restructure the
land purchase between SurgiCare, Inc., American International Industries, Inc.,
Texas Real Estate Enterprises, Inc., MidCity Houston Properties, Inc., a Texas
corporation, and International Diversified Corporation (IDC), IDC was to
reimburse the Company $400,000 by January 15, 2003. IDC failed to make any
payment on the $400,000 and thus has forfeited 1,709,024 shares held as
collateral by SurgiCare. On February 3, 2003, counsel for IDC claimed that the
Company has breached the agreement and has asked for repayment of the $1,000,000
investment by IDC. IDC has sued for the rescission of the contract and the
return of $1,000,000 or the deliverance of 2,439,024 shares. The Company intends
to vigorously defend this suit.
49
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
SurgiCare's Directors and Executive Officers are as follows:
NAME POSITION AGE
---- -------- ---
Keith LeBlanc President and Chief Executive Officer 44
Phil Scott Chief Financial Officer and Secretary 40
Jeffery Penso Director and Vice President 48
Sherman Nagler Director 46
Charles S. Cohen Director 40
Bruce Miller Director 53
Michael Mineo Director 58
Keith G. LeBlanc was appointed Chief Executive Officer on September 10th,
2002. Mr. LeBlanc previously served as CEO for Gulf Coast Surgery and Endoscopy
in Biloxi, Mississippi. Mr. LeBlanc has extensive healthcare management
experience, serving as a hospital CEO for 10 years and as the CEO and founder of
The Quest Group, a physician equity MSO joint venture. The Quest Group managed
physician practices statewide in Louisiana. Mr. LeBlanc is a registered
respiratory therapist and holds a MHS from LSU Medical School.
Phil Scott was appointed Chief Financial Officer on September 18th, 2002.
Mr. Scott previously served as the Vice President of Development for HealthCare
Partners, a $300 million physician management services organization. Mr. Scott
was also a co-founder, Vice President and CFO for The Camden Group, a national
healthcare consulting firm. Mr. Scott is a Chartered Financial Analyst and was
awarded an MBA from the University of San Diego.
Dr. Jeffery Penso D.P.M. was elected as Director of SurgiCare, Inc. on July
10, 1999. Dr. Penso has served as Vice-President of SurgiCare, Inc. since July
1999 and Vice-President of Bellaire SurgiCare, Inc. since July 1998. He has been
in private practice for 16 years. He received his undergraduate degree in 1983
at University of Akron, and then attended the Ohio College of Podiatric
Medicine. He has been a Diplomat of the American Board of Podiatric Surgery
since 1988.
Dr. Sherman Nagler D.P.M. was elected as Director of SurgiCare, Inc. on
July 10, 1999. He has been in private practice for 16 years. He received his
undergraduate degree in 1977 at State University of New York at Plattsburgh, and
then attended the New York College of Podiatric Medicine. He has been a Diplomat
of the American Board of Podiatric Surgery since 1985.
Charles S. Cohen was elected as a Director of SurgiCare, Inc. on July 10,
1999. Mr. Cohen previously served as the Co-CEO of SurgiCare, Inc. and before
that, the acting Chief Operating Officer since 1998, but was terminated on
September 9, 2002. From 1994 to 1998, Mr. Cohen was the President of Medical
Distributors International, Inc. (MDI). He has served as a Director of TMDI
Medical, from 1995-1997. Both MDI and TMDI were involved with the international
purchasing, importing, and exporting of medical and surgical equipment. Mr.
Cohen was educated at the University of Missouri at Columbia in business.
Dr. Bruce Miller, D.P.M. has been in private practice for 25 years. He
received his undergraduate degree in 1969 at Temple University and then attended
the Pennsylvania College of Podiatric Medicine. He has been a Diplomat of the
American Board of Podiatric Surgery since 1986.
