U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
COMMISSION FILE NO. 001-16587
ORION HEALTHCORP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 58-1597246
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1805 OLD ALABAMA ROAD
SUITE 350, ROSWELL GA 30076
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (678) 832-1800
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
-------------------------------------------------------------------------------
CLASS A COMMON STOCK, $0.001 PAR THE AMERICAN STOCK EXCHANGE
VALUE PER SHARE
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 [_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of November 10, 2005, 12,202,686 shares of the Registrant's Class A Common
Stock, par value $0.001, were outstanding, 10,448,470 shares of the Registrant's
Class B Common Stock, par value $0.001, were outstanding and 1,462,120 shares of
the Registrant's Class C Common Stock, par value $0.001, were outstanding.
Transitional Small Business Disclosure Format:
Yes [_] No [X]
ORION HEALTHCORP, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
ITEM NUMBER PAGE NUMBER
------------------------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis or Plan of Operation 3
3. Controls and Procedures 26
PART II - OTHER INFORMATION
1. Legal Proceedings 26
2. Unregistered Sales of Equity Securities and Use of Proceeds 27
3. Defaults Upon Senior Securities 28
4. Submission of Matters to a Vote of Security Holders 29
5. Other Information 29
6. Exhibits 29
SIGNATURES 31
CONSOLIDATED FINANCIAL STATEMENTS F-1
INDEX OF EXHIBITS 33
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB
constitute "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 (collectively, the "Acts"). Forward-looking statements
include statements preceded by, followed by or that include the words "may",
"will", "would", "could", "should", "estimates", "predicts", "potential",
"continue", "strategy", "believes", "anticipates", "plans", "expects", "intends"
and similar expressions. Any statements contained herein that are not statements
of historical fact are deemed to be forward-looking statements.
The forward-looking statements in this report are based on
current beliefs, estimates and assumptions concerning the operations, future
results, and prospects of Orion HealthCorp, Inc. (formerly known as SurgiCare,
Inc. "SurgiCare") ("Orion" or the "Company") and its affiliated companies
described herein. As actual operations and results may materially differ from
those assumed in forward-looking statements, there is no assurance that
forward-looking statements will prove to be accurate. Forward-looking statements
are subject to the safe harbors created in the Acts. Any number of factors could
affect future operations and results, including, without limitation, changes in
federal or state healthcare laws and regulations and third party payer
requirements, changes in costs of supplies, labor and employee benefits,
increases in interest rates on the Company's indebtedness as well as general
market conditions, competition and pricing, integration of business and
operations and the success of the Company's business strategies. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information or future events.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Company's consolidated financial statements and related
notes thereto are included as a separate section of this report, commencing on
page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations highlights the principal factors
that have affected Orion's financial condition and results of operations as well
as Orion's liquidity and capital resources for the periods described. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CERTAIN RECENT DEVELOPMENTS
ACQUISITION AND RESTRUCTURING TRANSACTIONS
On November 18, 2003, the Company entered into an agreement
and plan of merger with Integrated Physician Solutions, Inc. ("IPS"), which was
amended and restated on February 9, 2004, and further amended on July 16, 2004
and on September 9, 2004 (the "IPS Merger Agreement"), relating to the Company's
acquisition of IPS (the "IPS Merger"). On February 9, 2004, the Company entered
into an agreement and plan of merger with Dennis Cain Physician Solutions, Ltd.
("DCPS") and Medical Billing Services, Inc. ("MBS"), which was amended and
restated on July 16, 2004, and further amended on September 9, 2004 and on
December 15, 2004 (the "DCPS/MBS Merger Agreement"), relating to the Company's
acquisition of DCPS and MBS (the "DCPS/MBS Transaction" and together with the
IPS Merger, the "Acquisitions"). The Company completed the IPS Merger and the
DCPS/MBS Transaction on December 15, 2004. As a result of the IPS Merger and the
DCPS/MBS Transaction, IPS, MBS and DCPS became wholly-owned subsidiaries of the
Company.
On December 15, 2004, and simultaneous with the consummation
of the IPS Merger and DCPS/MBS Transaction, the Company consummated its
previously disclosed restructuring transactions (the "Closing"), which included
issuances of new equity securities for cash and contribution of outstanding
debt, and the restructuring of its debt facilities. The Company also completed a
one-for-ten reverse stock split (the "Reverse Stock Split"), created three new
classes of common stock (Class A, Class B and Class C Common Stock) and changed
its name. SurgiCare's common stock was converted into shares of Orion's Class A
Common Stock (the "Reclassification").
Also on December 15, 2004, the Company issued 11,482,261
shares of its Class B Common Stock (the "Investment Transaction") to various
investors for $13,200,000 in cash plus cash in the amount of $128,350, which
amount equaled the accrued but unpaid interest immediately prior to the Closing
owed to a subsidiary of Brantley Partners IV, L.P. ("Brantley IV") by SurgiCare
and IPS on amounts advanced prior to October 24, 2003 (the "Base Bridge Interest
Amount"). At the Closing, Orion used $5,908,761 to pay off the debt owed to the
subsidiary of Brantley IV. The Company also granted to Brantley IV the right to
purchase shares of Class A Common Stock for cash in an amount up to an aggregate
of $3,000,000 after the Closing (the "Purchase Right"). Brantley IV may exercise
the Purchase Right at any time after December 15, 2004. Each additional
investment will be: (i) subject to the approval of a majority of the members of
the board of directors of the Company that are not affiliated with Brantley IV,
(ii) consummated on a date mutually agreed by the Company and Brantley IV, and
(iii) accomplished with documentation reasonably satisfactory to the Company and
Brantley IV. Pursuant to the terms of the Purchase Right, the purchase price per
share of the Class A Common Stock will be equal to the lesser of (a) $1.25, and
(b) 70% multiplied by the average of the daily average of the high and low price
per share of the Class A Common Stock on the American Stock Exchange ("AMEX") or
a similar system on which the Class A Common Stock shall be listed at the time,
for the twenty trading days immediately preceding the date of the closing of the
exercise of the Purchase Right.
-3-
Holders of shares of Class B Common Stock have the option to
convert their shares of Class B Common Stock into shares of Class A Common Stock
at any time based on a conversion factor in effect at the time of the
conversion. The conversion factor is designed to yield one share of Class A
Common Stock per share of Class B Common Stock converted, plus such additional
shares of Class A Common Stock, or portions thereof, necessary to approximate
the unpaid portion of the return of the original purchase price for the Class B
Common Stock less the Base Bridge Interest Amount, plus an amount equal to nine
percent (9%) per annum on the amount of the original purchase price less the
Base Bridge Interest Amount, without compounding, from the date the Class B
Common Stock was first issued to the date of conversion. The conversion factor
is calculated based on a number equal to one plus the quotient of $1.15 plus 9%
per annum (not compounded), divided by the fair market value of the Class A
Common Stock (which is determined by reference to the prices at which Class A
Common Stock trades immediately prior to the conversion). Therefore, so long as
the Class B Common Stock has not yet received a full return of its purchase
price less the Base Bridge Interest Amount and a 9% rate of return, if the
market value of a share of Class A Common Stock increases, a share of Class B
Common Stock will convert into fewer shares of Class A Common Stock, and if the
market value of Class A Common Stock shares decreases, a share of Class B Common
Stock will convert into more shares of Class A Common Stock. The initial
conversion factor was approximately 1.28 (one share of Class B Common Stock
converts into approximately 1.28 shares of Class A Common Stock). As of
September 30, 2005, the conversion factor was approximately 4.158844397612
shares (one share of Class B Common Stock converts into approximately
4.158844397612 shares of Class A Common Stock). The holders of Class B Common
Stock vote together with the holders of Class A Common Stock and Class C Common
Stock, as a single class, generally, with each holder of Class A Common Stock
entitled to one vote per share of Class A Common Stock held by such holder; with
each holder of Class B Common Stock entitled to one vote per share of Class B
Common Stock held by such holder; and with each holder of Class C Common Stock
entitled to one vote per share of Class C Common Stock held by such holder.
Additionally, the Company used $3,683,492 of the proceeds of
the Investment Transaction to repay a portion of the indebtedness to
unaffiliated third parties and restructured additional existing indebtedness.
NEW LINE OF CREDIT AND DEBT RESTRUCTURING
In connection with the Closing, Orion also entered into a new
secured two-year revolving credit facility pursuant to the Loan and Security
Agreement (the "Loan and Security Agreement"), dated December 15, 2004, by and
among Orion, certain of its affiliates and subsidiaries, and Healthcare Business
Credit Corporation ("HBCC"). Under this facility, up to $4,000,000 of loans
could be made available to Orion, subject to a borrowing base. As discussed
below, the amount available under this credit facility has been reduced. Orion
borrowed $1,600,000 under this facility concurrently with the Closing. The
interest rate under this facility is equal to the prime rate plus 3%. Upon an
event of default, HBCC can accelerate the loans or call the guaranties described
below. In connection with entering into this new facility, Orion also
restructured its previously-existing debt facilities, which resulted in a
decrease in aggregate debt owed to DVI Business Credit Corporation and DVI
Financial Services (collectively, "DVI") from approximately $10.1 million to a
combined principal amount of approximately $6.5 million, of which approximately
$2.0 million was paid at the Closing.
Pursuant to the Guaranty Agreement (the "Brantley IV
Guaranty"), dated as of December 15, 2004, provided by Brantley IV to HBCC,
Brantley IV agreed to provide a deficiency guaranty in the initial amount of
$3,272,727. As discussed below, the amount of this Brantley IV Guaranty has been
reduced. Pursuant to the Guaranty Agreement (the "Brantley Capital Guaranty";
and together with the Brantley IV Guaranty, collectively, the "Guaranties"),
dated as of December 15, 2004, provided by Brantley Capital Corporation
("Brantley Capital") to HBCC, Brantley Capital agreed to provide a deficiency
guaranty in the initial amount of $727,273. As discussed below, the amount of
this Brantley Capital Guaranty has been reduced. In consideration for the
Guaranties, Orion issued warrants to purchase 20,455 shares of Class A Common
Stock, at an exercise price of $0.01 per share, to Brantley IV, and issued
warrants to purchase 4,545 shares of Class A Common Stock, at an exercise price
of $0.01 per share, to Brantley Capital.
POST-RESTRUCTURING LOAN TRANSACTIONS
On March 16, 2005, Brantley IV loaned the Company an aggregate
of $1,025,000 (the "First Loan"). On June 1, 2005, the Company executed a
convertible subordinated promissory note in the principal amount of $1,025,000
(the "First Note") payable to Brantley IV to evidence the terms of the First
Loan. The material terms of the First Note are as follows: (i) the First Note is
unsecured; (ii) the First Note is subordinate to the Company's outstanding loan
from HBCC and other indebtedness for monies borrowed, and ranks pari passu with
general unsecured trade liabilities; (iii) principal and interest on the First
Note is due April 19, 2006 (the "First Note Maturity Date"); (iv) the interest
accrues from and after March 16, 2005, at a per annum rate equal to nine percent
(9.0%) and is non-compounding; (v) if an event of default occurs and is
continuing, Brantley IV, by notice to the Company, may declare the principal of
the First Note to be due and immediately payable; and (vi) on or after the First
Note Maturity Date, Brantley IV, at its option, may convert all or a portion of
the outstanding principal and interest due of the First Note into shares of
Class A Common Stock of the Company at a price per share equal to $1.042825 (the
"First Note Conversion Price"). The number of shares of Class A Common Stock
issuable upon conversion of the First Note shall be equal to the number obtained
by dividing (x) the aggregate amount of principal and interest to be converted
by (y) the First Note Conversion Price (as defined above); provided, however,
the number of shares issuable upon conversion of the First Note shall not exceed
the lesser of: (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3% of
the then outstanding Class A Common Stock.
-4-
On April 19, 2005, Brantley IV loaned the Company an
additional $225,000 (the "Second Loan"). On June 1, 2005, the Company executed a
convertible subordinated promissory note in the principal amount of $225,000
(the "Second Note") payable to Brantley IV to evidence the terms of the Second
Loan. The material terms of the Second Note are as follows: (i) the Second Note
is unsecured; (ii) the Second Note is subordinate to the Company's outstanding
loan from HBCC and other indebtedness for monies borrowed, and ranks pari passu
with general unsecured trade liabilities; (iii) principal and interest on the
Second Note is due April 19, 2006 (the "Second Note Maturity Date"); (iv) the
interest accrues from and after April 19, 2005, at a per annum rate equal to
nine percent (9.0%) and is non-compounding; (v) if an event of default occurs
and is continuing, Brantley IV, by notice to the Company, may declare the
principal of the Second Note to be due and immediately payable; and (vi) on or
after the Second Note Maturity Date, Brantley IV, at its option, may convert all
or a portion of the outstanding principal and interest due of the Second Note
into shares of Class A Common Stock of the Company at a price per share equal to
$1.042825 (the "Second Note Conversion Price"). The number of shares of Class A
Common Stock issuable upon conversion of the Second Note shall be equal to the
number obtained by dividing (x) the aggregate amount of principal and interest
to be converted by (y) the Second Note Conversion Price (as defined above);
provided, however, the number of shares issuable upon conversion of the Second
Note shall not exceed the lesser of: (i) 254,597 shares of Class A Common Stock,
or (ii) 3.6% of the then outstanding Class A Common Stock.
Additionally, in connection with the First Loan and the Second
Loan, the Company entered into a First Amendment to the Loan and Security
Agreement (the "First Amendment"), dated March 22, 2005, with certain of the
Company's affiliates and subsidiaries, and HBCC, whereby its $4,000,000 secured
two-year revolving credit facility has been reduced by the amount of the loans
from Brantley IV to $2,750,000. As a result of the First Amendment, the Brantley
IV Guaranty was amended by the Amended and Restated Guaranty Agreement (the
"Amended Brantley IV Guaranty"), dated March 22, 2005, which reduces the
deficiency guaranty provided by Brantley IV by the amount of the First Loan to
$2,247,727. Also as a result of the First Amendment, the Brantley Capital
Guaranty was amended by the Amended and Restated Guaranty Agreement (the
"Amended Brantley Capital Guaranty"), dated March 22, 2005, which reduces the
deficiency guaranty provided by Brantley Capital by the amount of the Second
Loan to $502,273.
POST-RESTRUCTURING TRANSACTIONS INVOLVING SUBSIDIARIES
On June 7, 2005, InPhySys, Inc. (f/k/a IntegriMED, Inc.)
("IntegriMED"), a wholly-owned subsidiary of IPS, executed an Asset Purchase
Agreement (the "Agreement") with eClinicalWeb, LLC ("eClinicalWeb") to sell
substantially all of the assets of IntegriMED. The Agreement was deemed to be
effective as of midnight on June 6, 2005. The property sold by IntegriMED to
eClinicalWeb (hereinafter collectively referred to as the "Acquired Assets")
includes the machinery, equipment, supplies, materials, computers, software,
software licenses, and other personal property owned by IntegriMED and used
exclusively in the operation of IntegriMED's business, IntegriMED's goodwill and
all of the business conducted under the name "IntegriMED" and "InPhySys", sales
and customer lists, account lists, records, manuals, and telephone numbers used
exclusively in the operation of IntegriMED's business, and all of IntegriMED's
rights and interests in all contracts, open customer purchase orders, quotations
or similar agreements to the extent entered into by IntegriMED or assigned to
IntegriMED. Additionally, eClinicalWeb agreed to assume and to thereafter
perform and pay when due all liabilities related to the Acquired Assets but only
to the extent such liabilities arise from and after the Closing Date (as defined
below). eClinicalWeb also agreed to sublease certain space from IPS that was
occupied by employees of IntegriMED as of the Closing Date. As consideration for
the purchase of the Acquired Assets, eClinicalWeb issued to IntegriMED the
following: (i) a two percent (2%) ownership interest in eClinicalWeb; and (ii)
$69,033.90, for the payoff of certain leases and purchase of certain software,
via wire transfer at the closing of the transfer and delivery of all documents
and instruments necessary to consummate the transactions contemplated by the
Agreement (the "Closing Date"), which occurred concurrently with the execution
of the Agreement. In addition to the consideration listed above, IntegriMED
retained the following assets related to IntegriMED's business: (i) all cash and
cash equivalents relating to IntegriMED's business as of the Closing Date; (ii)
all accounts receivable relating to IntegriMED's business as of the Closing
Date; and (iii) other assets of IntegriMED not used exclusively in IntegriMED's
business.
On June 13, 2005, the Company announced that it had accepted
an offer to purchase its interests in the ambulatory surgery center and the
magnetic resonance imaging ("MRI") facility in Dover, Ohio. On September 30,
2005, Orion executed a Purchase Agreement (the "TASC Agreement") by and among
Tuscarawas Ambulatory Surgery Center, L.L.C. ("TASC"), each of the individuals
holding a minority equity interest in TASC (the "TASC Selling Investors" and
together with Orion, the "TASC Sellers") and Union Hospital ("Union"). The
consummation of the transactions contemplated by the TASC Agreement (the "TASC
Closing") occurred concurrently with the execution of the TASC Agreement, as
amended by the Closing Distribution Agreement, which was deemed to be effective
as of 12:01 a.m. on October 1, 2005 (the "TASC Closing Date").
Prior to the execution of the TASC Agreement, the TASC Sellers
owned units in TASC, which is organized as an Ohio limited liability
corporation. Under the TASC Agreement, the TASC Selling Investors agreed to sell
19.5 ownership units (the "TASC Units") to Union and Orion agreed to sell 54
TASC Units, which represents 100% of Orion's equity interests in TASC, to Union,
such that upon the TASC Closing Date, Union would own 70% of the TASC Units.
-5-
As consideration for the purchase of these TASC Units, Union
paid a price of $12,666.67 per TASC Unit for a total purchase price of $950,000.
