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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, 2003
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 KIMBERLEY LANE, 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, 2003: $8,064,523.
As of March 31, 2004, 28,408,685 shares of the registrant's common stock were
outstanding. The aggregate market value of the shares of common stock of the
registrant held by non-affiliates on March 31, 2004 was approximately $9,386,036
based upon a per share price of $0.38, the closing price per share for the
company's common stock on the American Stock Exchange on that day.
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SURGICARE, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Description of Business 3
Item 2. Description of Property 16
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 19
Item 7. Financial Statements 27
Item 8. Changes in and Disagreements with Accountants 54
Item 8A. Controls and Procedures 54
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance With 16(a) of the Exchange Act. 55
Item 10. Executive Compensation 55
Item 11. Security Ownership of Certain Beneficial Owners
and Management 55
Item 12. Certain Relationships and Related Transactions 55
Item 13. Exhibits and Reports on Form 8K 56
Item 14. Principal Accountant Fees and Services 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 9.86 million
shares of common stock, par value $.005 per share ("Common Stock") and 1.35
million 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, 2003, the company owned a majority interest in three
surgery centers and a minority interest as general partner in one additional
center. Three of SurgiCare's centers are located in Texas and one is located in
Ohio. In limited circumstances, SurgiCare, or its subsidiaries may also furnish
anesthesia services in support of the activities of the surgery centers. Our
ASCs perform various types of procedures including: orthopedic surgery,
colonoscopy, ophthalmic laser surgery, pain injections and various pediatric
surgeries. The most common procedures performed in our ASCs include knee
arthroscopy, lumbar nerve block and sacral injection, colonoscopy, hammertoe
correction, sinus endoscopic biopsy, cataract removal, breast biopsy, Mitchell
procedures and cystourethroscopy.
With a view to SurgiCare consolidating the operations of some or all of
these surgery centers, SurgiCare anticipates that it will need to adjust its
ownership interest in such centers to establish an ownership interest of
approximately 35% in each surgery center in keeping with our strategy of
maximizing our investor pool. SurgiCare believes that physician owned and
operated centers are typically more profitable because physicians who own and
operate an ambulatory surgery 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
performed. By allowing physicians to own approximately sixty-five percent of the
interest in the surgery centers, there is more opportunity for more physicians
to own an interest in the center. When physicians have an ownership interest in
surgery centers, they have an incentive to make the centers as profitable as
possible. Therefore, we have begun the process of restructuring the ownership of
the surgery center owned and operated by Bellaire to allow for the sale of
investment interests to operating physicians in the surgery center, but have not
conducted any offerings at this time.
We have negotiated a series of transactions that will restructure SurgiCare
and result in a change of control. The transactions include the acquisition of
three new businesses and issuance of new equity securities for cash and debt
forgiveness. We also intend to complete a reverse stock split and change our
name to Orion HealthCorp, Inc. Our board of directors has approved all of these
actions and a special meeting of stockholders in lieu of an annual meeting will
be held to approve them. The highlights of the financial transactions include:
-- Effecting a one-for-ten reverse stock split and re-designating our
outstanding common stock as Class A common stock.
-- Issuing a new class of common stock (Class B common stock) to Brantley
Partners IV, L.P., a private investor ("Brantley IV"). Brantley IV
will forgive indebtedness owed by SurgiCare and Integrated Physician
Solutions, Inc. ("IPS") to its subsidiary in the aggregate principal
amount of $1.28 million and will contribute up to $6 million in cash
(as reduced for additional debt owing by SurgiCare and IPS to Brantley
IV's subsidiary at the time of the closing of the transactions, which
will also be forgiven) in exchange for shares of Class B common stock.
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-- Acquiring IPS in a merger in which we will issue Class A common stock
to the IPS stockholders and certain IPS creditors. IPS is a provider
of business management services for pediatric practices and also
provides software and technology solutions for physicians.
-- Acquiring Medical Billing Services, Inc. ("MBS"), and Dennis Cain
Physician Solutions, Ltd. ("DCPS"), two providers of physician
management, billing, consulting and collection services in a merger in
which we will pay between $2.9 million and $3.5 million cash and issue
promissory notes in the aggregate principal amount of $500,000 and
Class C common stock to the current equity holders of MBS and DCPS.
The amount of consideration received depends upon the fair market
value of our common stock at the time of the closing of the
transactions, and the consideration is also subject to retroactive
increase or decrease, including the issuance of additional shares of
Class A common stock. We will also issue shares of Class A common
stock as directed by the DCPS and MBS equity holders, and may be
required to make additional payments in certain circumstances.
These transactions are contingent upon refinancing SurgiCare's, IPS's and
MBS's debt. The transactions and the refinancing will provide SurgiCare with
increased revenues and earnings, an improved balance sheet and the opportunity
to grow the business. Please review our proxy statement for our special meeting
of stockholders in lieu of an annual meeting, filed with the SEC for the full
details of the proposed restructuring.
Prior to the proposed amendments to its certificate of incorporation ,
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
Kimberley Lane, Suite 200, Houston, TX 77024, and its telephone number is
713-973-6675.
Bellaire SurgiCare, Inc.
Bellaire owns and operates an ASC located in Houston, Texas. The ASC has
been in operation for 14 years, first as The Institute for Eye Surgery, and
since March of 1995, as Bellaire SurgiCare, Inc. 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, as well as reconstructive and 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. While Bellaire is currently a
wholly-owned subsidiary of SurgiCare, we have begun the process of restructuring
the ownership of the surgery center owned and operated by Bellaire to allow for
the sale of investment interests to operating physicians in such surgery center.
In 2003, there were 1,803 patients treated at Bellaire by approximately 30
doctors, 14 of which have an ownership interest in the Company.
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. In 2003, there were 2,226 patients
treated at Memorial Village by approximately 60 doctors, 25 of which have an
ownership interest in Memorial Village.
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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.
In 2003, there were 4,214 patients treated at San Jacinto by approximately 43
doctors, 19 of which have an ownership interest in San Jacinto.
Tuscarawas Ambulatory Surgery Center, LLC
SurgiCare owns a 51% interest in Tuscarawas Ambulatory Surgery Center, LLC
(Tuscarawas) 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
Tuscarawas only charges the patients for the facility fee. In 2003, there were
2,762 patients treated at Tuscarawas by approximately 25 doctors, 12 of which
have an ownership interest in Tuscarawas.
INDUSTRY OVERVIEW
ASCs 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 ASCs. This shift is illustrated by an outpatient market study,
performed by Verispan, L.L.C. shows an 81% increase in surgeries provided
outside traditional hospitals, over a 7 year period from 1996 to 2003.
SurgiCare believes that the following factors have contributed to the growth of
ASCs:
Cost-effective Alternative. ASCs 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 ASC is
also less expensive than hospital-based ambulatory surgery for a number of
reasons, including:
-- Lower facility development costs;
-- More efficient use of staffing and space utilization;
-- Specialized operating environment focused on cost containment.
SurgiCare believes that interest in ASCs has grown as managed care
organizations have continued to seek a cost-effective alternative to inpatient
services.
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.
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Freestanding ASCs 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 ASCs. 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 ASC 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 ASCs.
BUSINESS PHILOSOPHY
SurgiCare believes that physician owned and operated ASCs are typically
profitable. This profitability results primarily from the fact that physicians
who own and operate an ASC 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 ASCs 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.
Furthermore, SurgiCare believes that physicians become more cost conscious
when they own and manage the ASCs in which they practice. This increased cost
consciousness can have a significant positive effect on the overall
profitability of the center without detrimentally affecting the patients.
SurgiCare believes that the profitability of freestanding ASCs 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 ASC, 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
operation and management of ASCs. 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
6
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 believes that if the goals and motivations for each center are
substantially aligned, then SurgiCare can achieve profitability for every center
in which it acquires an interest. However, there are numerous factors that
affect the profitability of ASCs, 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 ASCs.
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 has 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 targets 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 center, competition from
and the fees being charged by other surgical providers, relative
competitive market position of the surgery centers 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 ASCs as potential
acquisition targets and has, in some cases, conducted preliminary
discussions with representatives of centers, although there are no
signed letters of intent or any verbal offers to acquire such surgery
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 368 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
7
partnerships or limited liability companies. SurgiCare will typically acquire a
minority 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. These systems and protocols include: patient
scheduling and pre-certification process, block scheduling by
physicians, dedicating multiple operating rooms to each physician to
speed turn-around time, and not offering emergency room services which
ensures ease in scheduling and availability. 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.
-- 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 and practice management companies. 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
the healthcare providers who utilize our services. SurgiCare is
planning to expand into practice management, which is a core
discipline that SurgiCare will need to continue to grow and be
profitable. 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
ASC in partnership with SurgiCare, we anticipate that our 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.
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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.
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.
SurgiCare, under previous management, developed Bellaire surgery center.
SurgiCare, under current management developed Physicians Endoscopy Center, L.P.
("Physicians Endoscopy"). SurgiCare sold its interest in Physicians Endoscopy in
June 2003 and SurgiCare acquired Memorial Village, San Jacinto and Tuscarawas as
already established and operating surgery centers. SurgiCare's current
management has experience in developing surgery centers and was responsible for
developing five new centers and managing two centers prior to working for
SurgiCare.
In addition, SurgiCare is opening the Tuscarawas MRI center to expand our
operations in Dover, Ohio. Sixty percent of the funding is being provided by a
third party lease finance company called Maxus Leasing Group ("Maxus"). The
Maxus financing is a typical equipment lease financed over five years. The
remaining portion of the funding was loaned to SurgiCare by a wholly-owned
subsidary of Brantley IV.
Going forward, SurgiCare anticipates that its ownership interests in most
of its ASCs 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, 2003:
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%
Tuscarawas Ambulatory
Surgery Center Dover, Ohio June 2002 51%
AAAHC ACCREDITATION
Two of SurgiCare's surgery centers are accredited by the Accreditation
Association for Ambulatory Health Care Inc. ("AAAHC"). SurgiCare's Bellaire and
Memorial Village facilities are not yet
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accredited. SurgiCare will seek accreditation for the Bellaire facility upon
completion of the facility's renovation. In the future, SurgiCare's Memorial
Village facility will re-apply for accreditation. 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.
ASCs, such as those in which SurgiCare owns or intends to acquire an
interest depend upon third-party reimbursement programs, including governmental
and private insurance programs, to pay for services rendered to patients.
SurgiCare derived approximately 21% of its gross revenues from governmental
healthcare programs, including Medicare and Medicaid, in 2003. The Medicare
program currently pays ASCs and physicians in accordance with fee schedules,
which are prospectively determined.
The Department of Health and Human Services ("DHHS") currently bases its
reimbursement system to ASCs on a 1986 cost survey. The Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("MMA") enacted in December 2003
requires that the current ASC reimbursement methodology based on cost surveys be
replaced with a new ASC payment system that will be effective prior to 2008.
This new system will be based on recommendations made by the General Accounting
Office after studying the relative costs of procedures furnished in ASCs to
those furnished in hospital outpatient departments. The new payment methodology
could adversely impact surgery center reimbursement and therefore our financial
condition, results of operations and business prospects. The MMA also reduces
Medicare payments to ASC by 1% starting April 1, 2004 and freezes the payment
rates from October 1, 2004 through December 31, 2009.
In January 2003, the Medicare Payment Advisory Commission ("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 ("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 ASCs, several procedures are reimbursed at a
higher rate in ASCs. 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, ASCs 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 preferred provider organizations (" PPOs"),
health maintenance organizations ("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.
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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 ASCs. 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.
SurgiCare's most significant competitors include: Symbion, Inc., Amsurg
Corporation, Surgis, Inc., Foundation Surgery Affiliates, Inc., HealthSouth
Corporation, United Surgical Partners International, Inc. Dynacq Healthcare,
Inc., NovaMed Eyecare, Inc., TLC Vision Corporation, LCA Vision, Inc., Hospital
Partners of America, Inc. and National Surgical Care, Inc.