Dr. Michael Mineo D.P.M. was elected as Director of SurgiCare, Inc. on July
10, 1999. Dr. Mineo has served as Vice-President of Bellaire SurgiCare, Inc.
since March of 1995. He has been in private practice for 29 years. He received
his undergraduate degree in 1964 from Geneva College, Beaver Falls, PA, and then
attended the Ohio College of Podiatric Medicine. He has been a Diplomat of the
American Board of Podiatric Surgery since 1979, and a Fellow of the American
College of Foot Surgeons since 1980.
50
The terms of office of SurgiCare's current directors will expire at the
next annual meeting of the stockholders. Thereafter, directors will hold office
until the succeeding annual meeting or their successors are elected and
qualified. SurgiCare's officers hold office at the pleasure of the board of
directors and until the meeting of the board of directors next following the
annual meeting of stockholders, at which board meeting officers are to be
elected.
(B) Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires SurgiCare's officers and directors, and persons who own more than 10
percent of a registered class of SurgiCare's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish SurgiCare with copies of
all Section 16(a) forms they file.
Based solely on the reports received by us and on the representations of
the reporting persons, we believe that these persons have complied with all
applicable filing requirements during the fiscal year ended December 31, 2002,
except: (a) Mr. Cohen was late in reporting one transaction on Form 4, which was
reported on a Form 5 filed in August 2002; (b) Dr. Blumfield was late in
reporting one transaction on a Form 4, which was reported on a Form 5 filed in
August 2002; (c) Dr. Penso was late in reporting two transactions on Form 4,
which were reported on a Form 5 filed in September 2002; (d) Messrs. LeBlanc and
Scott did not timely file a Form 3, which form was filed in April 2003, and (e)
we have not received any Form 5s for the year ended December 31, 2002, nor have
we received any representations from reporting persons that such form was not
applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid during each of SurgiCare's last three fiscal years to each of
the highest paid persons who are officers or directors of SurgiCare, Inc.
receiving compensation of at least $100,000 and the Chief Executive Officer (the
"Covered Executives"). The following table includes compensation data for Mr.
LeBlanc, Dr. Blumfield and Mr. Cohen, each of which served as our Chief
Executive Officer during the fiscal year ended December 31, 2002. Except as
listed below, no executive officers or employees received a salary and bonus
during the fiscal year ended December 31, 2002 that met or exceeded $100,000.
For compensation for 2000, each of the persons indicated received their
compensation as a director or officer of Bellaire.
SUMMARY COMPENSATION TABLE
Name and Principal
Positions Year Annual Compensation Long-Term Compensation
------------------ ------ ------------------------------------- ---------------------------
Stock Underlying Options
Salary ($) Bonus ($) / SARs (#)
---------- --------- ----------
Keith LeBlanc,
President & CEO (1) 2002 56,654 -- 3,244,616
David Blumfield,
Co-CEO (2) 2002 44,098 -- --
2001 52,500 -- 175,000
2000 24,000 -- --
Charles S. Cohen
Co-CEO and COO (3) 2002 99,868 116,333
2001 125,000 -- 233,333
2000 75,000 -- --
51
Except as set forth in the table, no compensation has been rewarded to, earned
by or paid to any of the Covered Executives and required to be reported in the
table for any of the last three fiscal years.
(1) Commenced employment in November 10, 2002. Salary amount is for the period
from November 10, 2002 until December 31, 2002 and includes amount paid as a
consultant from September 10, 2002 until November 9, 2002.
(2) Resigned on September 10, 2002. Salary amount is for the period from January
2002 through December 31, 2002.
(3) Terminated on September 9, 2002. Salary amount is for the period from
January 2002 until resignation. Options issued are subject to resolution of
lawsuit filed by Charles Cohen against SurgiCare for wrongful termination. This
total assumes all unvested options are awarded to Charles Cohen.