The purchase price, less $82,632.47 in closing costs, was paid to the TASC
Sellers as follows on the TASC Closing
Date:
(i) Payment to Orion of $208,823.73 in immediately available funds;
(ii) Retention by Orion of the $250,000 escrow closing deposit previously
paid by Union;
(iii) As a portion of the single note payable from Union to Orion due on or
before March 30, 2006 in the gross amount of $530,547.37 (the
"Note")[which relates to all three transactions described herein], the
amount of $196,638.75; and
(iv) Payment of 100% of the net purchase price to the TASC Selling
Investors (collectively, $217,909.11), such amount to be by cashier's
or certified check.
Additionally, as part of the TASC Agreement, Orion executed a
management services agreement (the "TASC MSA) with TASC for a period of two
years from the Closing Date. The terms of the TASC MSA are substantially the
same as those of the management services agreement under which Orion performed
management services prior to the execution of the TASC Agreement.
On September 30, 2005 and concurrent with the execution of the
TASC Agreement, Union and TASC Anesthesia, L.L.C. ("TASC Anesthesia"), an Ohio
limited liability company whose sole member is TASC, executed an Asset Purchase
Agreement (the "TASC Anesthesia Agreement") to purchase certain assets of TASC
Anesthesia for the purchase price of $77,524.00, payable to the TASC Sellers on
a pro rata basis, determined by the TASC Units that were owned by each TASC
Seller immediately prior to the execution of the TASC Agreement. The
consummation of the transactions contemplated by the TASC Anesthesia Agreement
(the "TASC Anesthesia Closing") occurred concurrently with the execution of the
TASC Anesthesia Agreement, as amended by the Closing Distribution Agreement,
which was deemed to be effective as of 12:01 a.m. on October 1, 2005 (the "TASC
Anesthesia Closing Date"). The consideration for the TASC Anesthesia Agreement
was paid to the TASC and then distributed to the TASC Sellers as follows as of
the TASC Anesthesia Closing Date:
(i) Payment to Orion of $27,908.64 in immediately available funds;
(ii) As a portion of the Note, the amount of $11,960.85; and
(iii) Payment of 100% of the purchase price to the TASC Selling Investors
(collectively, $37,986.76), such amount to be by cashier's or
certified check.
On September 30, 2005, Orion executed a Purchase Agreement
(the "TOM Agreement") by and among Tuscarawas Open MRI, L.P. ("TOM"), each of
the individuals holding a minority equity interest in TOM (the "TOM Selling
Investors" and together with Orion, the "TOM Sellers") and Union. The
consummation of the transactions contemplated by the TOM Agreement (the "TOM
Closing") occurred concurrently with the execution of the TOM Agreement, as
amended by the Closing Distribution Agreement, which was deemed to be effective
as of 12:01 a.m. on October 1, 2005 (the "TOM Closing Date").
Prior to the execution of the TOM Agreement, the TOM Sellers
owned general or limited partnership interests in TOM (together, the
"Interests"), which is organized as an Ohio limited partnership. Under the TOM
Agreement, the TOM Selling Investors agreed to sell 29% of the Interests (the
"TOM Interests") to Union and Orion agreed to sell 41% of the TOM Interests,
which represents 100% of Orion's equity interests in TOM, to Union, such that
upon the TOM Closing Date, Union will own 70% of the TOM Interests.
As consideration for the purchase of these TOM Interests,
Union paid a price of $26,640.34 per TOM Interest for a total purchase price of
$2,188,237.35. The purchase price, less $82,632.47 in closing costs, was paid to
the TOM Sellers as follows as of the TOM Closing Date:
(i) Payment to Orion of $486,426.85 in immediately available funds;
(ii) Retention by Orion of the $250,000 escrow closing deposit previously
paid by Union;
(iii) As a portion of the Note, the amount of $321,947.77; and
(iv) Payment of 100% of the net purchase price to the TASC Selling
Investors (collectively, $1,047,230.43), such amount to be by
cashier's or certified check.
Additionally, as part of the TOM Agreement, Orion executed a
management services agreement (the "TOM MSA") with TOM for a period of two years
from the Closing Date. The terms of the TOM MSA are substantially the same as
those of the management services agreement under which Orion performed
management services prior to the execution of the TOM Agreement.
-6-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of Orion's financial statements is in
conformity with accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions that affect
the amounts reported in the financial statements and footnotes. Orion management
bases these estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments that are not readily apparent from other
sources. These estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Changes in the facts or circumstances
underlying these estimates could result in material changes and actual results
could differ from these estimates. Orion believes the following critical
accounting policies affect the most significant areas involving management's
judgments and estimates.
CONSOLIDATION OF PHYSICIAN PRACTICE MANAGEMENT COMPANIES. In
March 1998, the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") issued its Consensus on Issue 97-2 ("EITF 97-2"). EITF
97-2 addresses the ability of physician practice management ("PPM") companies to
consolidate the results of medical groups with which it has an existing
contractual relationship. Specifically, EITF 97-2 provides guidance for
consolidation where PPM companies can establish a controlling financial interest
in a physician practice through contractual management arrangements. A
controlling financial interest exists if, for a requisite period of time, the
PPM has "control" over the physician practice and has a "financial interest"
that meets six specific requirements. The six requirements for a controlling
financial interest include:
(a) the contractual arrangement between the PPM and physician practice (1)
has a term that is either the entire remaining legal life of the
physician practice or a period of 10 years or more, and (2) is not
terminable by the physician practice except in the case of gross
negligence, fraud, or other illegal acts by the PPM or bankruptcy of
the PPM;
(b) the PPM has exclusive authority over all decision making related to
(1) ongoing, major, or central operations of the physician practice,
except the dispensing of medical services, and (2) total practice
compensation of the licensed medical professionals as well as the
ability to establish and implement guidelines for the selection,
hiring, and firing of them; and
(c) the PPM must have a significant financial interest in the physician
practice that (1) is unilaterally salable or transferable by the PPM
and (2) provides the PPM with the right to receive income, both as
ongoing fees and as proceeds from the sale of its interest in the
physician practice, in an amount that fluctuates based upon the
performance of the operations of the physician practice and the change
in fair value thereof.
IPS is a PPM company. IPS's management services agreements
(each a "MSA" and collectively the "MSAs") governing the contractual
relationship with its affiliated medical groups are for forty year terms; are
not terminable by the physician practice other than for bankruptcy or fraud;
provide IPS with decision making authority other than related to the practice of
medicine; provide for employment and non-compete agreements with the physicians
governing compensation; provide IPS the right to assign, transfer or sell its
interest in the physician practice and assign the rights of the MSAs; provide
IPS with the right to receive a management fee based on results of operations
and the right to the proceeds from a sale of the practice to an outside party
or, at the end of the MSA term, to the physician group. Based on this analysis,
IPS has determined that its contracts meet the criteria of EITF 97-2 for
consolidating the results of operations of the affiliated medical groups and has
adopted EITF 97-2 in its statement of operations. EITF 97-2 also has addressed
the accounting method for future combinations with individual physician
practices. IPS believes that, based on the criteria set forth in EITF 97-2, any
future acquisitions of individual physician practices will be accounted for
under the purchase method of accounting.
REVENUE RECOGNITION. The Company recognizes revenue from its
surgery and diagnostic center business 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 and there have been no material settlements with third party
payers for the three months and nine months ended September 30, 2005.
IPS records revenue based on patient services provided by its
affiliated medical groups. Net patient service revenue is impacted by billing
rates, changes in current procedural terminology code reimbursement and
collection trends. IPS reviews billing rates at each of its affiliated medical
groups on at least an annual basis and adjusts those rates based on each
insurer's current reimbursement practices. Amounts collected by IPS for
treatment by its affiliated medical groups of patients covered by Medicaid and
other contractual reimbursement programs, which may be based on cost of services
provided or predetermined rates, are generally less than the established billing
rates of IPS's affiliated medical groups. IPS estimates the amount of these
contractual allowances and records a reserve against accounts receivable based
on historical collection percentages for each of the affiliated medical groups,
which include various payer categories. When payments are received, the
contractual adjustment is written off against the established reserve for
contractual allowances. The historical collection percentages are adjusted
quarterly based on actual payments received, with any differences charged
against net revenue for the quarter. Additionally, IPS tracks cash collection
percentages for each medical group on a monthly basis, setting quarterly and
annual goals for cash collections, bad debt write-offs and aging of accounts
receivable. IPS is not aware of any material claims, disputes or unsettled
matters with third party payers and there have been no material settlements with
third party payers for the three months and nine months ended September 30, 2005
and 2004.
-7-
MBS earns revenues based on the collection of MBS's customers'
receivables. Revenues are recognized during the period in which collections were
received.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. The
Company's surgery and diagnostic centers and IPS's affiliated medical groups
grant credit without collateral to its patients, most of which are insured under
third-party payer arrangements. The provision for bad debts that relates to
patient service revenues is based on an evaluation of potentially uncollectible
accounts. The provision for bad debts includes a reserve for 100% of the
accounts receivable older than 180 days. Establishing an allowance for bad debt
is subjective in nature. IPS uses historical collection percentages to determine
the estimated allowance for bad debts, and adjusts the percentage on a quarterly
basis.
MBS records uncollectible accounts receivable using the direct
write-off method of accounting for bad debts. Historically, MBS has experienced
minimal credit losses and has not written-off any material accounts during 2005
or 2004.
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 partnership and reduced to
reflect the share of the losses of the partnership or distributions from the
partnership.
These partnership interests were accounted for as
investment in limited partnerships due to the interpretation of Statement of
Financial Accounting Standards ("SFAS") 94/Accounting Research Bulletin ("ARB")
51 and the interpretations of such by Issue 96-16 and Statement of Position
("SOP") 78-9. Under those interpretations, the Company could not consolidate its
interest in those facilities in which it held a minority general 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, the Company recorded them as investments
in limited partnerships.
GOODWILL AND OTHER INTANGIBLE ASSETS. 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. In July 2001, the
FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 eliminates pooling-of-interest
accounting and requires that all business combinations initiated after June 30,
2001, be accounted for using the purchase method. SFAS No. 142 eliminates the
amortization of goodwill and certain other intangible assets and requires the
Company to evaluate goodwill for impairment on an annual basis by applying a
fair value test. SFAS No. 142 also requires that an identifiable intangible
asset that is determined to have an indefinite useful economic life not be
amortized, but separately tested for impairment using a fair value-based
approach at least annually. The Company evaluates its goodwill and other
intangible assets in the fourth quarter of each fiscal year.
OVERVIEW
SURGERY AND DIAGNOSTIC CENTER BUSINESS
The Company was incorporated in Delaware on February 24, 1984
as Technical Coatings Incorporated. On September 10, 1984, its name was changed
to Technical Coatings, Inc. Immediately prior to July 1999, the Company was an
inactive company. On July 11, 1999, the Company changed its name to SurgiCare,
Inc., and at that time changed its business strategy to developing, acquiring
and operating freestanding ambulatory surgery centers ("ASCs"). On July 21,
1999, the Company acquired all of the issued and outstanding shares of common
stock of Bellaire SurgiCare, Inc. ("Bellaire SurgiCare"), in exchange for the
issuance of 9.86 million shares of common stock (now 986,000 shares of Class A
Common Stock after giving effect to the Reverse Stock Split and
Reclassification), and 1.35 million shares of Series A redeemable preferred
stock, par value $.001 per share, to the holders of Bellaire SurgiCare's common
stock. For accounting purposes, this reverse acquisition was effective July 1,
1999. On December 15, 2004, the Company changed its name to Orion HealthCorp,
Inc.
As of September 30, 2005, the Company owned a majority
interest in one surgery center and a minority interest as general partner in two
additional centers. Two of the centers are located in Texas and one is located
in Ohio. In limited circumstances, the Company, or its subsidiaries, may also
furnish anesthesia services in support of the activities of the surgery centers.
The Company's 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 the Company's ASCs
include knee arthroscopy, lumbar nerve block and sacral injection, colonoscopy,
hammertoe correction, sinus endoscopic biopsy, cataract removal, breast biopsy,
Mitchell procedures and cystourethroscopy. The Company sold its 41% interest in
an open MRI center in Ohio and its 51% interest in its Tuscarawas ASC in Ohio,
in each case effective as of 12:01 a.m. on October 1, 2005. (See "Part I, Item
2. Management's Discussion and Analysis or Plan of Operations - Certain Recent
Developments - Post-Restructuring Transactions Involving Subsidiaries.") In
November 2005, the Company decided that, as a result of ongoing losses at its
SurgiCare Memorial Village ASC, it would need to either find a buyer for the
Company's equity interests in SurgiCare Memorial Village or close the facility.
The Company is in the process of identifying any charges related to selling or
closing SurgiCare Memorial Village and will record such charges, if any, in the
Company's financial statements in the period in which they are determinable.
-8-
The following table sets forth information related to Orion's
surgical and diagnostic centers in operation as of September 30, 2005:
ACQUISITION ORION
NAME LOCATION DATE OWNERSHIP
SurgiCare Memorial Village Houston, Texas Oct. 2000 49%
San Jacinto Surgery Center Baytown, Texas Oct. 2000 10%
Tuscarawas Ambulatory Surgery Center Dover, Ohio June 2002 51%*
Tuscarawas Open MRI Dover, Ohio July 2004 41% *
* The Company sold its interest in these ASCs effective October 1, 2005.
INTEGRATED PHYSICIAN SOLUTIONS
IPS, a Delaware corporation, was founded in 1996 as a business
development company to provide physician practice management services to general
and subspecialty pediatric practices. IPS commenced its business activities upon
consummation of several medical group business combinations effective January 1,
1999. The Pediatric Physician Alliance ("PPA") division of IPS manages pediatric
medical clinics.
IPS, through its wholly-owned IntegriMED subsidiary, also
provided technology solutions for physicians, including a comprehensive suite of
integrated business and clinical software applications. On June 7, 2005,
IntegriMED executed an Asset Purchase Agreement with eClinicalWeb, LLC to sell
substantially all of the assets of IntegriMED. The Agreement was deemed to be
effective as of midnight on June 6, 2005. (See "Part I, Item 2. Management's
Discussion and Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries.")
PPA is an experienced and innovative provider of healthcare
management services dedicated to the practice of pediatrics. As of September 30,
2005, PPA managed 10 practice sites, representing six medical groups in
Illinois, Ohio and New Jersey. PPA provides business management and
administrative services to the affiliated medical groups. These services include
human resources management, accounting, group purchasing, public relations,
marketing, information technology, and general day-to-day business operations
management services. The affiliated physicians, who are all employed by separate
corporations, provide all clinical and patient care related services. There is a
standard forty-year contract between PPA and the various affiliated medical
groups whereby the physicians are compensated after all practice expenses and a
management fee is paid to PPA.
On October 31, 2005, IPS executed a Mutual Release and
Settlement Agreement (the "Sutter Settlement") with John Ivan Sutter, M.D., PA
("Dr. Sutter") to settle disputes that had arisen between IPS and Dr. Sutter and
to avoid the risk and expense of litigation. As part of the Sutter Settlement,
Dr. Sutter and IPS agreed that Dr. Sutter would purchase the assets owned by IPS
as shown on the balance sheet on October 31, 2005 in exchange for termination of
the MSA. Additionally, among other provisions, after October 31, 2005, Dr.
Sutter has been released from any further obligation to IPS arising from any
previous agreement.
IPS owns all of the assets used in the operation of the
medical groups. Additionally, the physicians were equity owners in IPS, and, as
a result of the IPS Merger, are now equity owners in Orion. IPS manages the
day-to-day business operations of each medical group and provides the assets for
the physicians to use in their practice, for a fixed fee or percentage of the
net operating income of the medical group. All revenues are collected by IPS,
the fixed fee or percentage payment to IPS is taken from the net operating
income of the medical group and the remainder of the net operating income of the
medical group is paid to the physicians as a salary and treated as an expense on
IPS's accounting records.
MEDICAL BILLING SERVICES
MBS is based in Houston, Texas and was incorporated in Texas
on October 16, 1985. DCPS is based in Houston, Texas and was organized as a
Texas limited liability company on September 16, 1998. DCPS reorganized as a
Texas limited partnership on August 31, 2003. The Company acquired MBS and DCPS
in the DCPS/MBS Transaction. Subsequent to the DCPS/MBS Transaction, DCPS has
operated as a wholly-owned subsidiary of MBS. MBS and DCPS provide practice
management, billing and collection, managed care consulting and
coding/reimbursement services to hospital-based physicians and clinics. The
discussion of MBS below includes the operations of DCPS.
o MEDICAL PRACTICE MANAGEMENT SERVICES. MBS provides a wide range of
management services to medical practices, including accounting and
bookkeeping services, evaluation of staffing needs, and billing and
reimbursement analysis. These management services help create a more
efficient medical practice and provide assistance with the business
aspects associated with operating a medical practice.
o BILLING AND COLLECTION SERVICES. MBS provides billing and collection
services to its clients. These include coding, reimbursement services,
charge entry, claim submission, collection activities, and financial
reporting services.
o MANAGED CARE CONSULTING SERVICES. MBS provides consulting services
aimed at assisting clients with navigating and interacting with
managed care organizations.
-9-
MBS provides services to approximately 58 customers throughout
Texas. These customers include anesthesiologists, pathologists, radiologists,
imaging centers, comprehensive breast centers, hospital labs, cardio-thoracic
surgeons and ASCs.
RESULTS OF OPERATIONS
As part of the Acquisitions and restructuring transactions,
which closed on December 15, 2004, the IPS Merger has been treated as a reverse
acquisition, meaning that the purchase price, comprised of the fair value of the
outstanding shares of the Company prior to the transaction, plus applicable
transaction costs, has been allocated to the fair value of the Company's
tangible and intangible assets and liabilities prior to the transaction, with
any excess being considered goodwill. IPS is being treated as the continuing
reporting entity, and thus IPS's historical results have become those of the
combined company. Orion's results include the results of IPS for the three
months and nine months ended September 30, 2004 and the results of IPS, the
Company's surgery and diagnostic center business and MBS (which includes DCPS)
for the three months and nine months ended September 30, 2005. The descriptions
of the business and results of operations of MBS set forth in this report
include the business and results of operations of DCPS.