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 provided at those facilities.
Certificates of Need and State Licensing. CON regulations control the
development of ASCs in certain states. CON statutes 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 based on a determination that a need exists for those facilities or
services. SurgiCare expects that its development of ASCs 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. The large population states that require CON
regulatory approval are New York, Michigan and Illinois.
State licensing of ASCs 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
11
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 contracts (which are contracts that compensate the provider
based on the number of members in the plan rather than based on the services the
provider performs) 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.
SurgiCare and its affiliated groups currently do not and currently do not
intend to enter into contracts with managed care organizations, such as HMOs,
whereby SurgiCare and its affiliated groups would assume risk in connection with
providing healthcare services under capitated payment arrangements, although
certain of the subsidiaries of SurgiCare that will exist after the transactions
currently do so, and may continue to do so in the future. If SurgiCare or its
affiliated entities are considered to be in the business of insurance as a
result of entering into such 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. SurgiCare has not made a determination
regarding whether it will be deemed to be in the insurance business after the
transactions close.
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 its ASCs for
services rendered to patients in its centers. In order to receive Medicare
reimbursement, each ASC 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. ASCs undergo
periodic on-site Medicare certification surveys. SurgiCare's existing centers
are certified as Medicare providers. SurgiCare believes that its current centers
will participate in Medicare and other government programs. However, SurgiCare's
current centers may or may not continue to qualify for participation in Medicare
and other government programs. Additionally, the centers that SurgiCare acquires
in the future may not qualify for participation in Medicare or other government
programs.
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
12
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").
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. Where a physician
is in a position to direct referrals or business to an entity or facility in
which such physician has an ownership interest, and, therefore will benefit from
the financial profitability of such entity or facility, there is risk under
federal and state law, including the Medicare-Medicaid Illegal Remuneration
Provisions. If the facility where a surgeon performs surgery is considered an
extension of the surgeon's practice, this may reduce the risk of a violation of
the anti-kickback statutes of the Medicare-Medicaid Illegal Remuneration
Provisions.
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 million 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.
There is safe harbor protection under the anti-kickback statute for
physician-owned ASCs that are structured to meet certain tests set out in the
regulations. SurgiCare's surgery centers may not currently satisfy all
components of the tests for the safe harbor applicable to the ASCs. Nonetheless,
SurgiCare believes that it is in compliance with the current requirements of the
anti-kickback statute.
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 or
similar state 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
Stark II regulations state that items and services provided in any ASC and
reimbursed under the composite payment rate are not designated health services.
Because all items and services provided at SurgiCare's surgery centers are
billed to Medicare under a composite payment rate, as discussed below, SurgiCare
believes that it is not subject to the physician self-referral restrictions set
forth in Stark II. However, in the event that SurgiCare in the future offers
services that are not ASC services covered by a composite payment rate and are
"designated health services" under Stark II, SurgiCare would be subject to the
Stark II physician self-referral prohibition with respect to those services.
Medicare pays ASCs a composite rate, or fixed facility payment, as payment
in full for all items and services furnished to a patient in connection with a
surgical procedure. For example, the Medicare ASC facility fee includes payment
for all lab work that might be furnished in connection with a surgical
13
procedure. As such, the physician who furnishes a surgical procedure in an ASC
in which he or she has an ownership interest has no incentive to unnecessarily
order lab services. The Centers for Medicare and Medicaid Services ("CMS') cited
this as the primary basis for expressly protecting ASC services, and items and
services that otherwise would constitute designated health services when
furnished in the ASC setting.
Most payers pay using a composite payment rate based on the various
procedure groups used by ASCs. Some payers will pay separately for supplies and
implants. The compensation paid by each payer for the facility fees varies by
insurance carrier. Most pay at a percentage of Medicare or a fixed amount per
procedure group. If a facility has a mix of patients whose payers pay better
rates than average, the margins of that center are typically higher. If a
facility has a mix of patients whose payers pay less than the average rates, the
margins of that center are typically lower. The margins achieved at each center
are primarily a function of volume, payer, mix and operating efficiency, in that
order.
However, unfavorable future Stark II regulations or subsequent adverse
court interpretations concerning the Stark II law or regulations or similar
provisions found in similar state statutes could prohibit reimbursement for
treatment provided by the physicians affiliated with SurgiCare or its current or
future centers to their patients. The negative effect of such unfavorable future
Stark II regulations or court rulings may be that investor physicians would not
admit their patients to SurgiCare ASCs because of the prohibition on
reimbursement for services. This would have a chilling effect on the revenues of
SurgiCare and would make its continuing viability questionable. However, due to
the positive financial benefits ASCs offer over hospitals, as discussed in
"Industry Overview" in this section, SurgiCare believes it is unlikely that the
legislature or court will take such unfavorable actions because of the
overwhelming financial benefits enjoyed by Medicare by allowing procedures to be
performed at ASCs.
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.
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 the Health Insurance Portability and
Accountability Act of 1996 ("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
believe that we were 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.
14
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 (a private person
suing on the government's behalf under a statute that assigns a certain part of
the penalty award to the government). 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. Even though SurgiCare believes
that it has procedures in place to ensure the accurate completion of claims
forms and requests for payment, 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.
SurgiCare does not believe it has materially failed to comply with the any
of the regulations described above during the past two years.
EMPLOYEES
As of December 31, 2003, SurgiCare and its subsidiaries employed
approximately 96 persons, 67 of whom were full-time employees and 29 of whom
were part-time employees. Of the above, eight were employed at SurgiCare's
corporate office in Houston, Texas and the remaining employees were employed by
SurgiCare's surgery centers. These employees work in the following positions:
corporate management (8); business office (14); administrators (4); nurses (47);
and technicians (23). 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 SurgiCare.
PHYSICIAN STOCKHOLDERS
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 facilities. However, many of
the surgeons operating in SurgiCare facilities own SurgiCare common stock.
Depending on SurgiCare's profitability, the potential exists for all
stockholders, both physician and non-physician, to benefit financially.
15
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 Kimberley 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 four surgery centers in operation at December 31, 2003, lease
space ranging from 10,000 to 14,000 square feet with remaining lease terms
ranging from month-to-month to nine years.
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 1.2 million 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. SurgiCare currently has contracts to sell two of
these properties - the tract adjacent to the Anahuac National Wildlife Refuge
and the tract on Almeda Road. Pursuant to a December 11, 2002 agreement,
American International Industries, Inc. guaranteed a resale price on the land of
$4 million and agreed to make up any shortfall.
ITEM 3. LEGAL PROCEEDINGS.
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
settlement has been reached whereby SurgiCare will pay MarCap $150,000 over the
next year with interest at 10%, with an underlying settlement of approximately
$200,000 in the event of a breach in the payment plan.
On July 7, 2003, SurgiCare, Inc. was named as a party in the arbitration
entitled Brewer & Pritchard, P.C. vs. SurgiCare, Inc. before the American
Arbitration Association. Brewer & Pritchard have claimed breach of contract and
demanded payment of $131,294.88 in billed and unbilled legal fees plus third
party expenses, interest at the highest legal rate, costs, legal fees and
damages from breach of contract.
16
This case was settled in November 2003 and SurgiCare issued shares of common
stock valued at $117,500 as compensation for past legal fees.
On February 10, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled S.E. Altman v. SurgiCare. S.E. Altman has sued for breach of contract,
alleging that SurgiCare did not pay monies owed under a "Finders Fee Contract."
Plaintiff asserts damages in the amount of $217,000, plus interest and
attorneys' fees. International Diversified Corporation, Limited has indemnified
SurgiCare with respect to any fees owed to Altman under the Finders Fee
Contract. The case has been dismissed in favor of arbitration. In March 2004,
the parties executed a Settlement Agreement and Release of Claims to resolve the
dispute in which SurgiCare agreed to issue Mr. Altman 540,000 shares of common
stock to be registered with the Securities and Exchange Commission on Form S-8.
On April 14, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled A.I. International Corporate Holdings, Ltd. v. SurgiCare, Inc. in the
U.S. District Court for the Southern District of New York. Subsequently,
SurgiCare filed suit against A.I. International Corporate Holdings, Ltd. and
First National Bank, S.A.L. of Lebanon in the 215th Judicial District Court of
Harris County, Texas. The New York case involves allegations that SurgiCare
defaulted on its loan agreement. The plaintiffs in the New York case are suing
SurgiCare for $834,252 representing the loan amount and interest, plus $219,000,
representing damages for "No-filing Charges" and "Non-Effective Charges" under
the contract. SurgiCare's lawsuit in Texas asserts that the loan agreement is
usurious. The defendants in the Texas case have moved for sanctions against
SurgiCare in that forum. The New York case has been ordered to mediation, which
has not yet been scheduled. In conjunction with the mediation order, the parties
agreed to stay the litigation in both states until completion of the mediation.
On November 24, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled Vincent A. Giammalva, Trustee v. SurgiCare, Inc., Keith G. LeBlanc, and
Phillip C. Scott; in the 344th Judicial District Court of Chambers County,
Texas. This case involves allegations that SurgiCare defaulted on a contract to
sell a parcel of real estate to plaintiff. Plaintiff also claims that LeBlanc
and Scott committed fraud. SurgiCare states that it could not sell the parcel of
land because of a lien on the property. The plaintiff seeks specific
performance, forcing SurgiCare to sell the property, as well as actual damages.
SurgiCare is negotiating with the plaintiff in an effort to settle this matter.
In addition, we are involved in various other legal proceedings and claims
arising in the ordinary course of business. Our management believes that the
disposition of these additional matters, individually or in the aggregate, is
not expected to have a materially adverse effect on our financial condition.
However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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 under the symbol SRG. The following table
sets forth the high and low sales prices relating to SurgiCare's common stock
for the last two fiscal years:
FISCAL 2003
HIGH LOW
-------- --------
Quarter ended March 31, 2003 $ 0.50 $ 0.27
Quarter ended June 30, 2003 $ 0.45 $ 0.23
Quarter ended September 30, 2003 $ 0.54 $ 0.22
Quarter ended December 31, 2003 $ 0.72 $ 0.36
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
HOLDERS
SurgiCare believes that as of March 31, 2004, there were approximately 402
holders of record of the Company's Common 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.
OPTION PLAN DATA
In October 2001, SurgiCare established our 2001 Stock Option Plan, which
authorized 1.4 million shares of our common stock to be made available through
an incentive program for employees. The 2001 Stock Option Plan was approved by
the stockholders. The options were granted at an exercise price equal to the
fair market value of the common stock at the date of grant. The options had a
ten year term. There were 81,955 options granted under the 2001 Stock Option
Plan in 2002. There were none granted under the 2001 Stock Option Plan in 2003.
As of December 31, 2003, there were 62,706 options outstanding.
The number of warrants outstanding as of the beginning of 2003 to employees
was 7,265,899. The number of warrants outstanding as of the end of 2003 to
employees or former employees was
18
6,855,899 with exercise prices ranging from $0.32 to $2.00, with a weighted
average exercise price of $0.407 per share. There were no changes in the
exercise price of outstanding warrants through cancellation and re-issuance or
otherwise, except price changes resulting from the normal operation of
anti-dilution provisions of the warrants.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning issuances of securities
by SurgiCare during the quarter ended December 31, 2003.
On October 24, 2003, the Company issued 228,310 shares of common stock to
Charles Cohen, a former officer and director, in settlement of claims by Cohen
for compensation for services while he was employed by the Company. The stock
was issued to Mr. Cohen, an accredited investor, for services rendered in
reliance on the exemption provided by Section 4(2) of the Securities Act.