Options, Warrants, and Stock Appreciation Rights
The following table sets forth information concerning individual grants
of stock options made during the fiscal year ended December 31, 2002, to our
named executive officers. No stock appreciation rights were issued during the
fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Number of Securities
Underlying Options Percent of Total Options
Granted (#) Granted to Employees in Exercise or Base Expiration
Name Fiscal Year Price ($/Share) Date
---- ----------- ----------- --------------- ----
Keith LeBlanc 3,233,241 48.5% $0.32 11/09/2012
David Blumfield -- -- -- --
Charles S. Cohen -- -- -- --
The following table sets forth information concerning option exercises during
the fiscal year ended December 31, 2002 and option holdings as of December 31,
2002 with respect to our named executive officers. No stock appreciation rights
were outstanding at the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number of Securities Value of Unexercised
Shares Acquired Value Underlying Unexercised In-the-Money
Name on Exercise (#) Realized ($) Options at FY-End (#) Options at FY-End ($)
---- --------------- ------------ --------------------- ---------------------
Exercisable Unexercisable Exercisable Unexercisable
Keith LeBlanc -- -- 875,669 2,357,572 $157,620 $424,363
David Blumfield -- -- 175,000 -- $0 --
Charles S. Cohen (1) -- -- 350,000 -- $0 --
52
(1) Terminated on September 9, 2002. Options issued are subject to resolution of
lawsuit filed by Charles Cohen against SurgiCare for wrongful termination. This
total assumes all unvested options are awarded to Charles Cohen.
The values of the unexercised options above are based on the difference
between the exercise price of the options and the fair market value of our
common stock at the end of the fiscal year ended December 31, 2002, which was
$.50 per share.
Employment Agreements. Effective November 10, 2002, the Company has entered
into employment agreements with its executives. The term of the agreements is
three years. The agreements provide for payments of two times annual base salary
if the executives are terminated without cause. All options would also vest at
that time. The Company's aggregate base salary commitment under the employment
agreements through their respective terms is $1,588,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of March 31, 2003, 24,752,171 shares of our common stock were
outstanding, 1,225,100 shares of our Series A Preferred Stock were outstanding,
and 900,000 shares of our Series AA Preferred Stock were outstanding. The
following table sets forth, as of such date, information with respect to shares
beneficially owned by: (a) each person who is known by us to be the beneficial
owner of more than 5% of our outstanding shares of common stock, (b) each of our
directors and the executive officers named in the Summary Compensation Table
below, and (c) all current directors and executive officers as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act. Under this rule, certain shares may be deemed
beneficially owned by more than one person (if, for example, persons share the
power to vote or the power to dispose of the shares). In addition, shares are
deemed beneficially owned by a person if the person has the right to acquire
shares (for example, upon conversion of our Series A Preferred Stock or the
exercise of an option or warrant) within sixty days of the date as of which the
information is provided. In computing the percentage ownership of any person,
the amount of shares is deemed to include the amount of shares beneficially
owned by such person by reason of such acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in the following table
does not necessarily reflect the person's actual voting power at any particular
date.
53
To our knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
Title of Name & Amount of Percent
Class Address of Owner Ownership of Class
------------------------------------------------------------------------------------