The following table sets forth selected unaudited consolidated
condensed statements of operations data expressed as a percentage of Orion's net
operating revenues for the three months and nine months ended September 30, 2005
and 2004. Orion's historical results and period-to-period comparisons are not
necessarily indicative of the results for any future period.
Three Months Ended Nine Months Ended
--------------------------- ------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net operating revenues 100.0% 100.0% 100.0% 100.0%
Direct cost of revenues 42.1% 64.1% 42.7% 62.7%
----- ----- ----- -----
Gross margin 57.9% 35.9% 57.3% 37.3%
Total operating expenses 127.4% 42.3% 118.3% 46.0%
----- ----- ----- -----
Loss from continuing operations before other income (expenses) (69.5%) (6.4%) (61.0%) (8.7%)
Total other income (expenses), net (1.3%) (6.3%) (1.1%) (6.1%)
Minority interest earnings in partnership (0.4%) 0.0% (0.4%) 0.0%
----- ----- ----- -----
Loss from continuing operations (71.2%) (12.7%) (62.5%) (14.8%)
Discontinued operations
Loss from operations of discontinued
components, including gain (loss) on disposal (11.5%) (7.2%) (8.1%) (5.9%)
----- ----- ----- -----
Net loss (82.7%) (19.9%) (70.6%) (20.7%)
Preferred stock dividends 0.0% (3.7%) 0.0% (3.9%)
----- ----- ----- -----
Net loss attributable to common stockholders (82.7%) (23.6%) (70.6%) (24.6%)
===== ===== ===== =====
-10-
THREE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2004
The following table sets forth, for the periods indicated, the
unaudited consolidated condensed statements of operations of Orion.
For the Three Months
Ended September 30,
2005 2004
----------- -------------
(Unaudited) (Unaudited)
Net operating revenues $ 7,357,205 $ 4,509,863
Direct cost of revenues 3,096,524 2,889,511
----------- -----------
Gross margin 4,260,681 1,620,352
----------- -----------
Operating expenses:
Salaries and benefits 3,117,118 750,663
Facility rent and related costs 423,876 272,039
Depreciation and amortization 608,544 130,417
Professional and consulting fees 566,923 111,979
Insurance 238,315 134,904
Provision for doubtful accounts 278,184 271,176
Other expenses 677,644 236,810
Charge for impairment of intangible assets 3,461,351 --
----------- -----------
Total operating expenses 9,371,955 1,907,988
----------- -----------
Loss from continuing operations before other income (expenses) (5,111,274) (287,636)
----------- -----------
Other income (expenses):
Interest expense (97,178) (279,173)
Equity in earnings of limited partnerships 7,178 --
Other expense, net (5,120) (5,272)
----------- -----------
Total other income (expenses), net (95,120) (284,445)
----------- -----------
Minority interest earnings in partnership (32,001) --
----------- -----------
Loss from continuing operations (5,238,395) (572,081)
Discontinued operations
Loss from operations of discontinued components (843,892) (324,345)
----------- -----------
Net loss (6,082,287) (896,426)
Preferred stock dividends -- (165,300)
----------- -----------
Net loss attributable to common stockholders $(6,082,287) $(1,061,726)
=========== ===========
NET OPERATING REVENUES. Net operating revenues, which include
net patient service revenue related to the operations of IPS's affiliated
medical groups, other revenue, surgery and diagnostic center revenue and billing
services revenue, increased $2,847,342, or 63.1%, to $7,357,205 for the three
months ended September 30, 2005, as compared with $4,509,863 for the same period
in 2004. The Company's surgery and diagnostic center business and MBS reported
net operating revenues of $101,349 and $2,491,109, respectively, for the three
months ended September 30, 2005, and accounted for 91.0% of the increase in the
third quarter of 2005.
IPS net patient service revenue for the three months ended
September 30, 2005 increased $254,884, or 5.7%, from the same period in 2004.
The increase in net patient service revenue for the quarter was primarily the
result of increased patient volume during the quarter, with procedures and
office visits at the clinic-based facilities increasing 4,321 and 967,
respectively, from third quarter 2004 levels of 100,884 and 37,574,
respectively.
Other revenue totaled $6,946 in the third quarter of 2004,
increasing $37,680 to $44,626 for the three months ended September 30, 2005. In
the third quarter of 2005, revenue from the IPS Vaccine Alliance, a group
purchasing alliance for vaccines and medical supplies, decreased $3,650 from
2004 to $3,296. Revenue related to a small number of former IntegriMED customers
not fully transitioned to eClinicalWeb totaled $41,330 for the three months
ended September 30, 2005. This revenue is not expected to be recurring revenue.
DIRECT COST OF REVENUES. Direct cost of revenues, which
includes physician compensation, surgical and diagnostic costs and medical group
direct clinical expenses and totaled $2,889,511 in the third quarter of 2004,
increased $207,013, or 7.2%, to $3,096,524 for the three months ended September
30, 2005.
Pursuant to the terms of the MSAs governing each of IPS's
affiliated medical groups, the physicians of each medical group are compensated
after the payment of all clinic facility expenses as well as a management fee to
IPS. The management fee revenue and expense, which is eliminated in the
consolidation of the financial statements, is either a fixed fee, or is
calculated based on a percentage of net operating income and represented
approximately 15.2% of physician medical group net operating income for the
three months ended September 30, 2005 and 2004, respectively. Physician
compensation increased $5,889, or 0.3%, for the quarter ended September 30, 2005
to $2,003,996, as compared with $1,998,107 for the quarter ended September 30,
2004. Physician compensation expense represented 42.1% of total net operating
revenues in the third quarter of 2005, compared with 44.3% for the same period
in 2004. The increase in compensation in the third quarter of 2005 was directly
related to an increase in net patient service revenue, which was primarily the
result of increased patient volume.
Direct clinical expenses are expenses that are directly
related to the practice of medicine by the physicians who practice at the
affiliated medical groups managed by IPS. For the quarter ended September 30,
2005, direct clinical expenses increased $200,815, or 22.5% to $1,092,219,
largely as a result of increased vaccine expenses due to increased patient
volume at the affiliated medical groups.
OPERATING EXPENSES.
SALARIES AND BENEFITS. Consolidated salaries and benefits
increased $2,366,455 in the third quarter of 2005 to $3,117,118, compared to
$750,663 for the same period in 2004. The Company's surgery and diagnostic
center business and MBS recorded salaries and benefits expenses totaling
$735,838 and $1,537,438, respectively, in the third quarter of 2005, and
accounted for 96.1% of the increase over 2004. Salaries and benefits for the
surgery and diagnostic center business included an accrual of $484,520 for
separation benefits for Orion's president, Keith LeBlanc, who resigned from the
Company on November 8, 2005. (See "Part II, Item 5. Other Information.")
Salaries and benefits, excluding the surgery and diagnostic
center business and MBS, represent the employee-related costs of all
non-clinical practice personnel and the IPS and Orion corporate staff in
Roswell, Georgia. These expenses increased $109,920, or 17.4%, from $750,663 for
the quarter ended September 30, 2004 to $843,841 for the same period in 2005. Of
the total increase, $69,750 is for retention costs and accrued vacation related
to the corporate staff reductions at Orion's Houston, Texas office.
FACILITY RENT AND RELATED COSTS. Facility rent and related
costs increased 55.8% from $272,039 for the quarter ended September 30, 2004 to
$423,876 for the quarter ended September 30, 2005. For the third quarter of
2005, the Company's surgery and diagnostic center business and MBS recorded
facility rent and related expenses totaling $25,565 and $127,199, respectively.
Facility rent and related costs associated with IPS's
affiliated medical groups and Orion's corporate office totaled $271,112 for the
quarter ended September 30, 2005 compared to $272,039 for the same period in
2004. A $27,792 increase in property repairs and maintenance for IPS's
affiliated medical groups was offset by $27,000 in rent payments received as the
result of the sublease, which began in June 2005, between eClinicalWeb and IPS
for a portion of the corporate office in Roswell, Georgia.
-11-
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense totaled $608,544 in the third quarter of 2005, an increase
of $478,127 over the quarter ended September 30, 2004. For the three months
ended September 30, 2005, depreciation expense related to the fixed assets of
the Company's surgery and diagnostic center business and MBS totaled $11,843 and
$19,657, respectively. Depreciation expense related to the fixed assets of IPS
totaled $28,024 for the quarter ended September 30, 2005. Amortization expense
related to the MSAs totaled $88,392 and $97,668 for the quarters ended September
30, 2005 and 2004, respectively.
As part of the IPS Merger, the purchase price, comprised of
the fair value of the outstanding shares of the Company prior to the
transaction, plus applicable transaction costs, has been allocated to the fair
value of the Company's tangible and intangible assets and liabilities prior to
the transaction, with any excess being considered goodwill. The amortization
expense related to the intangible assets recorded as a result of the reverse
acquisition totaled $195,105 for the quarter ended September 30, 2005.
As part of the DCPS/MBS Transaction, the Company purchased MBS
and DCPS for a combination of cash, notes and stock. Since the consideration for
this purchase transaction exceeded the fair value of the net assets of MBS and
DCPS at the time of the purchase, a portion of the purchase price was allocated
to intangible assets and goodwill. The amortization expense related to the
intangible assets recorded as a result of the DCPS/MBS Transaction totaled
$265,523 for the quarter ended September 30, 2005.
PROFESSIONAL AND CONSULTING FEES. For the quarter ended
September 30, 2005, professional and consulting fees totaled $566,923, an
increase of $454,944, or 406.3%, over the same period in 2004. For the third
quarter of 2005, the Company's surgery and diagnostic center business and MBS
recorded professional and consulting fees totaling $139,669 and $79,257,
respectively, and accounted for 48.1% of the increase over 2004. A $90,000
charge to legal fees was recorded in the third quarter of 2005 related to a
litigation settlement.
IPS's professional and consulting fees, which also include the
costs of Orion corporate accounting, financial reporting and compliance,
increased from $111,979 for the three months ended September 30, 2004 to
$347,997 for the three months ended September 30, 2005. The increase is
primarily the result of (i) $161,092 in additional accounting, audit and legal
fees as a result of the expanded reporting requirements resulting from the IPS
Merger and the DCPS/MBS Transaction; (ii) $31,804 in professional fees for
investor relations and corporate communications; (iii) $13,682 in consulting
fees incurred in the third quarter of 2005 related to accounting software
upgrades in the corporate office; and (iv) $17,928 in costs associated with the
small number of former IntegriMED customers not fully transitioned to
eClinicalWeb for the three months ended September 30, 2005.
INSURANCE. Consolidated insurance expense, including
professional liability insurance for affiliated physicians, property and
casualty insurance, and directors and officers liability insurance, increased
from $134,904 for the quarter ended September 30, 2004 to $238,315 for the
quarter ended September 30, 2005. Insurance expenses of the Company's surgery
and diagnostic center business and MBS totaled $14,893 and $4,203, respectively,
for the third quarter of 2005, and accounted for 18.5% of the increase over
2004.
Directors and officers liability insurance expense for the
Company, which is included in IPS's insurance expense, increased $60,321 from
the third quarter of 2004 to the third quarter of 2005, and relates solely to
the increase in premiums as a result of the acquisition and restructuring
transactions that closed in December 2004.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful
accounts increased $7,008, or 2.6%, for the quarter ended September 30, 2005 to
$278,184. For the three months ended September 30, 2005, the Company's surgery
and diagnostic center business recorded bad debt expense totaling $26,389. IPS's
provision for doubtful accounts for the third quarter of 2005 accounted for 5.3%
of total net operating revenues compared to 6.0% for the same period in 2004.
The total collection rate, after contractual allowances, for IPS's affiliated
medical groups was 66.5% in the third quarter of 2005, compared to 62.9% for the
third quarter of 2004.
OTHER EXPENSES. Other expenses, which include other operating
expenses such as office and computer supplies, telephone, data communications,
printing, postage and transfer agent fees, as well as board of directors'
compensation and meeting expenses, totaled $677,644 for the quarter ended
September 30, 2005, an increase of $440,834 over the same period in 2004. For
the third quarter of 2005, the Company's surgery and diagnostic center business
and MBS recorded other expenses totaling $43,109 and $305,504, respectively,
which accounted for 79.1% of the increase over 2004. Other expenses, which
include certain Orion corporate costs, totaled $329,031 in the third quarter of
2005, an increase of $92,221 over the same period in 2004. Of the total
increase, $20,739 and $4,484 relate to Orion board of directors' compensation
and meeting expenses and transfer agent fees, respectively, which are new costs
for the Company in 2005. Additional printing costs associated with the Company's
Securities and Exchange Commission ("SEC") filings totaled $12,711 for the three
months ended September 30, 2005. Travel expenses related to the consolidation of
corporate functions between Roswell, Georgia and Houston, Texas totaled $14,772
in the third quarter of 2005.
CHARGE FOR IMPAIRMENT OF INTANGIBLE ASSETS. In November 2005,
the Company decided that, as a result of ongoing losses at its SurgiCare
Memorial Village ASC, it would need to either find a buyer for the Company's
equity interests in SurgiCare Memorial Village or close the facility. In
preparation for this pending transaction, the Company tested the identifiable
intangible assets and goodwill related to the surgery center business using the
present value of cash flows method. As a result of the decision to sell or close
SurgiCare Memorial Village, as well as the uncertainty of cash flows related to
the Company's surgery center business, the Company recorded a charge for
impairment of intangible assets of $3,461,351 for the three months ended
September 30, 2005. The Company is in the process of identifying any charges
related to selling or closing SurgiCare Memorial Village and will record such
charges, if any, in the Company's financial statements in the period in which
they are determinable.
-12-
INTEREST EXPENSE. Consolidated interest expense totaled
$97,178 for the third quarter of 2005, a decrease of $181,995 from the same
period in 2004. The decrease from 2004 can be explained generally by
the following events:
o As part of the Investment Transaction, the Company used $5,908,761 to
pay off the debt owed to a subsidiary of Brantley IV.
o As described in "Item 2. Management's Discussion and Analysis and Plan
of Operation - Certain Recent Developments - New Line of Credit and
Debt Restructuring," the Company restructured its previously-existing
debt facilities, which resulted in a decrease in aggregate debt owed
to DVI from approximately $10.1 million to a combined principal amount
of approximately $6.5 million, of which approximately $2.0 million was
paid at the Closing.
o Brantley Capital and Brantley Venture Partners III, L.P. ("Brantley
III") each held debt of IPS and are party to an Amended and Restated
Debt Exchange Agreement dated February 9, 2004, as amended on July 16,
2004 (the "Debt Exchange Agreement"). Pursuant to the Debt Exchange
Agreement, Brantley Capital and Brantley III received Class A Common
Stock with a fair market value (based on the daily average of the high
and low price per share of SurgiCare common stock over the five
trading days immediately prior to the Closing) equal to the amounts
owed to Brantley Capital and Brantley III under their loans to IPS in
exchange for contribution of such debt to Orion. Pursuant to the Debt
Exchange Agreement, Brantley Capital also received Class A Common
Stock with a fair market value (based on the daily average of the high
and low price per share of SurgiCare common stock over the five
trading days immediately prior to the Closing) equal to the amount of
certain accrued dividends owed to it by IPS in exchange for the
contribution of such indebtedness, provided that the amount of shares
received in respect of such dividends was subject to reduction to the
extent necessary to achieve the guaranteed allocation of shares of
Class A Common Stock to the holders of IPS common stock and Series B
Convertible preferred stock pursuant to the IPS Merger Agreement. The
aggregate amount of debt exchanged by the parties to the Debt Exchange
Agreement was $4,375,229, which included accrued interest as of the
Closing, and $593,100 of debt in respect of accrued dividends.
EQUITY IN EARNINGS OF 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 partnership and
reduced to reflect the share of the losses of the partnership or distributions
from the partnership.
These 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, the Company could not consolidate its interest in those
facilities in which it held a minority general 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, the Company recorded them as investments in
limited partnerships. For the three months ended September 30, 2005, the Company
recorded income of $7,178 on the minority interest in San Jacinto, based on the
Company's 10% ownership of that surgery center.
DISCONTINUED OPERATIONS. On September 19, 2003, IPS entered
into a Mutual Release and Settlement Agreement (the "Settlement Agreement") with
Dr. Jane Kao and PediApex Heart Center for Children (the "Heart Center") to
settle disputes as to the existence and enforceability of certain contractual
obligations. As part of the Settlement Agreement, Dr. Kao, the Heart Center and
IPS agreed that, until December 31, 2004, each party would conduct their
operations under the terms established by the MSA between IPS and the Heart
Center. Additionally, among other provisions, after December 31, 2004, Dr. Kao
and the Heart Center were released from any further obligation to IPS arising
from any previous agreement, and Dr. Kao purchased the accounts receivable
related to the Heart Center and IPS terminated its ownership and MSA with the
Heart Center. The operating results of the Heart Center were not included in the
consolidated statements of operations of IPS after September 19, 2003 because
this medical group did not meet the criteria for consolidation after that date
in accordance with EITF 97-2. The operations of this component are reflected in
the Company's consolidated statements of operations as `loss from operations
of discontinued components' in the third quarter of 2004. IPS recorded a loss on
disposal of this discontinued component of $12,366 for the year ended December
31, 2004. There were no operations for this component in the Company's financial
statements for the third quarter of 2005.
-13-
The following table contains selected financial statement data
related to the Heart Center as of and for the three months ended September 30,
2004:
Three Months Ended
September 30, 2004
------------------
Income statement data:
Net operating revenues $634,689
Direct cost of revenues 369,598
Operating expenses 209,729
--------
Net income $ 55,362
--------
Balance sheet data:
Current assets $210,836
Other assets 92,510
--------
Total assets $303,346
--------
Current liabilities $703,877
Other liabilities --
--------
Total liabilities $703,877
--------
As part of the Acquisitions and restructuring transactions
that closed on December 15, 2004, the Company recorded intangible assets related
to the IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company's
management expected the case volumes at Bellaire SurgiCare to improve in 2005.