On November 10, 2003, the Company issued 682,035 shares of common stock to
Long Nguyen, M.D., David Roberts, Gerald McIntosh, Hank Moore, and SMT
Marketing, LLC, each of whom are accredited investors for services rendered by
each of them under separate agreements with the Company. The stock was issued in
reliance on the exemption provided by Section 4(2) of the Securities Act.
On December 9, 2003, the Company issued 41,833 shares of common stock to
U.S. Billing & Contracting, LLC, an accredited investor, for services rendered,
in reliance on 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, our ability to continue our expansion strategy,
changes in federal or state healthcare laws and regulations or third party payer
practices, our 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 we believe 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 management or any other person
that our objectives and plans will be achieved. We undertake 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.
19
Critical Accounting Policies
In December 2001, the SEC requested that reporting companies discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one that is important to the portrayal of a
company's financial condition and operating results and requires management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of this and
other accounting policies, see Notes 1 and 2 to the accompanying Consolidated
Financial Statements. Our preparation of this Annual Report on Form 10-KSB
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities as of
the date of our financial statements. Therefore, actual results may differ from
those estimates.
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 such
factors as historical trends of billing and cash collections, established fee
schedules, accounts receivable agings and contractual relationships with
third-party payers. Contractual allowances are estimated primarily using each
surgery center's collection experience. Contractual rates and fee schedules are
also helpful in this process. On a rolling average basis, the Company tracks
collections as a percentage of related billed charges. This percentage, which is
adjusted on a quarterly basis, has proved to be the best indicator of expected
realizable amounts from patients and third-party payers. Contractual adjustments
and accounts deemed uncollectible are applied against the allowance account. The
Company is not aware of any material claims, disputes or unsettled matters with
third-party payers.
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.
These general partnership interests were accounted for as investment in
limited partnerships due to the interpretation of FAS 94/ARB 51 and the
interpretations of such by Issue 96-16 and SOP 78-9. Under those
interpretations, SurgiCare could not consolidate its interest in those
facilities in which it held a minority general interest partnership interest due
to management restrictions, shared operating decision- making, capital
expenditure and debt approval by limited partners and the general form versus
substance analysis. Therefore, SurgiCare recorded them as investments in limited
partnerships.
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
20
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
is no longer amortizing goodwill.
Upon adoption of SFAS 142, as well as December 31, 2003 and 2002, the
Company performed an impairment test of its goodwill and determined that no
impairment of the recorded goodwill existed. Under SFAS No. 142, goodwill is
tested annually and more frequently if an event occurs which indicates the
goodwill may be impaired.
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
and practice management.
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 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 we
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.
2003 2002
----------- -----------
Revenues, net 100.00% 100.00%
Expenses:
Direct Cost of Services 56.16% 46.55%
General & Administrative Expenses 75.64% 106.54%
Other Operating Expenses 8.97% 31.60%
Total Operating Expenses 140.77% 184.69%
Operating Loss -40.77% -84.69%
Other Loss -21.03% -12.62%
Minority Interest in Losses of Limited Partnerships - 6.77%
Loss Before Federal Income Tax Expense -61.80% -90.54%
Federal Income Tax Benefit:
Current -2.15% -1.94%
Deferred -11.99%
Net Loss -59.65% -76.60%
21
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 ("2003") vs. YEAR ENDED DECEMBER 31, 2002 ("2002")
Net Revenue. On a consolidated basis, case volume decreased 7.9% to 6,791
in 2003 compared to 7,374 cases in 2002. On a same-center basis (which includes
unconsolidated centers and pre-acquisition cases-see paragraph below), total
utilization increased 6.1% to 13,371 cases in 2003 from 12,603 in 2002. However,
revenue declined $3,487,916, or 30.2% to $8,064,523 in 2003 from $11,552,439 in
2002. On a per-case basis, revenue decreased to $1,188 in 2003 from $1,567 in
2002. In both comparable years, the average contractual allowance was
approximately 68%. Of the decrease, approximately $900,000 is attributable to
the decrease in case volume. The remaining decrease is due to the shift in types
of cases performed, where the company experienced decreases in cases with higher
reimbursement, including pain management, podiatry and urology, and increases in
ophthalmology cases, with lower reimbursement.
The measure of unconsolidated centers and pre-acquisition cases using the
same-center basis provides a more accurate reflection of the true growth rate of
the centers and cases over comparable time periods. Unconsolidated centers
included those entities in which the Company previously held an equity interest,
but which later came under the management of the Company. Using the same-center
basis provides a better depiction of a particular entity before and after it
came under the Company's management. Similarly, using the same-center basis to
measure the performance of cases pre-acquisition and post-acquisition by the
Company provides a more accurate reflection of the performance of the individual
cases.
Following a change in management of the Company in September 2002, the
Company determined that it was in the best interest of the Company to adopt a
change in accounting policy resulting in a more conservative method of
estimating contractual allowances based on a rolling average ratio of actual
cash collections to related billed charges. The adoption of this policy resulted
in insurance contractual allowances being increased by approximately $2.17
million, or approximately 6% of gross billings. This increase in allowance did
not represent a material change in the revenues and collections of the Company.
The increase in contractual allowances was a result of a change in internal
controls as disclosed in Item 14 of our Form 10-KSB for the year ended December
31, 2002. The Company's management determined that it was in the best interest
of the Company to use a conservative method of estimating such contractual
allowances. The method uses a rolling average based upon the trend of actual
cash collected compared to related billings.
The previous method used to calculate the allowances contained such
deficiencies as not accounting for the payer mix or service mix associated with
the gross billings or the historical collections based on that payer mix and
service mix. This did not represent a correction of error but an improvement on
the estimation of the contractual allowance. The Company has made changes to its
internal controls in this area by measuring the actual collections against the
gross billings on a rolling average on a quarterly basis, that accounts for
changes in payer and service mix that directly affect the contractual allowance.
Direct Cost of Revenues. Direct Cost of Revenues decreased $849,554, or
15.8% to $4,528,644 in 2003 from $5,378,198 in 2002. Surgical costs decreased
$1,085,148, or 40.0% to $1,629,661 in 2003 from $2,714,809 in 2002. As a
percentage of revenue, surgical costs decreased to 20.2% of revenue in 2003 from
23.5% in 2002. The decrease primarily corresponds to the 30.2% decrease in
revenue and case volume as discussed above. Additionally, based on the age of
some of the inventory items, new management determined in the third quarter of
2002 that it was appropriate to adjust the value of inventory. As a result,
surgical costs for 2002 reflect an adjustment of $300,000 to allow for potential
obsolescence of inventory. Direct clinical salaries and benefits increased
$226,104 or 13.3% to $1,928,822 in 2003 from
22
$1,702,718 in 2002 primarily due to the full year impact of the Tuscarawas
acquisition, which occurred in June 2002. As a whole, Direct Cost of Revenues
per case decreased 8.6% to $666 in 2003 compared to $729 in 2002, resulting from
the factors discussed above.
General and Administrative Expenses. General and administrative costs
decreased $6,207,882, or 50.4% to $6,100,192 in 2003 from $12,308,073 in 2002.
The decrease is primarily due to charges of $5.4 million to bad debt expense
taken in 2002 related to a change in the Company's policies regarding doubtful
accounts. Additionally, professional fees decreased by $1.1 million in 2003
compared to 2002, where the Company incurred substantial professional fees in
2002 related to raising equity, medical oversight and legal issues. These
expense decreases were partially offset by an increase of approximately $445,000
in expenses related to Tuscarawas (of which $233,000 included an increase in
rent), which was acquired in June 2002.
In early 2002, the Company's existing management implemented a
centralization of the collection functions of its centers and an outsourcing of
the collection of certain aged receivables, which did not result in the cost
reduction it was intended to. In September 2002, the Company's new management
instituted a change in policy resulting in a methodology of calculating the
allowance for doubtful accounts based upon age. For example, as a receivable
gets older, the percentage of required allowance increases. Management considers
this a change in estimate that results in a more conservative valuation of net
accounts receivable.
Other Operating Expenses.
Loss on sale of assets. In August 2003, the Company sold a promissory note
with a face amount of $223,177 to International Diversified Corporation ("IDC")
for $160,000, incurring a loss of $63,177. The Company also agreed to release
IDC from its $400,000 obligation to the Company, which had been included in
other receivables. In addition to the cash consideration, SurgiCare was released
from any and all obligations regarding the raising of additional funds for
working capital and was released of all liabilities regarding the lawsuit filed
by IDC claiming breach of contract requesting the return of $1 million or
2,439,024 shares under a previous agreement with IDC and American International
Industries, Inc. A total loss of $463,177 was recorded as a loss on sale of
assets. As part of the sale agreement, the Company was released of any liability
of the center and removed as a guarantor on the center's bank note payable.
Other than IDC's ownership of certain shares of the Company's common stock, IDC
has no relationship with the Company.
Loss (gain) on sale of partnership interests. In June 2003, the Company
sold its 10% interest in Physician's Endoscopy Center, Ltd for $425,000 and
recognized a gain on the sale of $319,086. As part of the sale agreement, the
Company was released of any liability of the center and removed as a guarantor
on the center's bank note payable. In 2002, the Company sold its 20% interest in
Bayside Surgical Partners, LP for a loss of $169,934.
Loss on terminated acquisition. In 2002, the Company incurred a loss of
$1,977,382 associated with its termination of the Aspen Healthcare acquisition.
Impairment on investment in land. In 2002, under the Company's previous
management, the Company acquired five tracts of land. Management's purpose for
acquiring the land was for the future development of additional surgery centers
for the Company. Management obtained an appraisal from Associated National
Appraisal Services, Inc. in January 2002, to determine the fair market value of
the transaction to purchase the land. The land was acquired from Texas Real
Estate Enterprises, Inc. and MidCity Houston Properties, Inc. The Company has no
relationship with either of these entities, other than the purchase of this
land.
The Company entered into a resale guarantee agreement with American
International Industries, Inc., as a part of the agreement of December 11, 2002,
described below. The guarantee provides the
23
Company with a land resale guarantee if, by June 1, 2006, the Company is unable
to sell any or all of the tracts of land for net sales proceeds of less than
$4,000,000. If the proceeds are less than $4,000,000, American International
Industries, Inc. agrees to compensate the Company in an amount equal to the
difference between $4,000,000 and the net sales proceeds received by the Company
from the sale of any of the land prior to June 1, 2006. American International
Industries, Inc. shall have the option to make such payment in the form of
shares of the Company's common stock valued at $0.41 per share or cash. In the
event that American International Industries, Inc. does not own any of the
Company's common stock on that date, it agrees to pay such difference in cash.
Other than this guarantee and its ownership of certain shares of the Company's
common and Series AA Preferred stock, American International Industries, Inc.
has no relationship with the Company.
The land was re-appraised in November 2002, in connection with a
refinancing and at the request of a lender. The Company's new management
determined that the development of surgery centers on these locations was not in
the best interest of the Company. The new management determined that the Company
would be better served by selling the land and using the proceeds to help fund
the operations of the Company.
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
at that time. In September 2003, the Company recorded additional impairment on
its investment in land amounting to $579,385. Such impairment was based on the
information gathered during the marketing of the land holdings. This information
indicated that SurgiCare would not receive in excess of the land resale
guarantee from American International Industries, Inc., and thus the value was
written down to the resale guarantee amount of $4 million. The Company is
continuing to market the tracts of land for sale and is protected by the
guarantee by American International Industries, Inc. of a $4 million resale
price and does not believe it will generate sale prices greater than the
guarantee in the next year or two. We valued the land at $4 million because of
the existence of the guarantee by American International Industries, Inc. of $4
million on our sales price.
Total Operating Expenses. Total operating expenses decreased $9,983,255, or
46.8% to $11,352,481in 2003 from $21,335,736 in 2002. As a percent of net
revenue, such expenses decreased to 140.8% in 2003 from 184.7% in 2002. Such
expense fluctuations, expressed both in dollars and as a percentage of revenue,
are related to the factors discussed above.