Common (1) Blumfield, David 800,000 3.21%
Preferred A 7400 Fannin #1100 91,000 7.43%
Houston, TX 77056
Common Nagler, Sherman 677,956 2.74%
Preferred A 1200 Binz 91,000 7.43%
Houston, TX 77004
Common (2) Bradbury, William 852,666 3.44%
Preferred A 7400 Fannin #1100 91,000 7.43%
Houston, TX 77056
Common (3) Jeffery Penso 842,636 3.40%
Preferred A 11006 Westheimer 91,000 7.43%
Houston, Texas 77042
Common (4) Michael Mineo 838,130 3.38%
Preferred A 6699 Chimney Rock 91,000 7.43%
Houston, Texas 77081
Common (5) Charles S. Cohen 379,900 1.51%
8902 Loch Lomond Ct.
Houston, Texas 77096
Common Son Nguyen 766,956 3.10%
Preferred A 1120-A Dennis 91,000 7.43%
Houston, Texas 77004
Common (6) Bruce Miller 901,257 3.64%
13737 S.W. Freeway
Sugarland, Texas 77478
Common Larry Likover 825,350 3.33%
Preferred A 902 Frostwood, #902 91,000 7.43%
Houston, Texas 77024
Common Long Nguyen 766,956 3.10%
Preferred A 4007 Bellaire, #FF 91,000 7.43%
Houston, Texas 77025
Common Gregory Mangum 767,831 3.10%
Preferred A 4754 Beechnut 91,000 7.43%
Houston, Texas 77096
Common Robert Parker 719,340 2.91%
Preferred A 1441 Memorial, #16 91,000 7.43%
Houston, Texas 77079
Common Jeffrey Ross 767,831 3.10%
Preferred A 6624 Fannin, #2450 91,000 7.43%
Houston, Texas 77030
Common Brian Zale 766,956 3.10%
Preferred A 11320 S. Post Oak, #1 91,000 7.43%
Houston, Texas 77035
Common American Int'l Industries, Inc. 3,658,537 14.78%
Preferred AA 601 Cien Street 900,000 100.00%
Kemah, TX 77565
Common (7) Elkana Faiwuszewicz 1,709,024 6.90%
601 Hanson Road
Kemah, TX 77565
Common (8) Keith LeBlanc 6,700,025 25.76%
12727 Kimberley Lane, Suite 200
Houston, TX 77024
Common Shirley Browne 378,981 1.53%
Preferred A P.O. Box 247 91,000 7.43%
Richmond, TX 77406
Common (9) Directors and Officers as a Group (8) 12,448,989 44.67%
Preferred A 364,000 29.71%
54
(1) Includes 175,000 shares underlying a warrant that is currently
exercisable at an exercise price of $1.90 per share.
(2) Includes 17,142 shares underlying a warrant that is currently
exercisable at an exercise price of $0.35 per share.
(3) Includes 17,142 shares underlying a warrant that is currently
exercisable at an exercise price of $0.35 per share.
(4) Includes 50,000 shares underlying a warrant that is currently
exercisable at an exercise price of $0.35 per share.
(5) Includes 350,000 shares underlying a warrant that is currently
exercisable at an exercise price of $1.90 per share. 116,333 warrants
are subject to the dispute in Charles Cohen's lawsuit against
SurgiCare for wrongful termination. See Item 3 - Legal Proceedings.
(6) Includes 17,142 shares underlying a warrant that is currently
exercisable at an exercise price of $0.35 per share.
(7) These shares held by International Diversified Corporation, Ltd. (Mr.
Faiwuszewicz is the majority owner) have been forfeited, but are
subject to the breach of contract suit filed by International
Diversified Corporation, Ltd. See Item 3 - Legal Proceedings.
(8) Includes 1,252,464 shares underlying warrants that are currently
exercisable at an exercise price from $0.32 to $0.45 per share. Mr.
LeBlanc has voting rights over 5,367,561 shares held by American
International Industries, Inc. and International Diversified
Corporation, Ltd until 12/10/2003.
(9) Includes 3,114,212 shares underlying warrants that are currently
exercisable at an exercise price from $0.32 to $1.90 per share. Mr.
LeBlanc has voting right over 5,367,561 shares held by American
International Industries, Inc. and International Diversified
Corporation, Ltd until 12/10/2003.
Equity Compensation Plan Information
The following table gives information about the Company's common stock that
may be issued upon the exercise of options under its SurgiCare, Inc. 2001 Stock
Option Plan as of December 31, 2002, which has been approved by the Company's
stockholders. There are no shares of Company common stock authorized for
issuance under compensation arrangements that were not approved by the Company's
stockholders.