However, by the end of February 2005, it was determined that the expected case
volume increases were not going to be realized. On March 1, 2005, the Company
closed Bellaire SurgiCare and consolidated its operations with the operations of
SurgiCare Memorial Village. The Company tested the identifiable intangible
assets and goodwill related to the surgery and diagnostic center business using
the present value of cash flows method. As a result of the decision to close
Bellaire SurgiCare and the resulting impairment of the joint venture interest
and management contracts related to the surgery centers, the Company recorded a
charge for impairment of intangible assets of $4,090,555 for the year ended
December 31, 2004. The Company also recorded a loss on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $163,050 for the quarter ended March 31, 2005. There were no
operations for this component in the third quarter of 2005.
On April 1, 2005, IPS entered into a Mutual Release and
Settlement Agreement (the "Settlement") with Dr. Bradley E. Chipps, M.D. and
Capital Allergy and Respiratory Disease Center, a Medical Corporation ("CARDC")
to settle disputes as to the existence and enforceability of certain contractual
obligations. As part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that
CARDC would purchase the assets owned by IPS as shown on the balance sheet on
March 31, 2005 in exchange for termination of the MSA between IPS and CARDC.
Additionally, among other provisions, after April 1, 2005, Dr. Chipps and CARDC
have been released from any further obligation to IPS arising from any previous
agreement. As a result of the Settlement, the Company recorded a charge for
impairment of intangible assets related to CARDC of $704,927 for the year ended
December 31, 2004. The Company also recorded a gain on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $506,625 for the quarter ended March 31, 2005. For the quarter ended
June 30, 2005, the Company reduced the gain on disposal of this discontinued
component by $238,333 as the result of post-settlement adjustments related to
the reconciliation of balance sheet accounts. The operations of this component
are reflected in the Company's consolidated statements of operations as `loss
from operations of discontinued components' for the quarter ended September 30,
2004. There were no operations for this component in the Company's financial
statements for the third quarter of 2005.
The following table contains selected financial statement data
related to CARDC as of and for the three months ended September 30, 2005 and
2004, respectively:
Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Income statement data:
Net operating revenues $-- $839,094
Direct cost of revenues -- 588,741
Operating expenses -- 211,653
---- --------
Net income $-- $ 38,700
---- --------
Balance sheet data:
Current assets $-- $229,199
Other assets -- 11,421
---- --------
Total assets $-- $240,620
---- --------
Current liabilities $-- $332,997
Other liabilities -- --
---- --------
Total liabilities $-- $332,997
---- --------
On June 7, 2005, as described in "Part I, Item 2. Management's
Discussion and Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries," IPS executed an Asset
Purchase Agreement with eClinicalWeb to sell substantially all of the assets of
IntegriMED. As a result of this transaction, the Company recorded a loss on
disposal of this discontinued component of $47,101 for the quarter ended June
30, 2005. The operations of this component are reflected in the Company's
consolidated statements of operations as `loss from operations of discontinued
components' for the three months ended September 30, 2004. There were no
operations for this component in the Company's financial statements for the
third quarter of 2005.
-14-
The following table contains selected financial statement data
related to IntegriMED as of and for the three months ended September 30, 2005
and 2004, respectively:
Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Income statement data:
Net operating revenues $-- $ 46,597
Direct cost of revenues -- --
Operating expenses -- 468,364
---- ---------
Net loss $-- $(421,767)
---- ---------
Balance sheet data:
Current assets $-- $ 287,656
Other assets -- 72,566
---- ---------
Total assets $-- $ 360,222
---- ---------
Current liabilities $-- $ 454,337
Other liabilities -- --
---- ---------
Total liabilities $-- $ 454,337
---- ---------
On June 13, 2005, the Company announced that it had accepted
an offer to purchase its interests in the Tuscarawas ASC and MRI facility in
Dover, Ohio. These transactions, which were consummated on September 30, 2005,
were deemed to be effective as of 12:01 a.m. on October 1, 2005, and are
described in greater detail in "Part I, Item 2. Management's Discussion and
Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries." As a result of these
transactions, as well as the uncertainty of future cash flows related to the
Company's surgery center business, the Company recorded a charge for impairment
of intangible assets of $6,362,849 for the three months ended June 30, 2005.
Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the assets and liabilities of the Tuscarawas ASC and
Tuscarawas open MRI facility have been reclassified as assets held for sale and
liabilities held for sale on the Company's consolidated balance sheet as of
September 30, 2005. The operations of this component are reflected in the
Company's consolidated statements of operations as `loss from operations of
discontinued components' for the three months ended September 30, 2005.
The following table contains selected financial statement data
related to the Tuscarawas ASC and Open MRI as of and for the three months ended
September 30, 2005:
Three Months Ended
September 30, 2005
------------------
Income statement data:
Net operating revenues $ 737,355
Direct cost of revenues 383,657
Operating expenses 443,772
-----------
Net loss $ (90,074)
-----------
Balance sheet data:
Cash overdraft $ (45,074)
Accounts receivable, net 615,293
Other current assets 70,953
Property and equipment, net 1,327,073
Other long-term assets 71,376
-----------
Total assets held for sale $ 2,039,621
-----------
Accounts payable and accrued expenses $ 617,186
Capital lease obligation 374,256
Long-term debt 454,056
-----------
Total liabilities held for sale $ 1,445,498
-----------
On October 31, 2005, IPS executed the Sutter Settlement with
Dr. Sutter to settle disputes that had arisen between IPS and Dr. Sutter and to
avoid the risk and expense of litigation. As part of the Sutter Settlement, Dr.
Sutter and IPS agreed that Dr. Sutter would purchase the assets owned by IPS as
shown on the balance sheet on October 31, 2005 in exchange for termination of
the MSA between IPS and Dr. Sutter. Additionally, among other provisions, after
October 31, 2005, Dr. Sutter has been released from any further obligation to
IPS arising from any previous agreement. The operations of this component are
reflected in the Company's consolidated statements of operations as `loss from
operations of discontinued components' for the three months ended September 30,
2005 and 2004, respectively.
-15-
The following table contains selected financial statement data
related to Dr. Sutter as of and for the three months ended September 30, 2005
and 2004, respectively:
Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Income statement data:
Net operating revenues $106,151 $108,861
Direct cost of revenues 54,372 55,595
Operating expenses 49,068 49,906
-------- --------
Net income $ 2,711 $ 3,360
-------- --------
Balance sheet data:
Current assets $102,924 $ 96,271
Other assets 14,066 14,736
-------- --------
Total assets $116,990 $111,007
-------- --------
Current liabilities $ 21,778 $ 10,277
Other liabilities -- --
-------- --------
Total liabilities $ 21,778 $ 10,277
-------- --------
In November 2005, the Company decided that, as a result of
ongoing losses at its SurgiCare Memorial Village ASC, it would need to either
find a buyer for the Company's equity interests in SurgiCare Memorial Village or
close the facility. In preparation for this pending transaction, the Company
tested the identifiable intangible assets and goodwill related to the surgery
center business using the present value of cash flows method. As a result of the
decision to sell or close SurgiCare Memorial Village, as well as the uncertainty
of cash flows related to the Company's surgery center business, the Company
recorded a charge for impairment of intangible assets of $3,461,351 for the
three months ended September 30, 2005. The Company is in the process of
identifying any charges related to selling or closing SurgiCare Memorial Village
and will record such charges, if any, in the Company's financial statements in
the period in which they are determinable. The operations of this component are
reflected in the Company's consolidated statements of operations as `loss from
operations of discontinued components' for the three months ended September 30,
2005.
The following table contains selected financial statement data
related to SurgiCare Memorial Village as of and for the three months ended
September 30, 2005:
Three Months Ended
September 30, 2005
------------------
Income statement data:
Net operating revenues $ 61,046
Direct cost of revenues 432,739
Operating expenses 384,836
-----------
Net loss $ (756,529)
-----------
Balance sheet data:
Current assets $ 714,255
Other assets 552,107
-----------
Total assets $ 1,266,362
-----------
Current liabilities $ 940,149
Other liabilities 52,546
-----------
Total liabilities $ 992,695
-----------
-16-
The following table summarizes the components of loss
from operations of discontinued components:
Three Months Ended September 30,
2005 2004
------------ --------------
Loss From Operations of Discontinued Components:
Heart Center
Net income $ -- $ 55,362
CARDC
Net income -- 38,700
IntegriMED
Net loss -- (421,767)
Tuscarawas ASC and Open MRI
Net loss (90,074) --
Dr. Sutter
Net income 2,711 3,360
SurgiCare Memorial Village
Net loss (756,529) --
--------- ---------
Total loss from operations of discontinued components $(843,892) $(324,345)
========= =========
PREFERRED STOCK DIVIDENDS. Prior to the IPS Merger, holders of
IPS's Series A-2 preferred stock were entitled to receive when, as and if
declared by the board of directors, cumulative dividends payable at the annual
rate of $0.40 for each share. Dividends accrued, even if not declared, and were
to be declared and paid in cash in equal installments on the first day of
January, April, July and October immediately following the issue date, or
continued to be accrued until such time as the preferred stockholders demanded
payment. Preferred stock dividends in the amount of $165,300 were accrued for
the quarter ended September 30, 2004. No cash payments of dividends were made in
the third quarter of 2004. The Series A-2 redeemable convertible preferred
stock, along with the other three series of redeemable convertible preferred
stock held by IPS stockholders prior to the IPS Merger, including any accrued
and unpaid dividends therein, were exchanged for shares of Orion's Class A
Common Stock as a part of the IPS Merger.
-17-
NINE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2004
The following table sets forth, for the periods indicated, the
unaudited consolidated condensed statements of operations of Orion.
For the Nine Months Ended
September 30,
2005 2004
------------ -------------
(Unaudited) (Unaudited)
Net operating revenues $ 22,856,724 $ 12,585,075
Direct cost of revenues 9,748,498 7,887,231
------------ ------------
Gross margin 13,108,226 4,697,844
------------ ------------
Operating expenses:
Salaries and benefits 8,388,405 2,254,183
Facility rent and related costs 1,281,975 827,377
Depreciation and amortization 2,335,745 391,900
Professional and consulting fees 1,498,563 398,549
Insurance 679,588 399,422
Provision for doubtful accounts 915,019 770,159
Other expenses 2,114,091 747,846
Charge for impairment of intangible assets 9,824,200
------------ ------------
Total operating expenses 27,037,586 5,789,436
------------ ------------
Loss from continuing operations before other income (expenses) (13,929,360) (1,091,592)
------------ ------------
Other income (expenses):
Interest expense (247,569) (747,633)
Equity in earnings of limited partnerships 26,214 --
Other expense, net (24,098) (17,068)
------------ ------------
Total other income (expenses), net (245,453) (764,701)
------------ ------------
Minority interest earnings in partnership (95,462) --
------------ ------------
Loss from continuing operations (14,270,275) (1,856,293)
Discontinued operations
Loss from operations of discontinued components,
including net gain on disposal of $58,142 for
the nine months ended September 30, 2005 (1,840,430) (746,980)
------------ ------------
Net loss (16,110,705) (2,603,273)
Preferred stock dividends -- (495,900)
------------ ------------
Net loss attributable to common stockholders $(16,110,705) $ (3,099,173)
============ ============
NET OPERATING REVENUES. Net operating revenues, which include
net patient service revenue related to the operations of IPS's affiliated
medical groups, other revenue, surgery and diagnostic center revenue and billing
services revenue, increased $10,271,649, or 81.6%, to $22,856,724 for the nine
months ended September 30, 2005, as compared with $12,585,075 for the same
period in 2004. The Company's surgery and diagnostic center business and MBS
reported net operating revenues of $319,755 and $7,684,641, respectively, for
the nine months ended September 30, 2005, and accounted for 77.9% of the
increase in the first nine months of 2005.
IPS's net patient service revenue for the nine months ended
September 30, 2005 increased $2,267,253, or 18.0%, from the same period in 2004.
The increase in net patient service revenue for the first nine months of the
year was primarily the result of increased patient volume during the nine months
ended September 30, 2005, with procedures and office visits at the clinic-based
facilities increasing 24,003 and 9,328, respectively, from 2004 levels of
292,857 and 120,293, respectively.
Other revenue totaled $26,179 in the first nine months of
2004, increasing $60,036 to $86,215 for the nine months ended September 30,
2005. In the first nine months of 2005, revenue from the IPS Vaccine Alliance, a
group purchasing alliance for vaccines and medical supplies, increased $8,316
over 2004 to $34,495. Revenue related to a small number of former IntegriMED
customers not fully transitioned to eClinicalWeb totaled $51,720 for the nine
months ended September 30, 2005. This revenue is not expected to be recurring
revenue.
DIRECT COST OF REVENUES. Direct cost of revenues, which
includes physician compensation, surgical and diagnostic costs and medical group
direct clinical expenses and totaled $7,887,231 in the first nine months of
2004, increased $1,861,267, or 23.6%, to $9,748,498 for the nine months ended
September 30, 2005.
Pursuant to the terms of the MSAs governing each of IPS's
affiliated medical groups, the physicians of each medical group are compensated
after the payment of all clinic facility expenses as well as a management fee to
IPS. The management fee revenue and expense, which is eliminated in the
consolidation of the financial statements, is either a fixed fee, or is
calculated based on a percentage of net operating income and represented
approximately 14.4% of physician medical group net operating income in the first
nine months of 2005 compared to 15.0% in the same period in 2004. Physician
compensation increased $1,441,209, or 27.9%, for the nine months ended September
30, 2005 to $6,607,754, as compared with $5,166,545 for the nine months ended
September 30, 2004. Physician compensation expense represented 44.5% of total
net operating revenues in the first nine months of 2005, compared with 41.1% for
the same period in 2004. The increase in compensation in the first nine months
of 2005 was directly related to an increase in net patient service revenue,
which was primarily the result of increased patient volume.
Direct clinical expenses are expenses that are directly
related to the practice of medicine by the physicians who practice at the
affiliated medical groups managed by IPS. For the nine months ended September
30, 2005, direct clinical expenses increased $418,229, or 15.4% to $3,138,915,
largely as a result of increased vaccine expenses due to increased patient
volume at the affiliated medical groups.
OPERATING EXPENSES.
SALARIES AND BENEFITS. Consolidated salaries and benefits
increased $6,134,222 in the first nine months of 2005 to $8,388,405, compared to
$2,254,183 for the same period in 2004. The Company's surgery and diagnostic
center business and MBS recorded salaries and benefits expenses totaling
$1,300,864 and $4,638,394, respectively, in the first nine months of 2005, and
accounted for 96.8% of the increase over 2004. Salaries and benefits for the
surgery and diagnostic center business included an accrual of $484,520 for
separation benefits for Orion's president, Keith LeBlanc, who resigned from the
Company on November 8, 2005. (See "Part II, Item 5. Other Information.")
Salaries and benefits, excluding the surgery and diagnostic
center business and MBS, represent the employee-related costs of all
non-clinical practice personnel and the IPS and Orion corporate staff in
Roswell, Georgia. These expenses increased $194,964, or 8.6%, from $2,254,183
for the nine months ended September 30, 2004 to $2,449,147 for the same period
in 2005. Of the total increase, $143,250 is for severance and retention costs
and accrued vacation related to the corporate staff reductions in Houston.
FACILITY RENT AND RELATED COSTS. Facility rent and related
costs increased 54.9% from $827,377 for the nine months ended September 30, 2004
to $1,281,975 for the nine months ended September 30, 2005. For the first nine
months of 2005, the Company's surgery and diagnostic center business and MBS
recorded facility rent and related expenses totaling $101,482 and $369,976,
respectively, which accounted for 103.7% of the increase over 2004.
Facility rent and related costs associated with IPS's
affiliated medical groups and Orion's corporate office totaled $810,518 for the
nine months ended September 30, 2005, a decrease of $16,859 from the same period
in 2004. IPS received $34,883 in rent payments as the result of the sublease,
which began in June 2005, between eClinicalWeb and IPS for a portion of the
corporate office in Roswell, Georgia.
-18-
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense totaled $2,335,745 in the first nine months of 2005, an
increase of $1,943,845 over the nine months ended September 30, 2004. For the
nine months ended September 30, 2005, depreciation expense related to the fixed
assets of the Company's surgery and diagnostic center business and MBS totaled
$34,611 and $61,492, respectively. Depreciation expense related to the fixed
assets of IPS totaled $86,840 for the year-to-date period ended September 30,
2005. Amortization expense related to the MSAs totaled $297,733 and $293,004 for
the nine-month periods ended September 30, 2005 and 2004, respectively.
As part of the IPS Merger the purchase price, comprised of the
fair value of the outstanding shares of the Company prior to the transaction,
plus applicable transaction costs, has been allocated to the fair value of the
Company's tangible and intangible assets and liabilities prior to the
transaction, with any excess being considered goodwill. The amortization expense
related to the intangible assets recorded as a result of the reverse acquisition
totaled $1,058,499 for the nine months ended September 30, 2005.
As part of the DCPS/MBS Transaction, the Company purchased MBS
and DCPS for a combination of cash, notes and stock. Since the consideration for
this purchase transaction exceeded the fair value of the net assets of MBS and
DCPS at the time of the purchase, a portion of the purchase price was allocated
to intangible assets and goodwill. The amortization expense related to the
intangible assets recorded as a result of the DCPS/MBS Transaction totaled
$796,570 for the nine months ended September 30, 2005.
PROFESSIONAL AND CONSULTING FEES. For the nine months ended
September 30, 2005, professional and consulting fees totaled $1,498,563, an
increase of $1,100,014, or 276.0%, over the same period in 2004. For the first
nine months of 2005, the Company's surgery and diagnostic center business and
MBS recorded professional and consulting fees totaling $275,372 and $221,518,
respectively, and accounted for 45.2% of the increase over 2004. A $90,000
charge to legal fees was recorded in the third quarter of 2005 related to a
litigation settlement.