Other Income (Loss). Total Other Expense increased $237,384, or 16.3% to
$1,695,667 in 2003 from $1,458,283 in 2002 primarily due to the following:
In 2003, the Company's equity in earnings (losses) from limited
partnerships was $194,444 compared to $(103,874) in 2002. In 2003, the limited
partnerships (in which the Company had a 10% equity interest) were profitable,
in contrast to 2002 when losses were incurred, resulting primarily from the
centers' adoption of the Company's policies and procedures surrounding
contractual allowances, provision for doubtful accounts and inventory valuation.
Additionally, the Company recorded a loss of approximately $40,000 for its 10%
interest in Physicians Endoscopy Center, which was a start up center and began
operations in December 2002.
Interest expense increased $563,255, or 41.4% to $1,922,315 in 2003 from
$1,359,060 in 2002 due to additional borrowings to complete an acquisition, to
attempt to acquire Aspen Healthcare, and to finance the Company's working
capital needs during 2003.
Minority Interest in Earnings (Losses) of Partnerships. In 2003, no credit
for minority interest in losses of partnerships was recorded because cumulative
losses exceeded the limited partners' minority interest in equity capital of the
partnerships. In 2002, $782,386 was recorded due to significant losses incurred
by the partnerships (whose financial results are consolidated with the
Company's), resulting
24
primarily from the partnerships' adoption of the Company's policies and
procedures surrounding contractual allowances, provision for doubtful accounts
and inventory valuation.
Federal Income Tax. In 2003, the Company recorded a tax benefit of
$173,407, or 3.5% of its pre-tax loss of $4,983,624. In 2002, the Company
recorded a tax benefit of $1,609,576, or 15.4% of its pre-tax loss of
$10,459,194. In both years, the percentage is less than the normally expected
rate due to valuation allowances against the Company's deferred tax assets.
Net Loss. Due to the factors discussed above, the Company's net loss in
2003 decreased to a loss of $4,810,217 compared to a net loss of $8,849,618 in
2002.
LIQUIDITY and CAPITAL RESOURCES
Net cash used in operating activities was $1,743,143 in 2003 compared to
$462,422 in 2002. The primary reason for usage of cash is due to continued
operating losses in both years.
Net cash provided by investing activities was $492,038 in 2003 compared to
net cash used in investing activities of $1,667,443 in 2002. In 2003, the
Company sold its ownership interest in Physicians Endoscopy Center for $425,000
cash and sold a note receivable for $160,000. In 2002, the increased use of cash
was primarily for the investment in Tuscarawas Ambulatory Surgery Center
($426,859) and Aspen Healthcare ($1.1 million).
Net cash provided by financing activities decreased to $1,130,331 in 2003
from $2,315,918 in 2002. In 2003, cash raised through the sale of common stock,
the exercise of warrants and additional loans was predominantly used to pay down
debt and for working capital purposes. In 2002, the Company used portions of the
cash raised through debt and issuance of common stock to fund acquisitions and
other capital expenditures.
As of December 31, 2003, the Company had cash and cash equivalents of
$141,553 and negative working capital of $10,498,027. SurgiCare has a total of
$6,928,542 in long-term debt and an additional $1,331,475 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 and DVI Financial Services, Inc. ("DVI"). On August 25,2003, DVI
filed for protection under Chapter 11 of the U.S. Bankruptcy laws. The Company
is currently pursuing a buyout of their debt with DVI (through its bankruptcy
trustee) and certain other debt holders.
The Company has financed its working capital needs primarily though the
issuance of equity, secured and/or convertible debt. See CHANGE OF CONTROLS
under Item 14 - Controls & Procedures. As of December 31, 2003, 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.
On March 6, 2003, the Company received a $1.2 million investment from
existing physician shareholders, local physicians, and select individuals. The
investment was made via a private placement, under which 3,418,544 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.
25
In November 2003, SurgiCare completed a $470,000 financing for working
capital through the issuance of one-year convertible unsecured promissory notes
bearing interest at 10% per annum. The notes are convertible into shares of
Company common, at any time, at the option of the note holder. The conversion
price for the notes will be equal to (a) $.35 per share, if the note is
converted on or prior to January 31, 2004, or (b) if the note is converted after
January 31, 2004, the lower of (i) $0.25 or (ii) seventy-five percent (75%) of
the average closing price for the 20 trading days immediately prior to the
conversion date. Based on the relative fair value of the beneficial conversion
feature of the notes, a charge of $123,566 was recorded to interest expense. The
note holders also received a five-year warrant to purchase shares of Company
common stock. The number of shares of common stock that may be purchased upon
the exercise of the warrant will be equal to 25% of the number of shares of
common stock into which the note is convertible. The warrant may be exercised at
an exercise price of $0.35 per share, and may be exercised on a cashless basis
at the option of the holder. Based on the relative fair value of the warrants, a
discount of $76,834 was recorded and is being amortized to interest expense over
the one-year term of the notes. The promissory notes will mature on October 31,
2004.
The Company believes that additional sales of debt and/or equity securities
will be required to continue operations. See Item 1 - DESCRIPTON OF THE BUSINESS
under the caption "THE COMPANY" for a description of a series of transactions
recently announced by the Company that, if consummated, will involve an equity
investment and recapitalization of the Company. Prior to the closing of such
contemplated transactions, any additional sales of debt and/or equity by the
Company will be subject to the prior approval of the counterparties to the
applicable transaction documents. 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.
26
ITEM 7. FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page Number
Independent Auditors' Reports 28
Consolidated Balance Sheets 30
Consolidated Statements of Operations 32
Consolidated Statements of Shareholders' Equity 34
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 37
27
Independent Auditors' Report
The Board of Directors
SurgiCare, Inc.
Houston, Texas
We have audited the accompanying Consolidated Balance Sheet of SurgiCare, Inc.
and Subsidiaries as of December 31, 2003 and the related Consolidated Statements
of Operations, Shareholders' Equity, and Cash Flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and 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 audit provides 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, 2003 and the consolidated
results of their operations and their cash flows for the year 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.
Mann, Frankfort, Stein & Lipp CPAs, LLP
Houston, Texas
March 18, 2004
28
Independent Auditors' Report
The Board of Directors
SurgiCare, Inc.
Houston, Texas
We have audited the accompanying Consolidated Balance Sheet of SurgiCare, Inc.
and Subsidiaries as of December 31, 2002 and the related Consolidated Statements
of Operations, Shareholders' Equity, and Cash Flows for the year 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 audit.
We conducted our audit 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 audit provides 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 the consolidated
results of their operations and their cash flows for the year 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
29
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
2003 2002
------------------------
ASSETS
Current Assets
Cash and cash equivalents $141,553 $262,327
Accounts Receivable:
Trade (less allowance for contractual
adjustments and doubtful accounts of
$3,768,846 and $6,496,000 at December 31,
2003 and 2002, respectively) 1,309,682 1,324,944
Other 59,909 398,834
Note receivable 223,178
Income tax receivable 159,846
Inventory 338,470 397,772
Prepaid expenses 133,293 69,380
Other current assets 23,027 76,313
------------ -----------
Total Current Assets 2,165,780 2,752,748
------------ -----------
Property and Equipment
Office furniture and equipment 399,912 378,901
Medical and surgical equipment 3,748,559 3,576,721
Leasehold improvements 946,890 941,440
Computer equipment and software 382,263 377,495
Transportation equipment 19,015 19,015
------------ -----------
5,496,639 5,293,572
Less: Accumulated depreciation and
amortization 3,237,657 2,468,662
------------ -----------
2,258,982 2,824,910
Goodwill 8,105,735 8,045,735
Real Estate 4,000,000 4,579,385
Investment in Limited Partnerships 381,434 306,654
Advances to Limited Partners 440,423 403,748
Loan Fees (net of amortization of $198,249 and
$108,321 in 2003 and 2002, respectively) 103,788 193,716
------------ -----------
$17,456,142 $19,106,896
=========== ============
30
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
-----------------------------
2003 2002
-------------- --------------
LIABILITIES
Current Liabilities
Accounts payable $2,864,199 2,362,378
Accrued expenses 1,274,340 472,645
Lines of credit 1,331,475 1,665,657
Current maturities of long-term debt 6,928,542 6,295,389
Current portion of capital leases 265,251 313,725
Payable to a related party 116,909
-------------- --------------
Total Current Liabilities 12,663,807 11,226,703
Long-Term Capital Lease Obligations 103,341
Long-Term Debt 454,328
Minority Interest in Partnerships
-------------- --------------
12,767,148 11,681,031
SHAREHOLDERS' EQUITY
Preferred Stock, Series A, par value
$.001, 1,650,000 authorized; 1,137,700
and 1,225,100 issued and outstanding at
December 31, 2003 and 2002;
respectively; redemption and liquidation
value $5,688,500 and $6,125,500,
respectively 1,138 1,225
Preferred Stock, Series AA, par value
$.001, 1,200,000 authorized; 900,000
issued and outstanding at December 31,
2003 and 2002 900 900
Common Stock, par value $.005, 50,000,000
shares authorized; 27,082,843 issued and
26,991,443 outstanding at December 31,
2003; 21,327,131 issued and 21,252,131
outstanding at December 31, 2002 135,414 106,635
Additional Paid-In Capital 17,116,523 15,065,801
Retained Earnings (Deficit) (12,518,413) (7,708,196)
Less: Treasury Stock - at cost, 91,400
and 75,000 shares at December 31, 2003
and 2002, respectively (38,318) (32,250)
Less: Shareholder receivables (8,250) (8,250)
-------------- --------------
4,688,994 7,425,865
-------------- --------------
$ 17,456,142 $ 19,106,896
============== ==============
31
See notes to consolidated financial statements.