Number of securities
remaining available for
Number of securities to be Weighted average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column A)
Plan Category (A) (B) (C)
------------- --- --- ---
Equity Compensation Plans 81,955 $2.05 318,045
Approved by Security
Holders
Equity Compensation Plans 7,243,149 $0.492 --
Not Approved by Security
Holders(1)
----------------------------- -------------------------- ----------------------------
Total 7,325,104 318,045
55
Other information required by this item is incorporated herein by
reference from the information provided under the heading "Security Ownership of
Certain Beneficial Owners and Management" of the Company's Proxy Statement.
(1) Warrants are exercisable at an exercise price ranging from $0.32 to of
$2.00 per share. The term of exercise ranges from April 5, 2007 to November
9, 2012. 116,333 warrants are subject to the dispute in Charles Cohen's
lawsuit against SurgiCare for wrongful termination. The warrants are
subject to vesting requirements and employment with SurgiCare.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 2002, the Company had revised the contractual
relationship with its founding physicians, all of whom are beneficial owners of
5% or more of the Company's preferred stock, whereby the physicians would be
retained as an advisory committee to oversee the activities of the physician
staffed medical executive committees of each of SurgiCare's surgery centers. In
addition to the services previously covered under the agreement, the advisory
committee would also assist management in revising existing and new operating
agreements, management agreements, establishing medical bylaws, and reviewing
policies and procedures. The Company has reduced the compensation to be paid to
the physician group for its services to $30,000 per month and limited the
contract from five years to six months.
Bellaire leases space for its offices in a medical office building owned by
a partnership in which Dr. Mineo, a director and shareholder, has a 25%
interest. The lease expires in 2003. During fiscal 2002, Bellaire paid
approximately $195,000 as rent to the partnership. During fiscal 2001, Bellaire
paid approximately $194,000 as rent to the partnership.
In January 2003, Messrs. LeBlanc and Scott purchased 160,000 shares of our
common stock for an aggregate purchase price of $72,000.
In February 2003, Dr. Mineo purchased 100,000 shares of our common stock
for a purchase price of $35,000.
In March 2003, Dr. Penso and Dr. Miller each purchased 34,284 shares of our
common stock for a purchase price of $11,999.40 each.
On July 21, 1999, the Board of Directors of both SurgiCare and Bellaire
unanimously approved SurgiCare's acquisition, effective July 1, 1999 of 100%
(1,350 shares) of the issued and outstanding common stock of Bellaire in
exchange for 10,955,556 shares of SurgiCare's common stock and 1,350,000 shares
of SurgiCare's Series A Preferred. This acquisition was accounted for as a
reverse merger. Following the closing of the transaction, Bellaire became a
wholly owned subsidiary of SurgiCare. At the time of the approval by both boards
of directors, the shareholders of Bellaire jointly held the majority of the
issued and outstanding shares of SurgiCare. In addition four of the five members
of the Board of Directors of SurgiCare each individually held 7.4% of the
outstanding and issued shares of Bellaire.
In determining the amount and character of the consideration to be paid by
SurgiCare for the Bellaire stock, the boards of directors of both SurgiCare and
Bellaire considered numerous factors, including the then inactive status of
SurgiCare and prior offers that Bellaire had received for the acquisition of
Bellaire by others.
56
ITEM13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
Exhibit 3.1 Amended and Restated Certificate of Incorporation of SurgiCare, Inc. (Incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 3.2 Articles of Incorporation of Bellaire SurgiCare, Inc. (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 3.3 By-Laws of Technical Coatings Incorporated (now SurgiCare, Inc.) (Incorporated by reference to Exhibit 3.3
of the Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 4.1 Certificate of Designation, Powers, Preferences and Rights of Series A Redeemable (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 4.2 Amended Certificate of Designation, Powers, Preferences and Rights of Series AA Preferred Stock, par value
$.001 per share (Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed on January 29,
2003)
Exhibit 4.3 Form of SurgiCare, Inc. Common Stock Certificate
Exhibit 10.1 Agreement between SurgiCare, Inc. and American International Industries, Inc., Texas Real Estate
Enterprises, Inc., and MidCity Houston Properties, Inc. dated December 11, 2002 (Incorporated by reference
to Exhibit 10.2 of the Company's Form 8-K filed on January 29, 2003)
Exhibit 10.2 Employment Agreement with Keith G. LeBlanc dated November 10, 2002.