IPS's professional and consulting fees, which also include the
costs of Orion corporate accounting, financial reporting and compliance,
increased from $398,549 for the nine months ended September 30, 2004 to
$1,001,672 for the nine months ended September 30, 2005. The increase is
primarily the result of (i) $431,317 in additional accounting, audit and legal
fees as a result of the expanded reporting requirements resulting from the IPS
Merger and the DCPS/MBS Transaction; (ii) $73,768 in professional fees
for investor relations and corporate communications; (iii) $15,682 in consulting
fees incurred in the first nine months of 2005 related to accounting software
upgrades in the corporate office; and (iv) $24,551 in costs associated with the
small number of former IntegriMED customers not fully transitioned to
eClinicalWeb for the nine months ended September 30, 2005.
INSURANCE. Consolidated insurance expense, including
professional liability insurance for affiliated physicians, property and
casualty insurance, and directors and officers liability insurance, increased
from $399,422 for the nine-month period ended September 30, 2004 to $679,588 for
the nine months ended September 30, 2005. Insurance expenses of the Company's
surgery and diagnostic center business and MBS totaled $54,002 and $9,205,
respectively, for the first nine months of 2005, and accounted for 22.6% of the
increase over 2004.
Directors and officers liability insurance expense for the
Company, which is included in IPS's insurance expense, increased $180,963 from
the first nine months of 2004 to the nine months ended September 30, 2005, and
relates solely to the increase in premiums as a result of the acquisition and
restructuring transactions that closed in December 2004.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful
accounts increased $144,860, or 18.8%, for the nine months ended September 30,
2005 to $915,019. For the first nine months of 2005, the Company's surgery and
diagnostic center business recorded bad debt expense totaling $26,389. IPS's
provision for doubtful accounts for the first nine months of 2005 accounted for
6.0% of total net operating revenues compared to 6.1% for the same period in
2004. The total collection rate, after contractual allowances, for IPS's
affiliated medical groups was 69.5% in the first nine months of 2005, compared
to 66.7% for the nine months ended September 30, 2004.
OTHER EXPENSES. Other expenses, which include other operating
expenses such as office and computer supplies, telephone, data communications,
printing, postage and transfer agent fees, as well as board of directors'
compensation and meeting expenses, totaled $2,114,091 for the nine months ended
September 30, 2005, an increase of $1,366,245 over the same period in 2004. For
the first nine months of 2005, the Company's surgery and diagnostic center
business and MBS recorded other expenses totaling $240,634 and $967,020,
respectively, which accounted for 88.4% of the increase over 2004. Other
expenses, which also includes certain Orion corporate costs, totaled $906,437 in
the first nine months of 2005, an increase of $158,591 over the same period in
2004. Orion's board of directors' compensation and meeting expenses and transfer
agent fees, which are new costs for the company in 2005, totaled $93,920 and
$20,876, respectively, for the nine months ended September 30, 2005. Additional
printing costs associated with the Company's SEC filings totaled $54,212 for the
nine-month period ended September 30, 2005, while bank charges decreased by
$42,568 in the first nine months of 2005 when compared with the same period in
2004, as a result of the reduction in overdraft expenses associated with the
Company's revolving line of credit.
-19-
CHARGE FOR IMPAIRMENT OF INTANGIBLE ASSETS. On June 13, 2005,
the Company announced that it had accepted an offer to purchase its interests in
the Tuscarawas ASC and the Tuscarawas open MRI facility in Dover, Ohio. In
preparation for this pending transaction, the Company tested the identifiable
intangible assets and goodwill related to the surgery center business using the
present value of cash flows method as of June 30, 2005. Based on the pending
sales transaction involving the Tuscarawas ASC and Tuscarawas open MRI facility,
as well as the uncertainty of future cash flows related to the Company's surgery
center business, the Company recorded a charge for impairment of intangible
assets of $6,362,849 for the three months ended June 30, 2005. In November 2005,
the Company decided that, as a result of ongoing losses at its SurgiCare
Memorial Village ASC, it would need to either find a buyer for the Company's
equity interests in SurgiCare Memorial Village or close the facility. In
preparation for this pending transaction, the Company tested the identifiable
intangible assets and goodwill related to the surgery center business using the
present value of cash flows method. As a result of the decision to sell or close
SurgiCare Memorial Village, as well as the uncertainty of cash flows related to
the Company's surgery center business, the Company recorded a charge for
impairment of intangible assets of $3,461,351 for the three months ended
September 30, 2005. The Company is in the process of identifying any charges
related to selling or closing SurgiCare Memorial Village and will record such
charges, if any, in the Company's financial statements in the period in which
they are determinable.
INTEREST EXPENSE. Consolidated interest expense totaled
$247,569 for the first nine months of 2005, a decrease of $500,064 from the same
period in 2004. The decrease from 2004 can be explained generally by the
following events:
o As part of the Investment Transaction, the Company used $5,908,761 to
pay off the debt owed to a subsidiary of Brantley IV.
o As described in "Item 2. Management's Discussion and Analysis and Plan
of Operation - Certain Recent Developments - New Line of Credit and
Debt Restructuring," the Company restructured its previously-existing
debt facilities, which resulted in a decrease in aggregate debt owed
to DVI from approximately $10.1 million to a combined principal amount
of approximately $6.5 million, of which approximately $2.0 million was
paid at the Closing.
o Brantley Capital and Brantley III each held debt of IPS and are party
to the Debt Exchange Agreement. Pursuant to the Debt Exchange
Agreement, Brantley Capital and Brantley III received Class A Common
Stock with a fair market value (based on the daily average of the high
and low price per share of SurgiCare common stock over the five
trading days immediately prior to the Closing) equal to the amounts
owed to Brantley Capital and Brantley III under their loans to IPS in
exchange for contribution of such debt to Orion. Pursuant to the Debt
Exchange Agreement, Brantley Capital also received Class A Common
Stock with a fair market value (based on the daily average of the high
and low price per share of SurgiCare common stock over the five
trading days immediately prior to the Closing) equal to the amount of
certain accrued dividends owed to it by IPS in exchange for the
contribution of such indebtedness, provided that the amount of shares
received in respect of such dividends was subject to reduction to the
extent necessary to achieve the guaranteed allocation of shares of
Class A Common Stock to the holders of IPS common stock and Series B
Convertible preferred stock pursuant to the IPS Merger Agreement. The
aggregate amount of debt exchanged by the parties to the Debt Exchange
Agreement was $4,375,229, which included accrued interest as of the
Closing, and $593,100 of debt in respect of accrued dividends.
EQUITY IN EARNINGS OF 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 partnership and
reduced to reflect the share of the losses of the partnership or distributions
from the partnership.
These 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, the Company could not consolidate its interest in those
facilities in which it held a minority general 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, the Company recorded them as investments in
limited partnerships. For the nine months ended September 30, 2005, the Company
recorded income of $26,214 on the minority interest in San Jacinto, based on the
Company's 10% ownership of that surgery center.
DISCONTINUED OPERATIONS. On September 19, 2003, IPS entered
into the Settlement Agreement with Dr. Jane Kao and the Heart Center to settle
disputes as to the existence and enforceability of certain contractual
obligations. As part of the Settlement Agreement, Dr. Kao, the Heart Center and
IPS agreed that, until December 31, 2004, each party would conduct their
operations under the terms established by the MSA between IPS and the Heart
Center. Additionally, among other provisions, after December 31, 2004, Dr. Kao
and the Heart Center were released from any further obligation to IPS arising
from any previous agreement, and Dr. Kao purchased the accounts receivable
related to the Heart Center and IPS terminated its ownership and management
agreement with the Heart Center. The operating results of the Heart Center were
not included in the consolidated statements of operations of IPS after September
19, 2003 because this medical group did not meet the criteria for consolidation
after that date in accordance with EITF 97-2. The operations of this component
are reflected in the Company's consolidated statements of operations as `loss
from operations of discontinued components' for the nine months ended September
30, 2004. IPS recorded a loss on disposal of this discontinued component of
$12,366 for the year ended December 31, 2004. There were no operations for this
component in Company's financial statements in 2005.
-20-
The following table contains selected financial statement data
related to the Heart Center as of and for the nine months ended September 30,
2004:
Nine Months Ended
September 30, 2004
-------------------
Income statement data:
Net operating revenues $1,860,396
Direct cost of revenues 873,249
Operating expenses 866,984
-------------------
Net income $120,163
-------------------
Balance sheet data:
Current assets $210,836
Other assets 92,510
-------------------
Total assets $303,346
-------------------
Current liabilities $703,877
Other liabilities --
-------------------
Total liabilities $703,877
-------------------
As part of the acquisition and restructuring transactions that
closed on December 15, 2004, the Company recorded intangible assets related to
the IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company's
management expected the case volumes at Bellaire SurgiCare to improve in 2005.
However, by the end of February 2005, it was determined that the expected case
volume increases were not going to be realized. On March 1, 2005, the Company
closed Bellaire SurgiCare and consolidated its operations with the operations of
SurgiCare Memorial Village. The Company tested the identifiable intangible
assets and goodwill related to the surgery and diagnostic center business using
the present value of cash flows method. As a result of the decision to close
Bellaire SurgiCare and the resulting impairment of the joint venture interest
and management contracts related to the surgery centers, the Company recorded a
charge for impairment of intangible assets of $4,090,555 for the year ended
December 31, 2004. The Company also recorded a loss on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $163,050 for the quarter ended March 31, 2005. There were no
operations for this component in the second and third quarter of 2005.
The following table contains selected financial statement data
related to Bellaire SurgiCare as of and for the nine months ended September 30,
2005:
Nine Months Ended
September 30, 2005
--------------------
Income statement data:
Net operating revenues $161,679
Direct cost of revenues 221,469
Operating expenses 128,627
--------------------
Net loss $(188,417)
--------------------
Balance sheet data:
Current assets $--
Other assets --
--------------------
Total assets $--
--------------------
Current liabilities $--
Other liabilities --
--------------------
Total liabilities $--
--------------------
On April 1, 2005, IPS entered into the Settlement with Dr.
Bradley E. Chipps, M.D. and CARDC to settle disputes as to the existence and
enforceability of certain contractual obligations. As part of the Settlement,
Dr. Chipps, CARDC, and IPS agreed that CARDC would purchase the assets owned by
IPS as shown on the balance sheet on March 31, 2005 in exchange for termination
of the MSA between IPS and CARDC. Additionally, among other provisions, after
April 1, 2005, Dr. Chipps and CARDC have been released from any further
obligation to IPS arising from any previous agreement. As a result of the
Settlement, the Company recorded a charge for impairment of intangible assets
related to CARDC of $704,927 for the year ended December 31, 2004. The Company
also recorded a gain on disposal of this discontinued component (in addition to
the charge for impairment of intangible assets) of $506,625 for the quarter
ended March 31, 2005. For the quarter ended June 30, 2005, the Company reduced
the gain on disposal of this discontinued component by $238,333 as the result of
post-settlement adjustments related to the reconciliation of balance sheet
accounts. The operations of this component are reflected in the Company's
consolidated statements of operations as `loss from operations of discontinued
components' for the nine months ended September 30, 2005 and 2004, respectively.
There were no operations for this component in the Company's financial
statements for the second and third quarter of 2005.
-21-
The following table contains selected financial statement data
related to CARDC as of and for the nine months ended September 30, 2005 and
2004, respectively:
Nine Months Ended
September 30, September 30,
2005 2004
----------------------------------
Income statement data:
Net operating revenues $848,373 $2,518,510
Direct cost of revenues 523,255 1,728,828
Operating expenses 286,418 674,482
----------------------------------
Net income $38,700 $115,200
----------------------------------
Balance sheet data:
Current assets $-- $229,199
Other assets -- 11,421
----------------------------------
Total assets $-- $240,620
----------------------------------
Current liabilities $-- $332,997
Other liabilities -- --
----------------------------------
Total liabilities $-- $332,997
----------------------------------
On June 7, 2005, as described in "Part I, Item 2. Management's
Discussion and Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries," IPS executed an Asset
Purchase Agreement with eClinicalWeb to sell substantially all of the assets of
IntegriMED. As a result of this transaction, the Company recorded a loss on
disposal of this discontinued component of $47,101 for the quarter ended June
30, 2005. The operations of this component are reflected in the Company's
consolidated statements of operations as `loss from operations of discontinued
components' for the nine months ended September 30, 2005 and 2004, respectively.
There were no operations for this component in the Company's financial
statements for the third quarter of 2005.
The following table contains selected financial statement data
related to IntegriMED as of and for the nine months ended September 30, 2005 and
2004, respectively:
Nine Months Ended
September 30, September 30,
2005 2004
----------------------------------
Income statement data:
Net operating revenues $191,771 $156,461
Direct cost of revenues -- --
Operating expenses 899,667 1,149,130
----------------------------------
Net loss $(707,896) $(992,669)
----------------------------------
Balance sheet data:
Current assets $-- $287,656
Other assets -- 72,566
----------------------------------
Total assets $-- $360,222
----------------------------------
Current liabilities $-- $454,337
Other liabilities -- --
----------------------------------
Total liabilities $-- $454,337
----------------------------------
On June 13, 2005, the Company announced that it had accepted
an offer to purchase its interests in the Tuscarawas ASC and MRI facility in
Dover, Ohio. These transactions, which were consummated on September 30, 2005,
were deemed to be effective as of 12:01 a.m. on October 1, 2005, and are
described in greater detail in "Part I, Item 2. Management's Discussion and
Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries." As a result of these
transactions, as well as the uncertainty of future cash flows related to the
Company's surgery center business, the Company recorded a charge for impairment
of intangible assets of $6,362,849 for the three months ended June 30, 2005.
Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the assets and liabilities of the Tuscarawas ASC and
Tuscarawas open MRI facility have been reclassified as assets held for sale and
liabilities held for sale on the Company's consolidated balance sheet as of
September 30, 2005. The operations of this component are reflected in the
Company's consolidated statements of operations as `loss from operations of
discontinued components' for the nine months ended September 30, 2005.
-22-
The following table contains selected financial statement data
related to the Tuscarawas ASC and Open MRI as of and for the nine months ended
September 30, 2005:
Nine Months Ended
September 30, 2005
-------------------
Income statement data:
Net operating revenues $2,408,156
Direct cost of revenues 1,102,898
Operating expenses 1,364,214
-------------------
Net loss $(58,956)
-------------------
Balance sheet data:
Cash overdraft $(45,074)
Accounts receivable, net 615,293
Other current assets 70,953
Property and equipment, net 1,327,073
Other long-term assets 71,376
-------------------
Total assets held for sale $2,039,621
-------------------
Accounts payable and accrued expenses $617,186
Capital lease obligation 374,256
Long-term debt 454,056
-------------------
Total liabilities held for sale $1,445,498
-------------------
On October 31, 2005, IPS executed the Sutter Settlement with
Dr. Sutter to settle disputes that had arisen between IPS and Dr. Sutter and to
avoid the risk and expense of litigation. As part of the Sutter Settlement, Dr.
Sutter and IPS agreed that Dr. Sutter would purchase the assets owned by IPS as
shown on the balance sheet on October 31, 2005 in exchange for termination of
the MSA between IPS and Dr. Sutter. Additionally, among other provisions, after
October 31, 2005, Dr. Sutter has been released from any further obligation to
IPS arising from any previous agreement. The operations of this component are
reflected in the Company's consolidated statements of operations as `loss from
operations of discontinued components' for the nine months ended September 30,
2005 and 2004, respectively.
The following table contains selected financial statement data
related to Sutter as of and for the nine months ended September 30, 2005 and
2004, respectively:
Nine Months Ended
September 30, September 30,
2005 2004
----------------------------------
Income statement data:
Net operating revenues $322,470 $327,340
Direct cost of revenues 169,353 164,843
Operating expenses 144,696 152,170
----------------------------------
Net income $8,421 $10,327
----------------------------------
Balance sheet data:
Current assets $102,924 $96,271
Other assets 14,066 14,736
----------------------------------
Total assets $116,990 $111,007
----------------------------------
Current liabilities $21,778 $10,277
Other liabilities -- --
----------------------------------
Total liabilities $21,778 $10,277
----------------------------------
In November 2005, the Company decided that, as a result of
ongoing losses at its SurgiCare Memorial Village ASC, it would need to either
find a buyer for the Company's equity interests in SurgiCare Memorial Village or
close the facility. In preparation for this pending transaction, the Company
tested the identifiable intangible assets and goodwill related to the surgery
center business using the present value of cash flows method. As a result of the
decision to sell or close SurgiCare Memorial Village, as well as the uncertainty
of cash flows related to the Company's surgery center business, the Company
recorded a charge for impairment of intangible assets of $3,461,351 for the
three months ended September 30, 2005. The Company is in the process of
identifying any charges related to selling or closing SurgiCare Memorial Village
and will record such charges, if any, in the Company's financial statements in
the period in which they are determinable. The operations of this component are
reflected in the Company's consolidated statements of operations as `loss from
operations of discontinued components' for the nine months ended September 30,
2005.
-23-
The following table contains selected financial statement data
related to SurgiCare Memorial Village as of and for the nine months ended
September 30, 2005:
Nine Months Ended
September 30, 2005
--------------------
Income statement data:
Net operating revenues $1,329,899
Direct cost of revenues 1,186,019
Operating expenses 1,134,303
--------------------
Net loss $(990,423)
--------------------
Balance sheet data:
Current assets $714,255
Other assets 552,107
--------------------
Total assets $1,266,362
--------------------
Current liabilities $940,149
Other liabilities 52,546
--------------------
Total liabilities $992,695
--------------------
The following table summarizes the components of loss
from operations of discontinued components:
Nine Months Ended
September 30,
2005 2004
----------------------------
Loss from operations of
discontinued components:
-------------------------
Heart Center
Net income $- $120,163
CARDC
Net income 38,700 115,200
Gain on disposal 268,292
Bellaire SurgiCare
Net loss (188,417) -
Loss on disposal (163,050) -
IntegriMED
Net loss (707,896) (992,669)
Loss on disposal (47,101) -
Tuscarawas ASC and Open MRI
Net loss (58,956) -
Dr. Sutter
Net income 8,421 10,327
SurgiCare Memorial Village
Net loss (990,423) -
----------------------------
Total loss from operations of discontinued
components $(1,840,430) $(746,979)
============================
PREFERRED STOCK DIVIDENDS. Prior to the IPS Merger, holders of
IPS's Series A-2 preferred stock were entitled to receive when, as and if
declared by the board of directors, cumulative dividends payable at the annual
rate of $0.40 for each share. Dividends accrued, even if not declared, and were
to be declared and paid in cash in equal installments on the first day of
January, April, July and October immediately following the issue date, or
continued to be accrued until such time as the preferred stockholders demanded
payment. Preferred stock dividends in the amount of $495,900 were accrued for
the nine months ended September 30, 2004. No cash payments of dividends were
made in the first nine months of 2004. The Series A-2 redeemable convertible
preferred stock, along with the other three series of redeemable convertible
preferred stock held by IPS stockholders prior to the IPS Merger, including any
accrued and unpaid dividends therein, were exchanged for shares of Orion Class A
Common Stock as a part of the IPS Merger.