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
------------------------
2003 2002
----------- ------------
Revenues:
Surgical, net $7,772,955 $11,164,043
Management fees 291,568 388,396
----------- ------------
8,064,523 11,552,439
----------- ------------
Direct Cost of Revenues:
Surgical costs 1,629,661 2,714,809
Clinical salaries and benefits 1,928,822 1,702,718
Other 970,161 960,671
----------- ------------
4,528,644 5,378,198
----------- ------------
General and Administrative Expenses:
Salaries and benefits 1,576,831 1,604,562
Management and affiliation fees 110,829 130,979
Rent 931,425 741,124
Depreciation 768,996 671,880
Amortization 89,928 73,851
Professional fees 1,097,264 2,223,374
Provision for doubtful accounts 289,823 5,753,734
Other 1,235,096 1,108,569
----------- ------------
6,100,192 12,308,073
----------- ------------
Other Operating Expenses:
Loss on sale of assets 463,346 2,149
Loss (gain) on sale of partnership interests (319,086) 169,934
Loss on terminated acquisition 1,977,382
Impairment on investment in land 579,385 1,500,000
----------- ------------
723,645 3,649,465
----------- ------------
Total Operating Expenses 11,352,481 21,335,736
----------- ------------
Operating Loss (3,287,958) (9,783,297)
----------- ------------
Other Income (Expense)
Miscellaneous income 32,205 4,651
Equity in earnings (loss) of limited
partnerships 194,444 (103,874)
Interest expense (1,922,315) (1,359,060)
----------- ------------
(1,695,667) (1,458,283)
----------- ------------
32
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
For the Year Ended
December 31,
----------------------------
2003 2002
------------- --------------
Loss Before Minority Interest and Federal
Income Tax Benefit (4,983,624) (11,241,580)
Minority Interest in Loss of Partnerships 782,386
------------- --------------
Loss Before Federal Income Tax Benefit (4,983,624) (10,459,194)
------------- --------------
Federal Income Tax Benefit
Current (173,407) (224,576)
Deferred (1,385,000)
------------- --------------
(173,407) (1,609,576)
------------- --------------
Net Loss $(4,810,217) $(8,849,618)
============= ==============
Net Loss Per Share - Basic $(.19) $(.56)
============= ==============
Net Loss Per Share - Diluted $(.19) $(.56)
============= ==============
Weighted Average Common Shares Outstanding
Basic 24,754,050 15,831,748
============= ==============
Diluted 24,754,050 15,831,748
============= ==============
33
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2003 and 2002
$.001 Series A $.001 Series AA $.005 Par Value
Preferred Stock Preferred Stock Common Stock Additional Retained
------------------ ------------------ --------------- Paid-In Treasury Earnings Shareholder Total
Shares Amount Shares Amount Shares Amount Capital Stock (Deficit) Receivables Equity
-------- -------- ------- -------- ------ -------- -------- --------- --------- ---------- ------
Balance - January 1, 2002 1,316,100 $ 1,316 14,089,320 $70,446 $4,991,301 $1,141,422 $(8,250) $6,196,235
Issuance of preferred stock
for land 1,200,000 $1,200 5,998,800 6,000,000
Sale of common stock 3,039,024 15,195 1,955,805 1,971,000
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 12,500
Issuances of stock for
consulting services 136,250 681 220,360 221,041
Issuances of stock and
warrants for acquisitions 188,000 940 770,313 771,253
Issuances of warrants 923,114 923,114
Beneficial conversion feature
of debt 212,590 212,590
Purchase of treasury stock $(32,250) (32,250)
Net loss (8,849,618) (8,849,618)
--------- ----- ------- ---- --------- --------- --------- -------- --------- ---------- ------
Balance - December
31, 2002 1,225,100 $1,225 900,000 $ 900 21,327,131 $106,635 $15,065,801 $(32,250) $(7,708,196) $(8,250) $7,425,865
--------- ----- ------- ---- --------- --------- --------- -------- --------- ---------- ------
Sale of common stock 3,418,544 17,093 885,992 903,085
Warrants issued in connection
with sale of common stock 236,811 236,811
Warrants issued in connection
with debt 76,834 76,834
Beneficial conversion feature
of debt 123,566 123,566
Exercise of warrants 1,384,990 6,925 299,723 306,648
Issuances of stock for
consulting services 952,178 4,761 427,796 432,557
Redemption of preferred
stock (87,400) (87) (87)
Purchase of treasury stock (6,068) (6,068)
Net loss (4,810,217 (4,810,217)
--------- ----- ------- ---- --------- -------- ---------- -------- --------- ---------- --------
Balance - December 31,
2003 1,137,700 $1,138 900,000 $900 27,082,843 $135,414 $17,116,523 $(38,318) $(12,518,413)$(8,250) $4,688,994
========= ===== ======= ==== =========== ======== ========= ========= ========== ======== =========
34
See notes to consolidated financial statements.
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
---------------------------
2003 2002
------------- -------------
Cash Flows From Operating Activities
Net loss $(4,810,217) $(8,849,618)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Equity in (earnings) loss of limited
partnerships (194,444) 103,874
Minority interest in loss of
partnerships (782,386)
Depreciation and amortization 858,924 745,731
Amortization of debt discount 95,134
Interest expense recognized on
beneficial conversion features
on notes payable 123,566
Provision for doubtful accounts 289,823 5,753,734
Deferred federal income tax (benefit) (1,385,000)
Loss (gain) on sale of interest in
limited partnerships (319,086) 169,934
Loss on sale of assets 463,346 2,118
Loss on terminated acquisition 1,977,382
Impairment on investment in land 579,385 1,500,000
Other (256)
Change in:
Accounts receivable (335,636) (1,166,934)
Income tax receivable (159,846)
Inventory 59,302 230,804
Prepaid expenses (63,913) 113,350
Other current assets 16,612 (163,170)
Loan fees (139,537)
Accounts payable 852,468 1,555,074
Federal income tax payable (224,576)
Accrued expenses 801,695 96,767
------------- -------------
Net Cash Used in Operating Activities (1,743,143) (462,422)
------------- -------------
Cash Flows From Investing Activities
Purchase of Tuscarawas (426,859)
Capital expenditures (46,712) (226,203)
Distributions from partnerships 13,750 81,000
Investment in limited partnerships (14,865)
Sale of note receivable 160,000
Proceeds from sale of interest in limited
partnership 425,000
Buyout of limited partners (60,000)
Proceeds from sale of assets 19,484
Investment in terminated acquisition (1,100,000)
------------- -------------
Net Cash Provided by (Used in) Investing
Activities 492,038 (1,667,443)
------------- -------------
Cash Flows From Financing Activities
Borrowings on lines of credit 3,789,996 8,569,165
Payments on lines of credit (4,124,178) (9,044,054)
Proceeds from debt 883,166 3,867,689
Payments on debt (751,975) (2,527,036)
Principal payments on capital lease (101,489) (113,991)
35
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Year Ended
December 31,
--------------------------
2003 2002
------------ -------------
Cash Flows From Financing Activities
(continued)
Distributions to limited partners (536,946)
Issuance of warrants with debt 76,834 149,841
Purchase of treasury stock (6,068) (32,250)
Exercise of warrants 294,148 12,500
Proceeds from issuance of common stock with
warrants 1,069,897 1,971,000
------------ -------------
Net Cash Provided by Financing Activities 1,130,331 2,315,918
------------ -------------
Net Increase (Decrease) in Cash and Cash
Equivalents (120,774) 186,053
Cash and Cash Equivalents - Beginning of
Period 262,327 76,274
------------ -------------
Cash and Cash Equivalents - End of Period $ 141,553 $ 262,327
============ =============
Supplemental Disclosures of Cash Flow
Information
Cash paid during the year for:
Interest $ 784,503 $ 1,205,353
============ =============
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Purchase of land with preferred stock $ 6,000,000
=============
Issuance of shares for investment $ 74,750
=============
Issuance of shares and warrants in payment
of debt $ 47,500
============
Issuance of shares in payment of accounts
payable $ 467,556 $ 404,314
============ =============
Beneficial conversion feature of
convertible notes $ 123,566 $ 212,590
============ =============
Equipment acquired with capital lease
obligation $ 156,356 $ 67,032
============ =============
36
See notes to consolidated financial statements.
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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 an ambulatory surgery center ("ASC") 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. ("Town & Country") was
formed as a Texas corporation and a wholly-owned subsidiary of SurgiCare,
Inc. Town & Country is a 60% general partner in SurgiCare Memorial Village,
L.P., which operates an ASC in Houston, Texas. During 2002, Town & Country
acquired a 10% general partner interest in Physicians Endoscopy Center,
Ltd., L.L.P. ("Physicians Endoscopy"), which operates an ASC in Houston,
Texas. During 2003, Town & Country sold its interest in Physicians
Endoscopy. See Note 3.
In October 2000, Baytown SurgiCare, Inc. ("Baytown") was formed as a Texas
corporation and a wholly-owned subsidiary of SurgiCare, Inc. Baytown is a 10%
general partner of San Jacinto Surgery Center, Ltd ("San Jacinto"), which
operates an ASC 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 an ASC in Pasadena, Texas. During 2002, Southeast SurgiCare,
Inc. sold their 20% interest in Bayside. See Note 3.
On May 31, 2002, SurgiCare, Inc. acquired a 51% ownership in Tuscarawas
Ambulatory Surgery Center, LLC (Tuscarawas), an Ohio limited liability
company, which operates an ASC 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.
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
Surgical revenue is recognized on the date the procedures are performed, and
accounts receivable are recorded at that time. Such 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 such factors as
historical trends of billing and cash collections, established fee schedules,
accounts receivable agings and contractual relationships with third-party
payers. Contractual allowances are estimated primarily using each surgery
center's collection experience. Contractual rates and fee schedules are also
helpful in this process. On a rolling average
37
basis, the Company tracks collections as a percentage of related billed
charges. This percentage, which is adjusted on a quarterly basis, has
proved to be the best indicator of expected realizable amounts from
patients and third-party payers. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account. The Company
is not aware of any material claims, disputes or unsettled matters with
third-party payers.
Net surgical revenue is comprised of the following components:
2003 2002
------------ -------------
Gross surgical revenue $ 25,108,526 $ 35,759,108
Contractual adjustments (17,335,571) (24,595,065)
------------- -------------
Net surgical revenue $ 7,772,955 $ 11,164,043
============= =============
Management fees are based on a percentage of customers' collected revenues
and are recognized during the period which services were performed.
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. 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 Remaining life of lease
Computer equipment and software 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.
These general partnership interests were accounted for as investment in
limited partnerships due to the interpretation of FAS 94/ARB 51 and the
interpretations of such by Issue 96-16 and SOP 78-9. Under those
interpretations, SurgiCare could not consolidate its interest in those
facilities in which it held a minority general interest partnership interest
due to management restrictions, shared operating decision- making, capital
expenditure and debt approval by limited partners and the general form versus
substance analysis. Therefore, SurgiCare recorded them as investments in
limited partnerships.
As of December 31, 2003 and 2002, the Company has a 10% general partnership
interest in San Jacinto Surgery Center, Ltd., a Texas limited partnership. As
of December 31, 2003, the difference in the carrying amount of the investment
and the 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, 2003, there is no impairment to this goodwill. As of December
31, 2003, San Jacinto had a $1,000,000 draw note payable to a bank with an
outstanding balance of $457,054, which is guaranteed by the Company. The note
bears interest at the prime rate plus 1% (4% as of December 31, 2003) and is
secured by the accounts receivable of San Jacinto.
As of December 31, 2002, the Company had a 10% general partnership interest
in Physicians Endoscopy Center, Ltd., L.L.P., a Texas limited partnership. As
described in Note 3, the Company sold its 10% interest during 2003.
38
Segments of an Enterprise and Related Information
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information
about segments of their business in their annual financial statements and
requires them to report selected segment information in their quarterly
reports issued to shareholders. It also requires entity-wide disclosures
about the products and services an entity provides, the material countries in
which it holds assets and reports revenues and its major customers. As
substantially all of the Company's revenues, loss from operations and
identifiable assets are from the ambulatory surgical segment, the Company has
not made segment disclosures in the accompanying consolidated financial
statements.
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 is no longer amortizing goodwill.
Under SFAS No. 142, goodwill is required to be tested annually and more
frequently if an event occurs which indicates the goodwill may be impaired.
Upon adoption of SFAS 142, as well as December 31, 2003 and 2002, the
Company performed an impairment test of its goodwill and determined that no
impairment of the recorded goodwill existed.
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.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed in SFAS No. 109, Accounting for Income Taxes. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the current period's provision for income taxes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not that such asset will not be realizable.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. In December 2002, the FASB issued SFAS No.
148, Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123, to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The statement also amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results.
The Company has chosen to continue to account for stock-based compensation
issued to employees using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
39
Issued to Employees, and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The Company grants
options at or above the market price of its common stock at the date of
each grant.
The fair value of options is calculated using the Black-Scholes
option-pricing model. Had the Company adopted the fair value method of
accounting for stock based compensation, compensation expense would have been
higher, and net loss and net loss attributable to common shareholders would
have increased for the periods presented. No change in cash flows would
occur. The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
2003 2002
-------------- --------------
Net loss - as reported $ (4,810,217) $ (8,849,618)
-------------- --------------
Deduct: Total stock-based employee
compensation (expense determined under
the fair value based method for all
awards), net of tax effect (210,900) (742,034)
-------------- --------------
Net loss - pro forma $ (5,021,117) $ (9,591,652)
============== ==============
Net Loss per share:
Basic - as reported $ (.19) $ (.56)
============== ==============
Basic - pro forma $ (.20) $ (.61)
============== ==============
Diluted - as reported $ (.19) $ (.56)
============== ==============
Diluted - pro forma $ (.20) $ (.61)
============== ==============
No options were granted to employees during 2003. The weighted average fair
value of options granted as employee compensation during 2002 was $0.18. The
fair values were determined using the Black-Scholes option pricing model with
the following weighted average assumptions, and a forfeiture rate that is
assumed to be negligible.