Exhibit 10.3 Employment Agreement with Phillip C. Scott dated November 10, 2002.
Exhibit 21 List of Subsidiaries of SurgiCare, Inc.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
For the quarter ended December 31, 2002, there were no Form 8-K filings.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-KSB, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS
Recently, the Company revised internal controls related to equity issuances
and accounting for contractual allowances to improve previous deficiencies in
reporting of stock issuances and recording appropriate contractual allowances.
57
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SurgiCare, Inc.
By: /s/ Keith G. LeBlanc
Keith G. LeBlanc,
President & Chief Executive Officer
---------------------------
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 Title Date
/s/ Keith G. LeBlanc
_________________________ Director, President & April 14, 2003
Keith G. LeBlanc Chief Executive Officer
(principal executive officer)
/s/ Phillip C. Scott
_________________________ Director & April 14, 2003
Phillip C. Scott Chief Financial Officer
(principal financial and
accounting officer)
/s/ Jeffrey Penso
_________________________ Director April 14, 2003
Jeffrey Penso
/s/ Sherman Nagler
_________________________ Director April 14, 2003
Sherman Nagler
/s/ Michael Mineo
_________________________ Director April 14, 2003
Michael Mineo
_________________________ Director April 14, 2003
Bruce Miller
_________________________ Director April 14, 2003
Charles Cohen
58
CERTIFICATIONS
I, Keith G. LeBlanc, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of SurgiCare, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Keith G. LeBlanc
-----------------------
Keith G. LeBlanc,
Chief Executive Officer(1)
(1) A signed original of this written statement required by Section 906 has been
provided to SurgiCare, Inc. and will be retained by SurgiCare, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
59
I, Phillip C. Scott, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of SurgiCare, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Phillip C. Scott
-----------------------
Phillip C. Scott,
Chief Financial Officer(1)
(1) A signed original of this written statement required by Section 906 has been
provided to SurgiCare, Inc. and will be retained by SurgiCare, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
60
Exhibit Index
Exhibit No. Description
Exhibit 3.1 Amended and Restated Certificate of Incorporation of SurgiCare, Inc. (Incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 3.2 Articles of Incorporation of Bellaire SurgiCare, Inc. (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 3.3 By-Laws of Technical Coatings Incorporated (now SurgiCare, Inc.) (Incorporated by reference to Exhibit 3.3
of the Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 4.1 Certificate of Designation, Powers, Preferences and Rights of Series A Redeemable (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on Form 10-SB/A filed on January 28, 2000)
Exhibit 4.2 Amended Certificate of Designation, Powers, Preferences and Rights of Series AA Preferred Stock, par value
$.001 per share (Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed on January 29,
2003)
Exhibit 4.3* Form of SurgiCare, Inc. Common Stock Certificate
Exhibit 10.1 Agreement between SurgiCare, Inc. and American International Industries, Inc., Texas Real Estate
Enterprises, Inc., and MidCity Houston Properties, Inc. dated December 3, 2002 (Incorporated by reference
to Exhibit 10.2 of the Company's Form 8-K filed on January 29, 2003)
Exhibit 10.2* Employment Agreement with Keith G. LeBlanc dated November 10, 2002.
Exhibit 10.3* Employment Agreement with Phillip C. Scott dated November 10, 2002.
Exhibit 21* List of Subsidiaries of SurgiCare, Inc.
Exhibit 99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(*) Filed herewith.
61