-24-
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $122,402 for the
three months ended September 30, 2005 compared to net cash used in operating
activities of $657,100 for the same period in 2004. Cash in the amount of
$1,223,159 was received on September 30, 2005 related to the sale of the
ambulatory surgery center and the open MRI facility in Dover, Ohio. (See "Part
I, Item 2. Management's Discussion and Analysis or Plan of Operations - Certain
Recent Developments - Post-Restructuring Transactions Involving Subsidiaries.")
Excluding the cash related to the sale of the ambulatory surgery center and open
MRI facility, net cash used in operations increased over 2004, primarily as a
result of the growth in operating expenses related to the IPS Merger and
DCPS/MBS Transaction.
For the nine-month period ended September 30, 2005, net cash
used in operating activities totaled $2,151,458 compared to $1,427,996 in net
cash used by operating activities for the same period in 2004. Cash in the
amount of $1,223,159 was received on September 30, 2005 related to the sale of
the ambulatory surgery center and the open MRI facility in Dover, Ohio. (See
"Part I, Item 2. Management's Discussion and Analysis or Plan of Operations -
Certain Recent Developments - Post-Restructuring Transactions Involving
Subsidiaries.") Excluding the cash related to the sale of the ambulatory surgery
center and open MRI facility, net cash used in operations increased over 2004,
primarily as a result of the growth in operating expenses related to the IPS
Merger and DCPS/MBS Transaction.
Net cash provided by investing activities totaled $93,929 for
the three months ended September 30, 2005 compared to net cash used in investing
activities totaling $58,548 for the three months ended September 30, 2004.
For the nine-month period ended September 30, 2005, net cash
provided by investing activities totaled $349,949 compared to $210,178 in net
cash used by investing activities for the same period in 2004.
Net cash provided by financing activities totaled $488,487 for
the three months ended September 30, 2005 compared to net cash provided by
financing activities totaling $725,819 for the three months ended September 30,
2004. For the nine-month period ended September 30, 2005, net cash provided by
financing activities totaled $1,870,761 compared to net cash provided by
financing activities of $1,734,892 for the same period in 2004. The following
financing activities occurred in the first nine months of 2005:
o Repayments of capital lease obligations totaled $164,835;
o Net borrowings on the HBCC revolving credit facility totaled $934,664;
and
o On March 16, 2005, Brantley IV loaned the Company an aggregate of
$1,025,000. On April 19, 2005, Brantley IV loaned the Company an
additional $225,000. (See "Part I, Item 2. Management's Discussion and
Analysis or Plan of Operation - Certain Recent Developments -
Post-Restructuring Loan Transaction.)
As of September 30, 2005, the Company had $771,098 of cash and
cash equivalents on hand and a working capital deficit of $7,137,022. The
Company incurred operating losses of $5,238,396 and $14,270,275, respectively,
for the three months and nine months ended September 30, 2005. In addition, the
Company has used substantial amounts of working capital in its operations.
The Company has financed its growth and operations primarily
through the issuance of equity securities, secured and/or convertible debt, most
recently by completing the Acquisitions, the Investment Transaction, the
Reclassification, the restructuring of its debt owed to DVI (the "Debt
Restructuring") and borrowing from affiliates. In connection with the Closing of
the Acquisitions and the Investment Transaction, the Company entered into a new
secured two-year revolving credit facility pursuant to the Loan and Security
Agreement by and among Orion, certain of its affiliates and subsidiaries, and
HBCC. (See "Item 2. Management's Discussion and Analysis or Plan of Operation -
Certain Recent Developments - Acquisition and Restructuring Transactions.") In
connection with entering into this new facility, Orion also consummated the Debt
Restructuring, which resulted in a decrease in aggregate debt owed to DVI from
approximately $10.1 million to a combined principal amount of approximately $6.5
million, of which approximately $2 million was paid at the Closing. In addition
to the Closing, on March 16, 2005, Brantley IV, an affiliate of the Company,
loaned Orion an aggregate of $1,025,000. On April 19, 2005, Brantley IV loaned
the Company an additional $225,000. (See "Item 2. Management's Discussion and
Analysis or Plan of Operation - Certain Recent Developments - Post-Restructuring
Loan Transactions.) Paul H. Cascio, the Chairman of the board of directors of
Orion, and Michael J. Finn, a director of Orion, are affiliates of Brantley IV.
Additionally, as part of this transaction, the Company entered into the First
Amendment whereby its $4,000,000 secured two-year revolving credit facility with
HBCC has been reduced by the amount of the loans from Brantley IV to $2,750,000.
As a result of the First Amendment, the Brantley IV Guaranty was amended by the
Amended Brantley IV Guaranty, which reduces the deficiency guaranty provided by
Brantley IV by the amount of the First Loan to $2,247,727. Also as a result of
the First Amendment, the Brantley Capital Guaranty was amended by the Amended
Brantley Capital Guaranty, which reduces the deficiency guaranty provided by
Brantley Capital by the amount of the Second Loan to $502,273.
As part of the Loan and Security Agreement, the Company is
required to comply with certain financial covenants, measured on a quarterly
basis. The financial covenants include maintaining a required debt service
coverage ratio and meeting a minimum operating income level for the surgery and
diagnostic centers before corporate overhead allocations. As of and for the nine
months ended September 30, 2005, the Company was out of compliance with both of
these financial covenants and has notified the lender as such. Under the terms
of the Loan and Security Agreement, failure to meet the required financial
covenants constitutes an event of default. Under an event of default, the lender
-25-
may (i) accelerate and declare the obligations under the credit facility to be
immediately due and payable; (ii) withhold or cease to make advances under the
credit facility; (iii) terminate the credit facility; (iv) take possession of
the collateral pledged as part of the Loan and Security Agreement; (v) reduce or
modify the revolving loan commitment; and/or (vi) take necessary action under
the Guaranties. The loan is secured by the Company's healthcare accounts
receivable. As of November 9, 2005, the outstanding principal under the
revolving credit facility was $1,890,247. The full amount of the loan as of
September 30, 2005 is recorded as a current liability. The Company is currently
in negotiations with the lender and is seeking to obtain a waiver of the
financial covenants as of and for the nine months ended September 30, 2005. In
the event the lender declares the obligations under the credit facility to be
immediately due and payable or exercises its other rights described above, the
Company would not be able to meet its obligations to the lender or its other
creditors. As a result, such action would have a material adverse effect on the
Company and on its ability to continue as a going concern.
As of September 30, 2005, the Company's existing credit
facility with HBCC has limited availability to provide for working capital
shortages. Although the Company believes that it will generate cash flows from
operations in the future, there is substantial doubt as to whether it will be
able to fund its operations solely from its cash flows. On April 28, 2005, the
Company announced the initiation of a strategic plan designed to accelerate the
Company's growth and enhance its future earnings potential. The plan focuses on
the Company's strengths, which include providing billing, collections and
complementary business management services to physician practices in addition to
the provision of development and management services to ambulatory surgery
centers. A fundamental component of the Company's plan is the selective
consideration of accretive acquisition opportunities in these core business
sectors. In addition, the Company will cease investment in business lines that
do not complement the Company's strategic plans and will redirect financial
resources and Company personnel to areas that management believes enhances
long-term growth potential. On June 7, 2005, as described in "Part I, Item 2.
Management's Discussion and Analysis or Plan of Operations - Certain Recent
Developments - Post-Restructuring Transactions Involving Subsidiaries," the
Company, via its IPS subsidiary completed the sale of substantially all of the
assets of IntegriMED. Additionally, on September 30, 2005, the Company completed
the sale of its interests in the Tuscarawas ASC and MRI facility in Dover, Ohio.
These transactions are described in greater detail in "Part I, Item 2.
Management's Discussion and Analysis or Plan of Operations - Certain Recent
Developments - Post-Restructuring Transactions Involving Subsidiaries. In
November 2005, the Company decided that, as a result of ongoing losses at its
SurgiCare Memorial Village ASC, it would need to either find a buyer for the
Company's equity interests in SurgiCare Memorial Village or close the facility.
The Company is in the process of identifying any charges related to selling or
closing SurgiCare Memorial Village and will record such charges, if any, in the
Company's financial statements in the period in which they are determinable. The
Company anticipates a substantial reduction of annual expenses attributable to a
combination of these initiatives and the consolidation of corporate functions
duplicated at the Company's Houston and Atlanta facilities.
The Company intends to continue to manage its use of cash.
However, the Company's business is still faced with many challenges. If cash
flows from operations and borrowings are not sufficient to fund the Company's
cash requirements, the Company may be required to further reduce its operations
and/or seek additional public or private equity financing or financing from
other sources or consider other strategic alternatives, including possible
additional divestitures of specific assets or lines of business. There can be no
assurances that additional financing or strategic alternatives will be
available, or that, if available, the financing or strategic alternatives will
be obtainable on terms acceptable to the Company or that any additional
financing would not be substantially dilutive to the Company's existing
stockholders.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company
maintains a set of disclosure controls and procedures that are designed to
provide reasonable assurance 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 accurately and
within the time periods specified in the SEC's rules and forms. As of the end of
the period covered by this report, the Company evaluated, under the supervision
and with the participation of its management, including its Chief Executive
Officer and Chief Financial Officer, of the design and effectiveness of its
disclosure controls and procedures pursuant to Rule 13a-15(c) of the Exchange
Act. Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings.
CHANGES IN INTERNAL CONTROLS. During the most recent fiscal
quarter, there have been no changes in the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 2004, Orion's predecessor, SurgiCare, was named
as a defendant in a suit entitled Shirley Browne and Bellaire Anesthesia
Management Consultants, Inc. ("BAMC") v. SurgiCare, Inc., Bellaire SurgiCare,
Inc., Sherman Nagler, Jeffrey Penso, and Michael Mineo, in the 152nd Judicial
District Court of Harris County, Texas, Cause No. 2004-55688. The dispute arises
out of the for cause termination of BAMC's exclusive contract to provide
-26-
anesthesia services to Bellaire SurgiCare, Inc. Ms. Browne had filed a charge of
discrimination with the EEOC on February 6, 2004, claiming that she was
terminated in retaliation for having previously complained about discriminatory
treatment and a hostile work environment. She claimed she had been discriminated
against based on her sex, female, and retaliated against in violation of Title
VII. The Company denied Ms. Browne's allegations of wrongdoing. The EEOC
mediation took place in May 2004. The mediation was unsuccessful. The EEOC
declined to institute an action and issued a right to sue letter, which prompted
the lawsuit. Ms. Browne filed suit shortly thereafter. The parties have reached
a preliminary settlement, which has been accrued for as of September 30, 2005,
on all matters for dismissal of all claims.
In addition, the Company is involved in various other legal
proceedings and claims arising in the ordinary course of business. The Company's
management believes that the disposition of these additional matters,
individually or in the aggregate, is not expected to have a materially adverse
effect on the Company's 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 the Company's future results of operations
or cash flows in a particular period.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
CLASS B COMMON STOCK CONVERSIONS. As part of the acquisition
and restructuring transactions completed on December 15, 2004, the Company
created Class B Common Stock, which was issued in connection with the Investment
Transaction. Holders of shares of Class B Common Stock have the option to
convert their shares of Class B Common Stock into Class A Common Stock at any
time based on a conversion factor in effect at the time of the transaction. The
conversion factor is designed to yield one share of Class A Common Stock per
share of Class B Common Stock converted, plus such additional shares of Class A
Common Stock, or portions thereof, necessary to approximate the unpaid portion
of the return of the original purchase price for the Class B Common Stock less
the Base Bridge Interest Amount, plus an amount equal to nine percent (9%) per
annum on the amount of the original purchase price less the Base Bridge Interest
Amount, without compounding, from the date the Class B Common Stock was first
issued to the date of conversion. As of November 10, 2005, each share of Class B
Common Stock is convertible into 4.886172945205 shares of Class A Common Stock.
As of that date, 10,448,470 shares of Class B Common Stock were issued and
outstanding. (See Part I, Item 2. Management's Discussion and Analysis of Plan
of Operation - Certain Recent Developments - Acquisition and Restructuring
Transactions.)
From July 1, 2005 through November 10, 2005, holders of shares
of Class B Common Stock converted an aggregate of 236,911 shares of Class B
Common Stock into 978,803 shares of Class A Common Stock. The Company's Class A
Common Stock was issued upon conversion of certain of the Company's Class B
Common Stock as of the following dates:
--------------------------------------------------------------------------------
NUMBER OF SHARES OF NUMBER OF SHARES OF
EFFECTIVE DATE OF CLASS B COMMON CLASS A COMMON
ISSUANCE STOCK CONVERTED STOCK ISSUED
--------------------------------------------------------------------------------
8/5/05 43,075 126,221
10/27/05 64,612 264,845
11/4/05 86,149 391,823
11/4/05 43,075 195,914
--------------------------------------------------------------------------------
There was no placement agent or underwriter for the
conversions. The Company processed the conversions internally. The shares of
Class A Common Stock were not sold for cash. The Company did not receive any
consideration in connection with the conversions, other than the return of the
shares of Class B Common Stock. The shares of Class A Common Stock issued are
not convertible or exchangeable. In connection with the issuance of the Class A
Common Stock upon conversion of shares of the Class B Common Stock, the Company
relied upon the exemption from the registration requirements of the Securities
Act of 1933, as amended, by virtue of Section 3(a)(9) thereof. In connection
with the original issuance of the Class B Common Stock in the Investment
Transaction, the Company relied on the exemption from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereof and Rule 506 of Regulation D promulgated thereunder. For purposes
of the exemption, the Company relied upon: (i) certain representations and
warranties of the individuals and entities receiving equity securities in the
Investment Transaction at the Closing; and (ii) its own independent
investigation to confirm that each of such individuals and entities were
"accredited investors" (as such term is defined in Rule 501 of Regulation D).
The Company did not pay any underwriting discounts or commissions in connection
with the issuance of the Class B Common Stock in the Investment Transaction
CLASS C COMMON STOCK CONVERSIONS. As part of the acquisition
and restructuring transactions completed on December 15, 2004, the Company
created its Class C Common Stock, which was issued in connection with the
DCPS/MBS Transaction. Holders of shares of Class C Common Stock have the option
to convert their shares of Class C Common Stock into shares of Class A Common
Stock at any time based on a conversion factor in effect at the time of the
transaction. The conversion factor is designed initially to yield one share of
Class A Common Stock per share of Class C Common Stock converted, with the
number of shares of Class A Common Stock reducing to the extent that
distributions are paid on the Class C Common Stock. The conversion factor is
calculated as (x) the amount by which $3.30 exceeds the aggregate distributions
made with respect to a share of Class C Common Stock divided by (y) $3.30. The
initial conversion factor was one (one share of Class C Common Stock converts
into one share of Class A Common Stock) and is subject to adjustment as
discussed below.
-27-
If the fair market value used in determining the conversion
factor for the Class B Common Stock in connection with any conversion of Class B
Common Stock is less than $3.30 (subject to adjustment to account for stock
splits, stock dividends, combinations or other similar events affecting Class A
Common Stock), holders of shares of Class C Common Stock have the option to
convert their shares of Class C Common Stock (within 10 days of receipt of
notice of the conversion of the Class B Common Stock) into a number of shares of
Class A Common Stock equal to (x) the amount by which $3.30 exceeds the
aggregate distributions made with respect to a share of Class C Common Stock
divided by (y) the fair market value used in determining the conversion factor
for the Class B Common Stock (the "Anti-Dilution Option"). The aggregate number
of shares of Class C Common Stock so converted by any holder shall not exceed a
number equal to (a) the number of shares of Class C Common Stock held by such
holder immediately prior to such conversion plus the number of shares of Class C
Common Stock previously converted in Class A Common Stock by such holder
multiplied by (b) a fraction, the numerator of which is the number of shares of
Class B Common Stock converted at the lower price and the denominator of which
is the aggregate number of shares of Class B Common Stock issued at the closing
of the Investment Transaction.