2002
-----------------------
Risk-free interest rate 3.00%
Expected life 3.14 years
Expected dividends None
Expected volatility 57%
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, and subsequently revised the Interpretation in
December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities, which have certain
characteristics. As revised, FIN 46R is now generally effective for financial
statements for interim or annual periods ending on or after March 15, 2004.
We have not identified any variable interest entities. In the event a
variable interest entity is identified, we do not expect the requirements of
FIN 46R to have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. An
issuer is required to classify a financial instrument that is within the
scope of this statement as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. We adopted the standard on July
1, 2003, and the adoption did not have a material impact on our consolidated
financial statements.
40
Advertising
The Company's policy is to expense advertising costs as incurred, which
amounted to $80,366 and $248,386 for the years ended December 31, 2003 and
2002, respectively.
Reclassifications
Certain reclassifications have been made in the 2002 financial statements to
conform to the reporting format in 2003. 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 2003.
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, 2003, 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.
The Company believes that additional sales of debt and/or equity
securities will be required to continue operations. See Note 19 - Subsequent
Events for a description of a series of transactions recently announced by
the Company that, if consummated, will involve an equity investment and
recapitalization of the Company. Prior to the closing of such contemplated
transactions, any additional sales of debt and/or equity by the Company will
be subject to the prior approval of the counterparties to the applicable
transaction documents. 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 / Dispositions
On May 31, 2002, the Company acquired a 51% interest in Tuscarawas for an
aggregate of $725,000 in cash and warrants to purchase 200,000 shares of the
Company's common stock at an exercise price of $0.01 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
the center in exchange for 5% of the center's net monthly collected revenue.
In June 2003, the Company sold its 10% interest in Physician's Endoscopy
Center, Ltd for $425,000 and recognized a gain on the sale of $319,086. As
part of the sale agreement, the Company was released of any liability of the
center and removed as a guarantor on the center's bank note payable.
In 2002, under the Company's previous management, the Company acquired five
tracts of land. Management's purpose for acquiring the land was for the
future development of additional surgery centers for the Company. Management
41
obtained an appraisal from Associated National Appraisal Services, Inc. in
January 2002, to determine the fair market value of the transaction to
purchase the land. The land was acquired from Texas Real Estate Enterprises,
Inc. and Midcity Houston Properties, Inc. The Company has no relationship
with either of these entities, other than the purchase of this land.
The Company entered into a resale guarantee agreement with American
International Industries, Inc., as a part of the agreement of December 11,
2002, (See Note 14 - Preferred Stock). The guarantee provides the Company
with a land resale guarantee if, by June 1, 2006, the Company is unable to
sell any or all of the tracts of land for net sales proceeds of less than
$4,000,000. If the proceeds are less than $4,000,000, American International
Industries, Inc. agrees to compensate the Company in an amount equal to the
difference between $4,000,000 and the net sales proceeds received by the
Company from the sale of any of the land prior to June 1, 2006. American
International Industries, Inc. shall have the option to make such payment in
the form of shares of the Company's common stock valued at $0.41 per share or
cash. In the event that American International Industries, Inc. does not own
any of the Company's common stock on that date, it agrees to pay such
difference in cash. Other than this guarantee and its ownership of certain
shares of the Company's common and Series AA Preferred stock, American
International Industries, Inc. has no relationship with the Company.
The land was re-appraised in November 2002 in connection with a refinancing
and at the request of a lender. The Company's new management determined that
the development of surgery centers on these locations was not in the best
interest of the Company. The new management determined that the Company would
be better served by selling the land and using the proceeds to help fund the
operations of the Company.
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 at that time. In September 2003, the Company recorded additional
impairment on its investment in land amounting to $579,385. Such impairment
was based on the information gathered during the marketing of the land
holdings. This information indicated that SurgiCare would not receive in
excess of the land resale guarantee from American International Industries,
Inc., and thus the value was written down to the resale guarantee amount of
$4 million. The Company is continuing to market the tracts of land for sale
and is protected by a guarantee by American International Industries, Inc. of
a $4 million resale price and does not believe it will generate sales prices
greater than the guarantee in the next year or two. We valued the land at $4
million because of the existence of the guarantee by American International
Industries, Inc. of $4 million on our sales price.
Note 4 - Certain Transactions
In August 2003, the Company sold a promissory note with a face amount of
$223,177 to International Diversified Corporation (IDC) for $160,000, incurring
a loss of $63,177. The Company also agreed to release IDC from its $400,000
obligation to the Company, which had been included in other receivables. In
addition to the cash consideration, SurgiCare was released from any and all
obligations regarding the raising of additional funds for working capital and
was released of all liabilities regarding the lawsuit filed by IDC claiming
breach of contract requesting the return of $1 million or 2,439,024 shares under
a previous agreement with IDC and American International Industries, Inc. A
total loss of $463,177 was recorded as a loss on sale of assets.
Note 5 - Intangible Assets Subject to Amortization
Intangible assets subject to amortization consist of loan fees, net of
accumulated amortization of $198,249 and $108,321 at December 31, 2003 and 2002,
respectively. The loan fees are amortized on a straight-line basis over the loan
terms. Amortization expense recorded for the years ended December 31, 2003 and
2002 was $89,928 and $73,851, respectively. Estimated future amortization
expense is as follows:
Year Ending December 31,
-------------------------------
2004 $ 38,443
2005 38,443
2006 18,746
2007 8,156
--------------
$ 103,788
==============
42
Note 6 - Earnings Per Share
Basic earnings per share are calculated on the basis of the weighted average
number of shares outstanding. Diluted earnings per share, in addition to the
weighted average determined for basic loss 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,
---------------------------
2003 2002
------------- -------------
Basic Loss Per Share:
Net Loss $(4,810,217) $(8,849,618)
Weighted average shares outstanding 24,754,050 15,831,748
Dilutive stock options and warrants (A) (A)
Conversion of preferred shares (B) (B)
Conversion of debt (C) (C)
Weighted average common shares outstanding
for diluted net loss per share 24,754,050 15,831,748
Net loss per share - Basic $(.19) $(.56)
============= =============
Net loss per share - Diluted $(.19) $(.56)
============= =============
The following potentially dilutive securities are not included in the 2003 and
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) 9,654,297 and 8,897,020 options and warrants outstanding at December 31,
2003 and 2002,respectively.
(B) 900,000 shares of Series AA Preferred stock are convertible into $4,500,000
of common shares. 1,137,700 shares of Series A Preferred stock are
convertible into 1,137,700 common shares.
(C) $1,000,000 of debentures are convertible into common stock at a price equal
to $1.50 per share. $470,000 of notes are convertible into common stock at
a price equal to $0.35 per share until January 31, 2004. If the notes are
converted after January 31, 2004, the conversion price will be equal to the
lower of $0.25 or 75% of the average closing price for the 20 trading days
immediately prior to the conversion date.
Note 7 - Lines-of-Credit
Lines-of-credit as of December 31 are as follows:
2003 2002
------------ ------------
$2,500,000 revolving lines-of-credit with
a financial institution, secured by
accounts receivable, bearing interest at
prime (4.00% at December 31, 2003) plus
2%, interest payable monthly, matured
March 31, 2003 $ 1,284,577 $ 1,665,657
------------ ------------
$150,000 revolving line-of-credit with a
financial institution, secured by
accounts receivable, bearing interest
at prime (4.00% at December 31, 2003)
plus 2%, interest payable monthly, due
upon demand 43,711 -
------------ ------------
Total $ 1,331,475 $ 1,665,657
============ ============
43
Note 8 - Long-Term Debt
Long-term debt as of December 31, 2003 and 2002, is as follows:
2003 2002
------------- -------------
Note payable to a financial institution,
secured by all assets of the Company, due
in monthly installments of $81,068
including interest at 10.75%, due April
2006 $ 2,682,536 $ 2,845,407
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 332,995 355,730
Notes payable to a financial institution,
secured by inventory and equipment, due in
monthly installments of $12,222 including
interest at 11.5%, due November 2002 122,368 175,122
Notes payable to an private equity
organization, unsecured, interest at
8.00%, payable on demand 490,000 -
$470,000 convertible notes payable,
bearing interest at 10%,
maturing October 2004, net of discount
for warrants (see below) 407,136 -
Note payable to a financial institution,
secured by an automobile, due in monthly
installments of $550 including interest at
7.99%, due November, 2004 6,318 12,147
Note payable to a bank, secured by land,
due in monthly installments of $29,740
including interest at the prime rate
(4.00% at December 31, 2003) plus 1.5%,
due December, 2007 1,240,651 1,500,000
Note payable to a shareholder, unsecured,
interest at the prime rate (4.00% at
December 31, 2003) plus 2% due March 2003 2,500 50,000
Note payable to a unrelated entity,
unsecured, due in monthly payments of
$4,303 including interest of 6%, due
October, 2003 50,000 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 24,649 32,966
$1,000,000 convertible debentures, bearing
interest at 25%, maturing June, 2003 1,000,000 918,836
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 562,445 706,463
Note payable to a bank, due on demand or in
monthly installments of $6,944 plus
interest at the prime rate (4.00% at
December 31, 2003) plus 1%, due December,
2003 6,944 83,334
------------- -------------
6,928,542 6,749,717
Less: Current maturities 6,928,542 6,295,389
------------- -------------
$ - $ 454,328
============= =============
44
Loan agreements relating to the majority of the Company's credit lines, notes
payable and capital leases contain requirements for maintenance of defined
minimum financial ratios. The Company is not in compliance with all such
provisions as of December 31, 2003. Further, the Company is delinquent in
payments on the majority of its outstanding debt. All notes and capital leases
in default have been shown as current in these financial statements. On August
25, 2003 the Company's senior lender, DVI Business Credit Corp. (DVI) announced
that it is seeking protection under Chapter 11 of the United States Bankruptcy
laws. The Company is currently negotiating a buyout of its debt with DVI through
the bankruptcy trustee and certain other debt holders.
The Company has financed its growth primarily though the issuance of equity,
secured and/or convertible debt. As of December 31, 2003, 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.
In November 2003, SurgiCare completed a $470,000 financing for working capital
through the issuance of one-year convertible unsecured promissory notes bearing
interest at 10% per annum. The notes are convertible into shares of Company
common, at any time, at the option of the note holder. The conversion price for
the notes will be equal to (a) $.35 per share, if the note is converted on or
prior to January 31, 2004, or (b) if the note is converted after January 31,
2004, the lower of (i) $0.25 or (ii) seventy-five percent (75%) of the average
closing price for the 20 trading days immediately prior to the conversion date.
Based on the relative fair value of the beneficial conversion feature of the
notes, a charge of $123,566 was recorded to interest expense. The note holders
also received a five-year warrant to purchase shares of Company common stock.
The number of shares of common stock that may be purchased upon the exercise of
the warrant will be equal to 25% of the number of shares of common stock into
which the note is convertible. The warrant may be exercised at an exercise price
of $0.35 per share, and may be exercised on a cashless basis at the option of
the holder. Based on the relative fair value of the warrants, a discount of
$76,834 was recorded and is being amortized to interest expense over the
one-year term of the notes. The promissory notes will mature on October 31,
2004.