From July 1, 2005 through November 10, 2005, holders of shares
of Class C Common Stock converted an aggregate of 93,016 shares of Class C
Common Stock into 368,581 shares of Class A Common Stock. The Class C conversion
price for each Class C conversion was determined by the Anti-Dilution Option
calculated after each conversion of Class B Common Stock. The Company's Class A
Common Stock was issued upon conversion of certain of the Company's Class C
Common Stock as of the following dates:
--------------------------------------------------------------------------------
NUMBER OF SHARES OF NUMBER OF SHARES OF
EFFECTIVE DATE OF CLASS C COMMON CLASS A COMMON
ISSUANCE STOCK CONVERTED STOCK ISSUED
--------------------------------------------------------------------------------
7/5/05 21,877 84,935
7/5/05 21,877 84,935
7/7/05 2,188 8,494
7/7/05 2,188 8,494
7/7/05 35,354 137,256
7/7/05 3,588 13,929
7/10/05 438 1,699
8/10/05 28 144
8/11/05 1,376 7,210
8/11/05 1,376 7,210
8/15/05 138 721
8/15/05 138 721
8/15/05 2,224 11,651
8/15/05 226 1,182
--------------------------------------------------------------------------------
There was no placement agent or underwriter for the
conversions. The Company processed the conversions internally. The shares were
not sold for cash. The Company did not receive any consideration in connection
with the conversions, other than the return of the shares of Class C Common
Stock. The shares of Class A Common Stock issued are not convertible or
exchangeable. In connection with the issuance of the Class A Common Stock upon
conversion of shares of the Class C Common Stock, the Company relied upon the
exemption from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 3(a)(9) thereof. In connection with the original
issuance of the Class C Common Stock in the DCPS/MBS Transaction, the Company
relied on the exemption from the registration requirements of the Securities Act
of 1933, as amended, by virtue of Section 4(2) thereof and Rule 506 of
Regulation D promulgated thereunder. For purposes of the exemption, the Company
relied upon: (i) certain representation and warranties of certain individuals
and entities receiving equity securities in the DCPS/MBS Transaction at the
Closing; (ii) its own independent investigation to confirm that certain of such
individuals and entities were "accredited investors" (as such term is defined in
Rule 501 of Regulation D); and (iii) the inclusion of no more than 35 purchasers
who were not "accredited investors" in accordance with Rule 506 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As part of the Loan and Security Agreement, the Company is
required to comply with certain financial covenants, measured on a quarterly
basis. The financial covenants include maintaining a required debt service
coverage ratio and meeting a minimum operating income level for the surgery and
diagnostic centers before corporate overhead allocations. As of and for the nine
months ended September 30, 2005, the Company was out of compliance with both of
these financial covenants and has notified the lender as such. Under the terms
of the Loan and Security Agreement, failure to meet the required financial
covenants constitutes an event of default. Under an event of default, the lender
may (i) accelerate and declare the obligations under the credit facility to be
immediately due and payable; (ii) withhold or cease to make advances under the
credit facility; (iii) terminate the credit facility; (iv) take possession of
the collateral pledged as part of the Loan and Security Agreement; (v) reduce or
modify the revolving loan commitment; and/or (vi) take necessary action under
the Guaranties. The loan is secured by the Company's healthcare accounts
receivable. As of November 9, 2005, the outstanding principal under the
revolving credit facility was $1,890,247. The full amount of the loan as of
September 30, 2005 is recorded as a current liability. The Company is currently
in negotiations with the lender and is seeking to obtain a waiver of the
financial covenants as of and for the nine months ended September 30, 2005. In
the event the lender declares the obligations under the credit facility to be
immediately due and payable or exercises its other rights described above, the
Company would not be able to meet its obligations to the lender or its other
creditors. As a result, such action would have a material adverse effect on the
Company and on its ability to continue as a going concern.
-28-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
As part of the Loan and Security Agreement, the Company is
required to comply with certain financial covenants, measured on a quarterly
basis. The financial covenants include maintaining a required debt service
coverage ratio and meeting a minimum operating income level for the surgery and
diagnostic centers before corporate overhead allocations. As of and for the nine
months ended September 30, 2005, the Company was out of compliance with both of
these financial covenants and has notified the lender as such. (See "Part II,
Item 3. Defaults Upon Senior Securities.")
On November 9, 2005, the Company announced that Gerald M.
McIntosh has resigned from the Company's Board of Directors. Also on November 9,
2005, the Company announced that Keith G. LeBlanc has resigned his position as
president and a director of the Company to pursue other interests. He will
remain as a consultant to the Company for a period of 12 months. The Company and
Mr. LeBlanc executed a Separation Agreement and General Release (the "Separation
Agreement") governing Mr. LeBlanc's separation benefits and consulting
agreement. The Separation Agreement is attached as Exhibit 10.8 to this report.
ITEM 6. EXHIBITS
Exhibits
EXHIBIT NO. DESCRIPTION
------------------ ------------------------------------------------------------------------------------------------------------
Exhibit 2.1 Asset Purchase Agreement, dated as of June 6, 2005, by and among InPhySys, Inc. (f/k/a IntegriMED, Inc.)
and eClinicalWeb, LLC (Incorporated by reference to Exhibit 2.1 filed with the Company's Current Report on
Form 8-K filed on June 13, 2005)
Exhibit 2.2 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Ambulatory Surgery Center,
L.L.C., Orion HealthCorp, Inc., each of the individuals holding a minority equity interest in Tuscarawas
Ambulatory Surgery Center, L.L.C., and Union Hospital (Incorporated by reference to Exhibit 2.1 filed with
the Company's Current Report on Form 8-K filed on October 7, 2005)
Exhibit 2.3 Asset Purchase Agreement, dated as of September 30, 2005, by and between Union Hospital and TASC
Anesthesia, L.L.C. (Incorporated by reference to Exhibit 2.2 filed with the Company's Current Report on
Form 8-K filed on October 7, 2005)
Exhibit 2.4 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Open MRI, L.P., Orion
HealthCorp, Inc each of the individuals holding a minority equity interest in Tuscarawas Open MRI, L.P.,
and Union Hospital (Incorporated by reference to Exhibit 2.3 filed with the Company's Current Report on
Form 8-K filed on October 7, 2005)
Exhibit 10.1 First Amendment to Loan and Security Agreement, dated as of March 22, 2005, by and among Orion HealthCorp,
Inc., certain affiliates and subsidiaries of Orion HealthCorp, Inc., and Healthcare Business Credit
Corporation (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form
10-QSB filed on May 13, 2005)
Exhibit 10.2 Amended and Restated Guaranty Agreement, dated as of March 22, 2005, provided by Brantley Partners IV, L.P.
to Healthcare Business Credit Corporation (Incorporated by reference to Exhibit 10.2 filed with the
Company's Quarterly Report on Form 10-QSB filed on May 13, 2005)
Exhibit 10.3 Amended and Restated Guaranty Agreement, dated as of March 22, 2005, provided by Brantley Capital
Corporation to Healthcare Business Credit Corporation (Incorporated by reference to Exhibit 10.3 filed with
the Company's Quarterly Report on Form 10-QSB filed on May 13, 2005)
Exhibit 10.4 Convertible Subordinated Promissory Note, dated as of June 1, 2005, by and among Orion HealthCorp, Inc. and
Brantley Partners IV, L.P. (Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on June 7, 2005)
Exhibit 10.5 Convertible Subordinated Promissory Note, dated as of June 1, 2005, by and among Orion HealthCorp, Inc. and
Brantley Partners IV, L.P. (Incorporated by reference to Exhibit 10.2 filed with the Company's Current
Report on Form 8-K filed on June 7, 2005)
Exhibit 10.6 Amendment No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of June 1, 2005 (Incorporated by
reference to Exhibit 10.6 filed with the Company's Quarterly Report on Form 10-QSB filed on August 12, 2005)
-29-
Exhibit 10.7 Form of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock Option), dated as of June 17, 2005
(Incorporated by reference to Exhibit 10.7 filed with the Company's Quarterly Report on Form 10-QSB filed
on August 12, 2005)
Exhibit 10.8 Separation Agreement and General Release, dated as of November 8, 2005, by and between Orion HealthCorp,
Inc. and Keith G. LeBlanc
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 Section 1350 Certification
Exhibit 32.2 Section 1350 Certification
-30-
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.
ORION HEALTHCORP, INC.
By:/S/ TERRENCE L. BAUER
---------------------
Dated: November 14, 2005 Terrence L. Bauer
Chief Executive Officer and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears on the signature page to this Report constitutes and appoints
Terrence L. Bauer and Stephen H. Murdock, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the same,
with all exhibits hereto, and other documents in connection herewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of the, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on November 14, 2005.
By:/S/ TERRENCE L. BAUER By:/S/ MICHAEL J. FINN
--------------------- -------------------
Terrence L. Bauer Michael J. Finn
Chief Executive Officer and Director
Director (Principal Executive Officer)
By:/S/ PAUL H. CASCIO By:/S/ JOSEPH M. VALLEY, JR.
------------------ -------------------------
Paul H. Cascio Joseph M. Valley, Jr.
Director and Non-Executive Chairman of the Board Director
By:/S/ DAVID CRANE By:/S/ STEPHEN H. MURDOCK
--------------- ----------------------
David Crane Stephen H. Murdock
Director Chief Financial Officer (Principal Accounting
and Financial Officer)
-31-
ORION HEALTHCORP, INC.
INDEX TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Page
Number
Consolidated Condensed Balance Sheets as of September 30, 2005 F- 2
(unaudited) and December 31, 2004
Consolidated Condensed Statements of Operations for the Three F- 3
Months Ended September 30, 2005 and 2004 (unaudited)
Consolidated Condensed Statements of Operations for the Nine F- 4
Months Ended September 30, 2005 and 2004 (unaudited)
Consolidated Condensed Statements of Cash Flows for the Three F- 5
Months Ended September 30, 2005 and 2004 (unaudited)
Consolidated Condensed Statements of Cash Flows for the Nine F- 6
Months Ended September 30, 2005 and 2004 (unaudited)
Notes to Unaudited Consolidated Condensed Financial Statements F- 7
Orion HealthCorp, Inc.
Consolidated Condensed Balance Sheets
September 30, December 31,
2005 2004
------------- -------------
(Unaudited)
Current assets
Cash and cash equivalents $771,098 $701,846
Accounts receivable, net 2,951,392 4,469,240
Inventory 459,440 519,509
Prepaid expenses and other current assets 1,071,786 519,843
Assets held for sale 2,039,621 -
------------- -------------
Total current assets 7,293,337 6,210,438
------------- -------------
Property and equipment, net 1,172,408 3,370,928
------------- -------------
Other long-term assets
Intangible assets, including goodwill, net 21,273,637 32,250,640
Other assets, net 448,901 534,314
------------- -------------
Total other long-term assets 21,722,538 32,784,954
------------- -------------
Total assets $30,188,283 $42,366,320
============= =============
Current liabilities
Accounts payable and accrued expenses $6,647,414 $6,784,950
Other current liabilities 1,238,159 304,144
Income taxes payable 116,943 116,943
Current portion of capital lease obligation 92,991 258,478
Current portion of long-term debt 4,889,356 2,762,334
Liabilities held for sale 1,445,498 -
------------- -------------
Total current liabilities 14,430,361 10,226,849
------------- -------------
Long-term liabilities
Capital lease obligation, net of current portion 166,669 540,274
Long-term debt, net of current portion 3,877,413 4,238,839
Deferred tax liability 620,977 620,977
Minority interest in partnership 305,802 169,500
------------- -------------
Total long-term liabilities 4,970,861 5,569,590
------------- -------------
Stockholders' equity
Preferred stock, par value $0.001; 20,000,000
shares authorized; no shares issued and
outstanding - -
Common stock, Class A, par value $0.001;
70,000,000 shares authorized, 11,429,454 and
8,602,149 shares issued and outstanding at
September 30, 2005 and December 31, 2004,
respectively 11,431 8,602
Common stock, Class B, par value $0.001;
25,000,000 shares authorized, 10,642,306 and
11,482,261 shares issued and outstanding at
September 30, 2005 and December 31, 2004,
respectively 10,642 11,482
Common stock, Class C, par value $0.001;
2,000,000 shares authorized, 1,462,121 and
1,575,760 shares issued and outstanding at
September 30, 2005 and December 31, 2004,
respectively 1,463 1,576
Additional paid-in capital 56,928,796 56,602,786
Accumulated deficit (46,126,953) (30,016,247)
Treasury stock - at cost; 9,140 shares at
September 30, 2005 and December 31, 2004,
respectively (38,318) (38,318)
------------- -------------
Total stockholders' equity 10,787,061 26,569,881
------------- -------------
Total liabilities and stockholders' equity $30,188,283 $42,366,320
============= =============
The accompanying notes are an integral part of these financial statements.
F-2
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Operations
For the Three Months
Ended September 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Net operating revenues $7,357,205 $4,509,863
Direct cost of revenues 3,096,524 2,889,511
------------ ------------
Gross margin 4,260,681 1,620,352
------------ ------------
Operating expenses:
Salaries and benefits 3,117,118 750,663
Facility rent and related costs 423,876 272,039
Depreciation and amortization 608,544 130,417
Professional and consulting fees 566,923 111,979
Insurance 238,315 134,904
Provision for doubtful accounts 278,184 271,176
Other expenses 677,644 236,810
Charge for impairment of intangible
assets 3,461,351 -
------------ ------------
Total operating expenses 9,371,955 1,907,988
------------ ------------
Loss from continuing operations before
other income (expenses) (5,111,274) (287,636)
------------ ------------
Other income (expenses):
Interest expense (97,178) (279,173)
Equity in earnings of limited
partnerships 7,178 -
Other expense, net (5,120) (5,272)
------------ ------------
Total other income (expenses), net (95,120) (284,445)
------------ ------------
Minority interest earnings in partnership (32,001) -
------------ ------------
Loss from continuing operations (5,238,395) (572,081)
Discontinued operations
Loss from operations of discontinued
components (843,892) (324,345)
------------ ------------
Net loss (6,082,287) (896,426)
Preferred stock dividends - (165,300)
------------ ------------
Net loss attributable to common
stockholders $(6,082,287) $(1,061,726)
============ ============
Weighted average common shares outstanding;
--------------------------------------------
Basic 10,300,977 8,602,149
Diluted 10,300,977 8,602,149
Earnings (loss) per share:
---------------------------
Basic:
Net loss per share from continuing
operations $(0.509) $(0.067)
Net income per share from
discontinued operations $(0.082) $(0.038)
------------ ------------
Net loss per share $(0.591) $(0.105)
============ ============
Diluted:
Net loss per share from continuing
operations $(0.509) $(0.067)
Net income per share from
discontinued operations $(0.082) $(0.038)
------------ ------------
Net loss per share $(0.591) $(0.105)
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Operations
For the Nine Months Ended
September 30,
2005 2004
------------- ------------
(Unaudited) (Unaudited)
Net operating revenues $22,856,724 $12,585,075
Direct cost of revenues 9,748,498 7,887,231
------------- ------------
Gross margin 13,108,226 4,697,844
------------- ------------
Operating expenses:
Salaries and benefits 8,388,405 2,254,183
Facility rent and related costs 1,281,975 827,377
Depreciation and amortization 2,335,745 391,900
Professional and consulting fees 1,498,563 398,549
Insurance 679,588 399,422
Provision for doubtful accounts 915,019 770,159
Other expenses 2,114,091 747,846
Charge for impairment of intangible
assets 9,824,200
------------- ------------
Total operating expenses 27,037,586 5,789,436
------------- ------------
Loss from continuing operations before
other income (expenses) (13,929,360) (1,091,592)
------------- ------------
Other income (expenses):
Interest expense (247,569) (747,633)
Equity in earnings of limited
partnerships 26,214 -
Other expense, net (24,098) (17,068)
------------- ------------
Total other income (expenses), net (245,453) (764,701)
------------- ------------
Minority interest earnings in partnership (95,462) -
------------- ------------
Loss from continuing operations (14,270,275) (1,856,293)
Discontinued operations
Loss from operations of discontinued
components, including net gain on
disposal of $58,142 for the nine
months ended September 30, 2005 (1,840,430) (746,980)
------------- ------------
Net loss (16,110,705) (2,603,273)
Preferred stock dividends - (495,900)
------------- ------------
Net loss attributable to common
stockholders $(16,110,705) $(3,099,173)
============= ============
Weighted average common shares outstanding;
--------------------------------------------
Basic 9,889,278 8,602,149
Diluted 9,889,278 8,602,149
Earnings (loss) per share:
---------------------------
Basic:
Net loss per share from continuing
operations $(1.443) $(0.216)
Net income per share from
discontinued operations $(0.186) $(0.087)
------------- ------------
Net loss per share $(1.629) $(0.303)
============= ============
Diluted:
Net loss per share from continuing
operations $(1.443) $(0.216)
Net income per share from
discontinued operations $(0.186) $(0.087)
------------- ------------
Net loss per share $(1.629) $(0.303)
============= ============
The accompanying notes are an integral part of these financial statements.
F-4
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Cash Flows
For the Three Months
Ended September 30,
2005 2004
------------------------
Operating activities
Net loss $(6,082,287) $(896,426)
Adjustments to reconcile net loss to net cash used in operating
activities:
Charge for impairment of intangible assets 3,461,351 -
Minority interest in earnings of partnerships 32,001 -
Provision for doubtful accounts 278,184 289,943
Depreciation and amortization 608,544 143,485
Assets held for sale 40,401 -
Conversion of notes payable to common stock - -
Gain on disposition of discontinued components - -
Changes in operating assets and liabilities:
Accounts receivable 592,069 (366,455)
Inventory 14,496 (22,216)
Prepaid expenses and other assets (72,158) (80,735)
Other assets 21,453 -
Accounts payable and accrued expenses (289,615) 296,420
Deferred revenues and other liabilities 1,273,159 (21,116)
------------------------
Net cash used in operating activities (122,402) (657,100)
------------------------
Investing activities
Purchase of property and equipment 93,929 (58,548)
------------------------
Net cash provided by investing activities 93,929 (58,548)
------------------------
Financing activities
Net repayments of capital lease obligations (39,186) (540)
Net borrowings on line of credit 579,151 92,797
Net borrowings (repayments) of notes payable (12,235) 550,001
Net borrowings (repayments) of other obligations (39,243) 83,561
------------------------
Net cash provided by financing activities 488,487 725,819
------------------------
Net increase in cash and cash equivalents 460,014 10,171
Cash and cash equivalents, beginning of period 311,084 136,079
------------------------
Cash and cash equivalents, end of period $771,098 $146,250
========================
The accompanying notes are an integral part of these financial statements.