The Company believes that additional sales of debt and/or equity securities will
be required to continue operations. See Note 19 - Subsequent Events for a
description of a series of transactions recently announced by the Company that,
if consummated, will involve an equity investment and recapitalization of the
Company. Prior to the closing of such contemplated transactions, any additional
sales of debt and/or equity by the Company will be subject to the prior approval
of the counterparties to the applicable transaction documents. 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 9 - Long-Term Capital Leases
The Company leases certain equipment from third parties. The leases expire
through 2008. As of December 31, 2003, certain 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, 2003:
45
For the Year Ending
December 31,
---------------------
2004 $ 302,826
2005 36,844
2006 18,422
2007 18,422
2008 12,281
------------------
Total 425,638
Less: Amount representing interest (57,046)
------------------
Present value of minimum lease payments 368,592
Less: Current obligations 265,251
------------------
Long-term obligations under capital lease $ 103,341
==================
Property and equipment includes the following amounts for leases that have been
capitalized:
Office furniture and equipment $ 65,994
Medical and surgical equipment 409,276
Computer equipment and software 162,904
---------------------
638,174
Less: accumulated depreciation 269,214
---------------------
$ 368,960
=====================
Depreciation for property and equipment under capital leases is included in
depreciation expense.
Note 10 - Operating Leases
The Company leases its treatment facilities and corporate office space under
operating leases that 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,
--------------------------
2004 $ 718,030
2005 701,482
2006 507,869
2007 400,505
2008 267,003
-------------
$ 2,594,889
=============
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 2.5% to 5% of
46
revenues collected by the facilities under contract. The Company recorded the
following fees during 2003 and 2002:
2003 2002
----------- -----------
SurgiCare Memorial Village, L.P. $ 57,223 $ 102,630
San Jacinto Surgery Center, Ltd. 103,772 219,918
Bayside Surgical Partners, L.P. - 37,500
Physicians Endoscopy Center, L.P. 76,967 28,348
Tuscarawas Ambulatory Surgery Center 53,606 -
----------- -----------
$ 291,568 $ 388,396
=========== ===========
The contract with Bayside was terminated in 2002 with the sale of the investment
in Bayside. The contract with Physicians Endoscopy was terminated in June 2003
with the sale of the Company's investment in Physicians Endoscopy.
Note 12 - Related Party Transactions
As of December 31, 2003 and 2002, the Company had a non-interest-bearing
receivable from a shareholder of $8,250 for the purchase of stock.
As of December 31, 2003, the Company had a receivable from San Jacinto of
$13,364. As of December 31, 2002, the Company had a payable to San Jacinto of
$126,086.
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 expired in 2003 and is now month-to-month. During 2003 and 2002,
Bellaire paid approximately $179,000 and $195,000 as rent to the partnership.
A group of doctors who own 35% of Tuscarawas also have an ownership interest in
Oxford Capital Enterprises Two, which owns the medical building where the center
is located. The lease expires in 2008. During 2003 and 2002, Tuscarawas paid
approximately $401,000 and $234,000 as rent to Oxford Capital Enterprises Two.
The Company entered into a resale guarantee agreement with American
International Industries, Inc., which also owns shares of the Company's common
and Series AA Preferred stock. See Note 3 - Acquisitions / Dispositions and Note
14 - Preferred Stock for further discussion.
Note 13 - Income Taxes
A reconciliation of the statutory federal income tax rate to the effective tax
rate for the years ended December 31, 2003 and 2002, is as follows:
2003 2002
------------ ------------
Federal income tax benefit at statutory rate $(1,635,474) $(3,474,002)
Increase in valuation allowance and estimates 1,808,881 1,864,426
------------ ------------
$ (173,407) $(1,609,576)
============ ============
47
Components of deferred taxes as of December 31, 2003 and 2002, were as follows:
2003 2002
----------- -----------
Deferred tax liabilities:
Accrual to cash conversion $ - $ (595,000)
Goodwill (150,000) (595,000)
----------- -----------
Total deferred tax liabilities (150,000) (595,000)
Deferred tax assets:
Net operating loss 4,950,000 3,274,000
Contractual and bad debt allowance 1,281,000 2,209,000
----------- -----------
Total deferred tax assets 6,231,000 5,483,000
Net deferred tax asset 6,081,000 4,888,000
Valuation allowance (6,081,000) (4,888,000)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
The Company has a net operating loss carry forward of approximately $14.5
million, which will begin to expire in 2021. The valuation allowance increased
$1,193,000 and $4,888,000 in 2003 and 2002, respectively.
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. The Series A preferred stock was
converted on January 29, 2004. See Note 19 - Subsequent Events.
In 2002, the Company issued 1,200,000 shares of Series AA Preferred Stock to
fund the acquisition of land (see Note 3). Under the original terms, 25% of the
preferred shares were convertible each year into common stock on a one-to-one
basis beginning June 1, 2003. If the common stock was trading at less than $5
per share, the difference between the redemption value ($5) and the market value
was to be paid in cash or in Class B shares. The number of Class B shares issued
would be the amount of cash due divided by the average stock price over the
previous five trading days. Class B shares required redemption at $5 per share
plus 16% interest, payable quarterly on the first anniversary of their issuance.
The Company also had the option to redeem the preferred stock for $5 per share
at any time.
In an agreement dated December 11, 2002, the terms of the Series AA Preferred
Stock were modified as follows: 300,000 shares converted 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.
The Company negotiated a modification to the original terms of the Series AA
Preferred Stock for several reasons, including: a) Management determined that it
was unlikely that the Company's common share price would be greater than $5
within the next few years and the Company would not have the cash to redeem the
shares, thus requiring the Company to issue Class B shares, which carried the
same redemption plus a 16% interest rate; b) It was in the best interest of the
Company to obtain the land resale guarantee, obtain the refinancing of the land
debt and to obtain an additional equity investment of $1million at the time the
terms were renegotiated; c) It allowed the Company to redeem the Series AA
Preferred Stock with common shares regardless of the price of the common shares
and maintain a floor of $0.41 per share for conversion.
48
The Company has authorized 20 million shares of total Preferred stock, including
those authorized for Series A, Series AA and any future series of Preferred
stock. The accompanying balance sheets reflect the shares allocated to such
series.
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 2003, the Company issued warrants as follows:
Number of Shares Exercise
Price Expiration In connection
with
------------------ ---------------- ------------------- --------------
526,531 $ .35 January 31,2008 Consulting
80,000 .45 January 31, 2008 Private Placement
1,629,272 .35 February 29,2004 Private Placement
335,713 .35 September 30, 2008 Debt
------------------
2,571,516
==================
During 2002, the Company issued warrants as follows:
Number of Shares Exercise
Price Expiration In connection
with
------------------ ---------------- ------------------- --------------
235,849 $ 2.12 July 15, 2005 Debt
200,000 .01 June 1, 2007 Acquisition
50,000 1.00 March 1, 2005 Consulting
336,786 .32 September 15, 2007 Acquisition
526,531 .35 November 12, 2007 Consulting
------------------
1,349,166
==================
Information with respect to warrants for December 31, 2003 and 2002, is as
follows:
2003 2002
---------------------------- ---------------------------
Price Per Price Per
Warrants Share Warrants Share
------------- -------------- ------------ --------------
Outstanding on January 1, 1,549,166 $ .32 - 3.00 325,000 $ .10 - 3.00
Issued 2,571,516 .35 - .45 1,349,166 .01 - 2.95
Exercised (1,384,990) .01 - .25 (125,000) .10
------------- ------------
Outstanding on December 31 2,735,692 $ .01 - 3.00 1,549,166 $ .32 - 3.00
============= ============
Weighted average exercise price $ .70 $ .93
============= ============
49
Weighted average fair value of warrants granted during the year
$ .12 $ .85
============= ============
Weighted average remaining life of warrants at December 31
1.51 years 4.26 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 3.00% 3.01%
Expected life 1.9 years 2.7 years
Expected dividends None None
Expected volatility 55% 74%
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. No options were granted under this plan in 2003. There were
81,955 granted under this plan in 2002.
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 vested immediately upon grant, 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, 2003 and
2002, is as follows:
2003 2002
--------------------------- ---------------------------
Price Per Price Per
Options Share Options Share
------------ -------------- ------------ --------------
Outstanding on January 1 7,347,854 $ 1.90 860,000 $1.90
Granted - .32 - 2.05 6,746,187 .32 - 2.05
Forfeited (429,249) 1.90 (258,333) 1.90
------------ ------------
Outstanding on December 31 6,918,605 $ .32 - 2.05 7,347,854 $ .32 - 2.05
============ ============
Exercisable on December 31 3,788,279 $ .32 - 2.05 2,657,853 $ .32 - 2.05
============ ============
50
Weighted average fair value of options granted during the year
$ .00 $ .18
============ ============
Weighted average exercise price
Outstanding $ .42 $ .51
============ ============
Exercisable $ .50 $ .84
============ ============
Weighted average remaining life of options at December 31
Outstanding 8.69 years 9.64 years
============ ============
Exercisable 8.55 years 9.23 years
============ ============
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. On a discretionary basis,
the Company may match 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 2003, the
Company did not make a matching contribution to the plan. In 2002, the Company
contributed approximately $7,000 to the Plan.
Note 17 - Litigation
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 settlement has
been reached whereby SurgiCare will pay MarCap $150,000 over the next year with
interest at 10%, with an underlying settlement of approximately $200,000 in the
event of a breach in the payment plan.
On July 7, 2003, SurgiCare, Inc. was named as a party in the arbitration
entitled Brewer & Pritchard, P.C. vs. SurgiCare, Inc. before the American
Arbitration Association. Brewer & Pritchard have claimed breach of contract and
demanded payment of $131,294.88 in billed and unbilled legal fees plus third
party expenses, interest at the highest legal rate, costs, legal fees and
damages from breach of contract. This case was settled in November 2003 and
SurgiCare issued shares of common stock valued at $117,500 as compensation for
past legal fees.
On February 10, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled S.E. Altman v. SurgiCare. S.E. Altman has sued for breach of contract,
alleging that SurgiCare did not pay monies owed under a "Finders Fee Contract."
Plaintiff asserts damages in the amount of $217,000, plus interest and
attorneys' fees. International Diversified Corporation, Limited has indemnified
SurgiCare with respect to any fees owed to Altman under the Finders Fee
Contract. The case has been dismissed in favor of arbitration. In March 2004,
the parties executed a Settlement Agreement and Release of Claims to resolve the
dispute in which SurgiCare agreed to issue Mr. Altman 540,000 shares of common
stock to be registered with the Securities and Exchange Commission on Form S-8.
On April 14, 2003, SurgiCare, Inc. was named as a defendant in a suit entitled
A.I. International Corporate Holdings, Ltd. v. SurgiCare, Inc. in the U.S.
District Court for the Southern District of New York. Subsequently, SurgiCare
filed suit against A.I. International Corporate Holdings, Ltd. and First
National Bank, S.A.L. of Lebanon in the 215th Judicial District Court of Harris
County, Texas. The New York case involves allegations that SurgiCare defaulted
on its loan agreement. The plaintiffs in the New York case are suing SurgiCare
for $834,252 representing the loan amount and interest, plus $219,000,
representing damages for "No-filing Charges" and "Non-Effective Charges" under
the contract. SurgiCare's lawsuit in Texas asserts that the loan agreement is
usurious. The defendants in the Texas case have moved for sanctions against
SurgiCare in that forum. The New York case has been ordered to mediation, which
has not yet been scheduled. In conjunction with the mediation order, The Parties
agreed to stay the litigation order in both states until the completion of the
mediation.
51
On November 24, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled Vincent A. Giammalva, Trustee v. SurgiCare, Inc., Keith G. LeBlanc, and
Phillip C. Scott; in the 344th Judicial District Court of Chambers County,
Texas. This case involves allegations that SurgiCare defaulted on a contract to
sell a parcel of real estate to plaintiff. Plaintiff also claims that LeBlanc
and Scott committed fraud. SurgiCare states that it could not sell the parcel of
land because of a lien on the property. The plaintiff seeks specific
performance, forcing SurgiCare to sell the property, as well as actual damages.
SurgiCare is negotiating with the plaintiff in an effort to settle this matter.
In addition, we are involved in various other legal proceedings and claims
arising in the ordinary course of business. Our management believes that the
disposition of these additional matters, individually or in the aggregate, is
not expected to have a materially adverse effect on our financial condition.
However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period.
Note 18 - Commitments
On November 10, 2002, the Company 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 is 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
On January 29, 2004, the Company converted all of its Series A Redeemable
Preferred Stock with the rights and preferences set forth in the Certificate of
Designation, Powers, Preferences, and Rights filed with the Secretary of State
of Delaware on September 12, 2001 (the "Preferred Stock") to common stock of the
Company. This conversion was approved by the majority vote of the Preferred
Stock shareholders in a written consent effective as of October 20, 2003, which
granted the Company the right to convert the Preferred Stock and in which the
shareholders disclaimed any past or possible future rights regarding the
Preferred Stock, including but not limited to the liquidation preference upon
the liquidation, dissolution or winding upon of the Company, pursuant to the
aforementioned Certificate of Designation.
We have negotiated a series of transactions that will restructure SurgiCare
and result in a change of control. The transactions include the acquisition of
three new businesses and issuance of new equity securities for cash and debt
forgiveness. We also intend to complete a reverse stock split and change our
name to Orion HealthCorp, Inc. Our board of directors has approved all of these
actions and a special meeting of stockholders in lieu of an annual meeting will
be held to approve them. The highlights of the financial transactions include:
-- Effecting a one-for-ten reverse stock split and re-designating our
outstanding common stock as Class A common stock.
-- Issuing a new class of common stock (Class B common stock) to Brantley
Partners IV, L.P., a private investor ("Brantley IV"). Brantley IV
will forgive indebtedness owed by SurgiCare and Integrated Physician
Solutions, Inc. ("IPS") to its subsidiary in the aggregate principal
amount of $1.28 million and will contribute up to $6 million in cash
(as reduced for additional debt owing by SurgiCare and IPS to Brantley
IV's subsidiary at the time of the closing of the transactions, which
will also be forgiven) in exchange for shares of Class B common stock.
-- Acquiring IPS, in a merger in which we will issue Class A common stock
to the IPS stockholders and certain IPS creditors. IPS is a provider
of business management services for pediatric practices and also
provides software and technology solutions for physicians.
-- Acquiring Medical Billing Services, Inc. ("MBS"), and Dennis Cain
Physician Solutions, Ltd. ("DCPS"), two providers of physician
management, billing, consulting and collection services in a merger in
which we will pay between $2.9 million and $3.5 million cash and issue
promissory notes in the aggregate principal amount of $500,000 and
Class C common stock to the current equity holders of MBS and DCPS.
The amount of consideration received depends upon the fair market
value of our common stock at the time of the
52
closing of the transactions, and the consideration is also subject to
retroactive increase or decrease, including the issuance of additional
shares of Class A common stock. We will also issue shares of Class A
common stock as directed by the DCPS and MBS equity holders, and may
be required to make additional payments in certain circumstances.
These transactions are contingent upon refinancing SurgiCare's IPS's and
MBS's debt. The transactions and the refinancing will provide SurgiCare with
increased revenues and earnings, an improved balance sheet and the opportunity
to grow the business. Please review our proxy statement for our special meeting
of stockholders in lieu of an annual meeting, filed with the SEC for the full
details of the proposed restructuring.
53
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 28, 2003, we dismissed Weinstein Spira & Company, P.C. ("WSC") as
our independent auditors and retained Mann Frankfort Stein & Lipp CPAs, LLP
("MSFL") as our new independent auditors. The decision to change auditors was
approved by our board of directors.
WSC reported on our financial statements for each of the fiscal years ended
December 31, 2002 and 2001. WSC did not include in any report on our financial
statements, an adverse opinion or a disclaimer of opinion, or a qualification or
modification as to uncertainty, audit scope or accounting principles.
During our two most recent fiscal years ended December 31, 2002, and the
subsequent interim period through July 28, 2003, there were no disagreements
between us and WSC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to WSC's satisfaction, would have caused WSC to
make reference to the subject matter of the disagreement in connection with its
reports on our financial statements. WSC's report on our financial statements
for the year ended December 31, 2002, was modified by the inclusion of an
explanatory paragraph addressing our ability to continue as a going concern.
ITEM 8A. CONTROLS AND PROCEDURES.
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports filed
by us under the Securities Exchange Act of 1934, as amended ("Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. As of the end of the period covered by this
report, we evaluated, under the supervision and with the participation of our
management, including our President and Chief Executive Officer and our
Secretary and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on
that evaluation, our President and Chief Executive Officer and our Secretary and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective.
During the most recent fiscal quarter, there have been no changes in our
internal controls over financial reporting that have materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
CHANGES IN INTERNAL CONTROLS
During 2002, under prior management, SurgiCare issued restricted common
stock in some circumstances in which restrictive transfer legends were
improperly omitted from stock certificates. SurgiCare's current management has
conferred with counsel about these past issuances, and has instituted procedures
to ensure that future issuances of unregistered shares of securities include
appropriate legends and safeguards against transfer. SurgiCare has issued
instructions to its transfer agent warning against permitting transfers of
shares or removal of restrictive legends without assurance that such actions are
permissible under federal securities laws. SurgiCare also plans, after
completion of the transactions described in Item 1 - Description of Business
under the caption "The Company," to switch to a new transfer agent, which has
better protections in place for maintaining internal control over issuance and
transfer of securities.
Disclosure controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Our disclosure controls and procedures are designed to insure that the
information required to be filed is accumulated and communicated to our
management in a manner designed to enable them to make timely decisions
regarding required disclosure.
Our management, including our CEO and CFO, does not expect that our
disclosure controls or internal controls over financial reporting will prevent
all error or fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, but not absolute, assurance that the objectives of
a control system are met. Any control system contains limitations imposed by
resources and relevant cost considerations. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that all control issues have teen addressed. These inherent limitations include
the realities that judgments can be faulty and that breakdowns can
54
occur because of simple error or mistake. In addition, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of a control. Our control system design is
also based on assumptions about the likelihood of future events, and we cannot
be sure that we have considered all possible future circumstances and events.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information with respect to the directors, executive officers,
promoters and control persons; compliance with Section 16(a) of the Exchange Act
and other information under this item is incorporated herein by reference to the
proxy statement for our special meeting of shareholders in lieu of an annual
meeting for 2004.
ITEM 10. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated herein
by reference to the proxy statement for our special meeting of shareholders in
lieu of an annual meeting for 2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners
and management and related shareholder matters is incorporated herein by
reference to the proxy statement or our special meeting of shareholders in lieu
of an annual meeting for 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions is incorporated herein by reference to the proxy statement for our
special meeting of shareholders in lieu of an annual meeting for 2004.
55
ITEM 13. 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
(Incorporated by reference to Exhibit 4.3 of the
Company's Form 10-KSB for the year ended December
31, 2002 filed April 14, 2003)
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 (Incorporated by reference to
Exhibit 10.2 of the Company's Form 10-KSB for the
year ended December 31, 2002 filed on April 14,
2003)
Exhibit 10.3 Employment Agreement with Phillip C. Scott dated
November 10, 2002 (Incorporated by reference to
Exhibit 10.2 of the Company's Form 10-KSB for the
year ended December 31, 2002 filed on April 14,
2003)
Exhibit 16.1 Letter to the Securities and Exchange Commission
from Weinstein Spira & Company, P.C., dated July
31, 2003, regarding Item 4 to the Registrant's
Form 8-K filed August 1, 2003 (Incorporated by
reference to Exhibit 16.1 of the Company's Form
8-K/A filed on August 4, 2003)
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, 2003, the following reports on Form
8-K were filed:
Dated November 18, 2003 to announce that the SurgiCare had
entered into agreements relating to business combinations with
three other companies, an equity investment and a
recapitalization that will result in a new healthcare company
named Orion HealthCorp, Inc.
Dated November 24, 2003 to report issuance of a press release
summarizing SurgiCare's third quarter 2003 financial results.
56
Dated January 29, 2004 to report SurgiCare's conversion of all
of its Series A Redeemable Preferred Stock.
Dated February 17, 2004 to announce that SurgiCare has
executed a definitive agreement to acquire Dennis Cain
Physician Solutions, Ltd and Medical Billing Services, Inc. In
addition, SurgiCare announced that it has filed preliminary
proxy materials with the Security and Exchange Commission
relating to a meeting of stockholders to be held to approve
various matters relating to the aforementioned acquisitions as
well as the previously announced recapitalization, equity
investment and acquisition of Integrated Physician Solutions,
Inc.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by Mann Frankfort Stein & Lipp CPAs, LLP ("MFSL")
for professional services rendered for the review of financial statements
included in SurgiCare's quarterly reports on Form 10-QSB for the fiscal year
2003 were $5,365. During fiscal years 2002 and 2003 the aggregate fees billed by
Weinstein Spira & Company, P.C. ("WSC") totaled $73,776 and $72,434.
Tax Fees
The aggregate fees billed by MFSL during fiscal year 2003 for tax-related
services totaled $6,728. The aggregate fees billed by WSC during fiscal years
2002 and 2003 for tax related services totaled $18,167 and $25,900,
respectively.
All Other Fees
During fiscal years 2002 and 2003, all other fees billed by WSC totaled
$374 and $1,500, which primarily consisted of finance charges and Form S-8
consents.
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
--------------------- President & April 13, 2004
Keith G. LeBlanc Chief Executive Officer
(principal executive officer)
/s/ Phillip C. Scott
--------------------- Secretary & April 13, 2004
Phillip C. Scott Chief Financial Officer
(principal financial and accounting officer)
/s/ Jeffrey Penso
------------------ Director April 13, 2004
Jeffrey Penso, DPM
/s/ Sherman Nagler
------------------- Director April 13, 2004
Sherman Nagler, DPM
/s/ Michael Mineo
------------------ Director April 13, 2004
Michael Mineo, DPM
/s/ Bruce Miller
----------------- Director April 13, 2004
Bruce Miller, DPM
58
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-15(e) and 15d-15) 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 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 over financial reporting 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 13, 2004
/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-15(e) and 15d-15) 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 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 over financial reporting 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 13, 2004
/s/ Phillip C. Scott
---------------------------------------------
Phillip C. Scott, Chief Financial Officer1
-------------------------------
( 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
(Incorporated by reference to Exhibit 4.3 of the
Company's Form 10-KSB for the year ended December
31, 2002 filed April 14, 2003)
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 16.1 Letter to the Securities and Exchange Commission
from Weinstein Spira & Company, P.C., dated July
31, 2003, regarding Item 4 to the Registrant's
Form 8-K filed August 1, 2003 (Incorporated by
reference to Exhibit 16.1 of the Company's Form
8-K/A filed on August 4, 2003)
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.
61
Exhibit 21
SURGICARE, INC.
SUBSIDIARY LIST
AS OF MARCH 31, 2004
State of
Name of Subsidiary Org. Owned By Ownership %
------------------ ----- -------- -----------
Bellaire SurgiCare, Inc. Texas SurgiCare, Inc. 100%
Town & Country SurgiCare, Inc. Texas SurgiCare, Inc. 100%
SurgiCare Memorial
Village, L.P. Texas Town & Country 60%
SurgiCare, Inc.
Baytown SurgiCare, Inc. Texas SurgiCare, Inc. 100%
San Jacinto Surgery
Center, L.P. Texas Baytown SurgiCare, Inc. 10%
Tuscarawas Ambulatory
Surgery Center, LLP Ohio SurgiCare, Inc. 51%
Southeast SurgiCare, Inc. Texas SurgiCare, Inc. 100%
Tuscarawas Open MRI, L.P. Ohio SurgiCare, Inc 100%
Bellaire ASC, L.P. Texas Bellaire SurgiCare, Inc. 100%
TASC Anesthesia, LLC Ohio Tuscarawas Ambulatory 100%
Surgery Center, LLC
62