F-5
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended
September 30,
2005 2004
-------------------------
Operating activities
Net loss $(16,110,705)$(2,603,273)
Adjustments to reconcile net loss to net cash used in operating activities:
Charge for impairment of intangible assets 9,824,200 -
Minority interest in earnings of partnerships 93,802 -
Provision for doubtful accounts 915,019 816,486
Depreciation and amortization 2,335,746 424,778
Assets held for sale 45,074 -
Conversion of notes payable to common stock 57,886 -
Gain on disposition of discontinued components (58,141) -
Changes in operating assets and liabilities:
Accounts receivable (229,122) (593,295)
Inventory (10,742) (80,357)
Prepaid expenses and other assets (154,849) (131,889)
Other assets 12,859 8,041
Accounts payable and accrued expenses (139,662) 683,372
Deferred revenues and other liabilities 1,267,177 48,141
-------------------------
Net cash used in operating activities (2,151,458) (1,427,996)
-------------------------
Investing activities
Purchase of property and equipment 349,949 (210,178)
-------------------------
Net cash provided by (used in) investing activities 349,949 (210,178)
-------------------------
Financing activities
Net borrowings (repayments) of capital lease obligations (164,835) 47,030
Net borrowings on line of credit 943,664 21,912
Net borrowings of notes payable 1,140,360 1,600,003
Net borrowings (repayments) of other obligations (48,428) 65,947
-------------------------
Net cash provided by financing activities 1,870,761 1,734,892
-------------------------
Net increase (decrease) in cash and cash equivalents 69,252 96,718
Cash and cash equivalents, beginning of period 701,846 49,532
-------------------------
Cash and cash equivalents, end of period $771,098 $146,250
=========================
The accompanying notes are an integral part of these financial statements.
F-6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. General
Orion HealthCorp, Inc. (formerly SurgiCare, Inc. "SurgiCare") ("Orion"
or the "Company") and its subsidiaries maintain their accounts on the accrual
method of accounting in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). The consolidated financial statements
include the accounts of the Company and all of its majority-owned subsidiaries.
As described in Note 3, Acquisition and Restructuring Transactions, Orion's
results include the results of Integrated Physician Solutions, Inc. ("IPS") for
the three months and nine months ended September 30, 2004 and the results of
IPS, the Company's surgery and diagnostic center business and Medical Billing
Services, Inc. ("MBS") (which includes Dennis Cain Physician Solutions, Ltd.
("DCPS")) for the three months and nine months ended September 30, 2005. The
descriptions of the business and results of operations of MBS set forth in these
notes include the business and results of operations of DCPS. All material
intercompany balances and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with GAAP
for interim financial reporting and in accordance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, the accompanying unaudited consolidated condensed financial
statements include all adjustments consisting of only normal recurring
adjustments necessary for a fair presentation of the Company's financial
position and results of operations and cash flows of the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
The accompanying unaudited consolidated condensed financial statements
should be read in conjunction with the financial statements and related notes
therein included in the Company's 2004 Annual Report on Form 10-KSB.
Description of Business
Surgery and Diagnostic Centers
SurgiCare 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 ("ASCs"). On July 21, 1999,
SurgiCare acquired all of the issued and outstanding shares of common stock of
Bellaire SurgiCare, Inc. a Texas corporation ("Bellaire SurgiCare"), in exchange
for the issuance of 9.86 million shares of SurgiCare's common stock (now 986,000
shares of Class A Common Stock after giving effect to the Reverse Stock Split
and Reclassification, as discussed in Note 3. Acquisition and Restructuring
Transactions) and 1.35 million shares of SurgiCare's Series A redeemable
preferred stock, par value $.001 per share, to the holders of Bellaire
SurgiCare's common stock. For accounting purposes, this reverse acquisition was
effective July 1, 1999. On December 15, 2004, the Company changed its name to
Orion HealthCorp, Inc.
As of September 30, 2005, Orion owned a majority interest in one
surgery center and a minority interest as general partner in two additional
centers. Two of the centers are located in Texas and one is located in Ohio. In
limited circumstances, Orion, or its subsidiaries, may also furnish anesthesia
services in support of the activities of the surgery centers. The Company's 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. Orion also owns a 41% interest in an open magnetic resonance
imaging ("MRI") center in Ohio, which opened in July 2004. The open MRI center
performs diagnostic procedures using MRI technology. The Company sold its 41%
interest in the open MRI facility and its 51% interest in its Tuscarawas ASC
("Tuscarawas ASC"), each of which are in Ohio, effective as of 12:01 a.m. on
October 1, 2005, and this transaction is described in greater detail in Note 14.
Subsequent Events. In November 2005, the Company decided that, as a result of
ongoing losses at its SurgiCare Memorial Village ASC, it would need to either
find a buyer for the Company's equity interests in SurgiCare Memorial Village or
close the facility. The Company is in the process of identifying any charges
related to selling or closing SurgiCare Memorial Village and will record such
charges, if any, in the Company's financial statements in the period in which
they are determinable.
Integrated Physician Solutions
IPS, a Delaware corporation, was founded in 1996 as a business
development company to provide physician practice management services to general
and subspecialty pediatric practices. IPS commenced its business activities upon
consummation of several medical group business combinations effective January 1,
1999. The Pediatric Physician Alliance ("PPA") division of IPS manages pediatric
medical clinics. As of September 30, 2005, PPA managed ten practice sites,
representing six medical groups in Illinois, Ohio and New Jersey.
F-7
On June 7, 2005, InPhySys, Inc. (f/k/a IntegriMED, Inc.)
("IntegriMED"), a wholly-owned subsidiary of IPS, executed an Asset Purchase
Agreement (the "Agreement") with eClinicalWeb, LLC ("eClinicalWeb") to sell
substantially all of the assets of IntegriMED. The consummation of the
transactions contemplated by the Agreement was deemed to be effective as of
midnight on June 6, 2005. The property sold by IntegriMED to eClinicalWeb
(hereinafter collectively referred to as the "Sold Assets") includes the
machinery, equipment, supplies, materials, computers, software, software
licenses, and other personal property owned by IntegriMED and used exclusively
in the operation of IntegriMED's business, IntegriMED's goodwill and all of the
business conducted under the name "IntegriMED" and "InPhySys", sales and
customer lists, account lists, records, manuals, and telephone numbers used
exclusively in the operation of IntegriMED's business, and all of IntegriMED's
rights and interests in all contracts, open customer purchase orders, quotations
or similar agreements to the extent entered into by IntegriMED or assigned to
IntegriMED. Additionally, eClinicalWeb agreed to assume and to thereafter
perform and pay when due all liabilities related to the Sold Assets but only to
the extent such liabilities arise from and after the Closing Date (as defined
below). eClinicalWeb also agreed to sublease certain space from IPS that was
occupied by employees of IntegriMED as of the Closing Date. As consideration for
the purchase of the Sold Assets, eClinicalWeb issued to IntegriMED the
following: (i) a two percent (2%) ownership interest in eClinicalWeb; and (ii)
$69,033.90, for the payoff of certain leases and purchase of certain software,
via wire transfer at the closing of the transfer and delivery of all documents
and instruments necessary to consummate the transactions contemplated by the
Agreement (the "Closing Date"), which occurred concurrently with the execution
of the Agreement. In addition to the consideration listed above, IntegriMED
retained the following assets related to IntegriMED's business: (i) all cash and
cash equivalents relating to IntegriMED's business as of the Closing Date; (ii)
all accounts receivable relating to IntegriMED's business as of the Closing
Date; and (iii) other assets of IntegriMED not used exclusively in IntegriMED's
business.
On October 31, 2005, IPS executed a Mutual Release and Settlement
Agreement (the "Sutter Settlement") with John Ivan Sutter, M.D., PA ("Dr.
Sutter") to settle disputes as to the existence and enforceability of certain
contractual obligations. This transaction is described in Note 10. Discontinued
Operations and Note 14. Subsequent Events.
Medical Billing Services
MBS is based in Houston, Texas and was incorporated in Texas on October
16, 1985. DCPS is based in Houston, Texas and was organized as a Texas limited
liability company on September 16, 1998. DCPS reorganized as a Texas limited
partnership on August 31, 2003. Orion acquired MBS and DCPS in the DCPS/MBS
Transaction, which is described in Note 3. Acquisition and Restructuring
Transactions. Subsequent to the DCPS/MBS Transaction, DCPS has operated as a
subsidiary of MBS. MBS and DCPS provide practice management, billing and
collection, managed care consulting and coding/reimbursement services to
hospital-based physicians and clinics. Any descriptions of MBS include the
business and operations of DCPS.
Note 2. Going Concern
The accompanying consolidated condensed financial statements have been
prepared in conformity with GAAP, which contemplate the continuation of the
Company as a going concern. The Company incurred substantial operating losses
during 2004 and in the first three quarters of 2005. In addition, the Company
has used substantial amounts of working capital in its operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
The Company has financed its growth and operations primarily through
the issuance of equity securities, secured and/or convertible debt, most
recently by completing a series of acquisition and restructuring transactions
(the "Restructuring"), which occurred in December 2004 and are described in Note
3. Acquisition and Restructuring Transactions, and borrowing from affiliates. In
connection with the closing of these transactions, the Company entered into a
new secured two-year revolving credit facility pursuant to a Loan and Security
Agreement (the "Loan and Security Agreement"), dated December 15, 2004, by and
among Orion, certain of its affiliates and subsidiaries, and Healthcare Business
Credit Corporation ("HBCC"). In connection with entering into this new facility,
Orion also restructured its previously-existing debt facilities, which resulted
in a decrease in aggregate debt owed to DVI Business Credit Corporation and DVI
Financial Services, Inc. (collectively, "DVI") from approximately $10.1 million
to a combined principal amount of approximately $6.5 million, of which
approximately $2.0 million was paid at the Closing.
In addition to the Closing, on March 16, 2005, Brantley Partners IV,
L.P. ("Brantley IV"), an affiliate of Orion, loaned Orion an aggregate of
$1,025,000 (the "First Loan"). On June 1, 2005, the Company executed a
convertible subordinated promissory note in the principal amount of $1,025,000
(the "First Note") payable to Brantley IV to evidence the terms of the First
Loan. The material terms of the First Note are as follows: (i) the First Note is
unsecured; (ii) the First Note is subordinate to the Company's outstanding loan
from HBCC and other indebtedness for monies borrowed, and ranks pari passu with
general unsecured trade liabilities; (iii) principal and interest on the First
Note is due April 19, 2006 (the "First Note Maturity Date"); (iv) the interest
accrues from and after March 16, 2005, at a per annum rate equal to nine percent
(9.0%) and is non-compounding; (v) if an event of default occurs and is
continuing, Brantley IV, by notice to the Company, may declare the principal of
the First Note to be due and immediately payable; and (vi) on or after the First
Note Maturity Date, Brantley IV, at its option, may convert all or a portion of
the outstanding principal and interest due of the First Note into shares of
Class A Common Stock of the Company at a price per share equal to $1.042825 (the
"First Note Conversion Price"). The number of shares of Class A Common Stock
issuable upon conversion of the First Note shall be equal to the number obtained
by dividing (x) the aggregate amount of principal and interest to be converted
by (y) the First Note Conversion Price (as defined above); provided, however,
the number of shares issuable upon conversion of the First Note shall not exceed
the lesser of: (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3% of
the then outstanding Class A Common Stock. On April 19, 2005, Brantley IV loaned
the Company an additional $225,000 (the "Second Loan"). On June 1, 2005, the
F-8
Company executed a convertible subordinated promissory note in the principal
amount of $225,000 (the "Second Note") payable to Brantley IV to evidence the
terms of the Second Loan. The material terms of the Second Note are as follows:
(i) the Second Note is unsecured; (ii) the Second Note is subordinate to the
Company's outstanding loan from HBCC and other indebtedness for monies borrowed,
and ranks pari passu with general unsecured trade liabilities; (iii) principal
and interest on the Second Note is due April 19, 2006 (the "Second Note Maturity
Date"); (iv) the interest accrues from and after April 19, 2005, at a per annum
rate equal to nine percent (9.0%) and is non-compounding; (v) if an event of
default occurs and is continuing, Brantley IV, by notice to the Company, may
declare the principal of the Second Note to be due and immediately payable; and
(vi) on or after the Second Note Maturity Date, Brantley IV, at its option, may
convert all or a portion of the outstanding principal and interest due of the
Second Note into shares of Class A Common Stock of the Company at a price per
share equal to $1.042825 (the "Second Note Conversion Price"). The number of
shares of Class A Common Stock issuable upon conversion of the Second Note shall
be equal to the number obtained by dividing (x) the aggregate amount of
principal and interest to be converted by (y) the Second Note Conversion Price
(as defined above); provided, however, the number of shares issuable upon
conversion of the Second Note shall not exceed the lesser of: (i) 254,597 shares
of Class A Common Stock, or (ii) 3.6% of the then outstanding Class A Common
Stock. Paul H. Cascio, the Chairman of the board of directors of Orion, and
Michael J. Finn, a director of Orion, are affiliates of Brantley IV.
Additionally, in connection with the First Loan and the Second Loan, the Company
entered into a First Amendment to the Loan and Security Agreement (the "First
Amendment"), dated March 22, 2005, with certain of the Company's affiliates and
subsidiaries, and HBCC whereby its $4,000,000 secured two-year revolving credit
facility has been reduced by the amount of the loans from Brantley IV to
$2,750,000. As a result of the First Amendment, the Brantley IV Guaranty, which
is discussed in Note 3. Acquisition and Restructuring Transactions, was amended
by the Amended and Restated Guaranty Agreement (the "Amended Brantley IV
Guaranty"), dated March 22, 2005, which reduces the deficiency guaranty provided
by Brantley IV by the amount of the First Loan to $2,247,727. Also as a result
of the First Amendment, the Brantley Capital Guaranty, which is discussed in
Note 3. Acquisition and Restructuring Transactions, was amended by the Amended
and Restated Guaranty Agreement (the "Amended Brantley Capital Guaranty"), dated
March 22, 2005, which reduces the deficiency guaranty provided by Brantley
Capital by the amount of the Second Loan to $502,273.
As part of the Loan and Security Agreement, the Company is required to
comply with certain financial covenants, measured on a quarterly basis. The
financial covenants include maintaining a required debt service coverage ratio
and meeting a minimum operating income level for the surgery and diagnostic
centers before corporate overhead allocations. As of and for the nine months
ended September 30, 2005, the Company was out of compliance with both of these
financial covenants and has notified the lender as such. Under the terms of the
Loan and Security Agreement, failure to meet the required financial covenants
constitutes an event of default. Under an event of default, the lender may (i)
accelerate and declare the obligations under the credit facility to be
immediately due and payable; (ii) withhold or cease to make advances under the
credit facility; (iii) terminate the credit facility; (iv) take possession of
the collateral pledged as part of the Loan and Security Agreement; (v) reduce or
modify the revolving loan commitment; and/or (vi) take necessary action under
the Guaranties. The loan is secured by the Company's healthcare accounts
receivable. As of November 9, 2005, the outstanding principal under the
revolving credit facility was $1,890,247. The full amount of the loan as of
September 30, 2005 is recorded as a current liability. The Company is currently
in negotiations with the lender and is seeking to obtain a waiver of the
financial covenants as of and for the nine months ended September 30, 2005. In
the event the lender declares the obligations under the credit facility to be
immediately due and payable or exercises its other rights described above, the
Company would not be able to meet its obligations to the lender or its other
creditors. As a result, such action would have a material adverse effect on the
Company and on its ability to continue as a going concern.
As of September 30, 2005, the Company's existing credit facility with
HBCC has limited availability to provide for working capital shortages. Although
the Company believes that it will generate cash flows from operations in the
future, there is substantial doubt as to whether it will be able to fund its
operations solely from its cash flows. On April 28, 2005, the Company announced
the initiation of a strategic plan designed to accelerate the Company's growth
and enhance its future earnings potential. The plan focuses on the Company's
strengths, which include providing billing, collections and complementary
business management services to physician practices in addition to the provision
of development and management services to ASCs. A fundamental component of the
Company's plan is the selective consideration of accretive acquisition
opportunities in these core business sectors. In addition, the Company will
cease investment in business lines that do not complement the Company's
strategic plans and will redirect financial resources and Company personnel to
areas that management believes enhances long-term growth potential. On June 7,
2005, as described in Note 1. General - Description of Business, IPS completed
the sale of substantially all of the assets of IntegriMED. Additionally, on
October 1, 2005, the Company completed the sale of its interests in the
Tuscarawas ASC and MRI facility in Dover, Ohio. These transactions are described
in greater detail in Note 14. Subsequent Events. In November 2005, the Company
decided that, as a result of ongoing losses at its SurgiCare Memorial Village
ASC, it would need to either find a buyer for the Company's equity interests in
SurgiCare Memorial Village or close the facility. The Company is in the process
of identifying any charges related to selling or closing SurgiCare Memorial
Village and will record such charges, if any, in the Company's financial
statements in the period in which they are determinable. The Company
anticipates a substantial reduction of annual expenses attributable to a
combination of these initiatives and the consolidation of corporate functions
duplicated at the Company's Houston and Atlanta facilities.
The Company intends to continue to manage its use of cash. However, the
Company's business is still faced with many challenges. If cash flows from
operations and borrowings are not sufficient to fund the Company's cash
requirements, the Company may be required to further reduce its operations
and/or seek additional public or private equity financing or financing from
other sources or consider other strategic alternatives, including possible
additional divestitures of specific assets or lines of business. There can be no
assurances that additional financing or strategic alternatives will be
available, or that, if available, the financing or strategic alternatives will
be obtainable on terms acceptable to the Company or that any additional
financing would not be substantially dilutive to the Company's existing
stockholders.
F-9
Note 3. Acquisition and Restructuring Transactions
On November 18, 2003, the Company entered into an agreement and plan of
merger with IPS, which was amended and restated on February 9, 2004, and further
amended on July 16, 2004 and on September 9, 2004 (the "IPS Merger Agreement"),
relating to the Company's acquisition of IPS (the "IPS Merger"). On February 9,
2004, the Company entered into an agreement and plan of merger with DCPS and
MBS, which was amended and restated on July 16, 2004, and further amended on
September 9, 2004 and on December 15, 2004 (the "DCPS/MBS Merger Agreement"),
relating to the Company's acquisition of MBS and DCPS (the "DCPS/MBS
Transaction" and together with the IPS Merger, the "Acquisitions"). The Company
completed the Acquisitions on December 15, 2004. As a result of the
Acquisitions, IPS, MBS and DCPS became wholly-owned subsidiaries of the Company.
On December 15, 2004, and simultaneous with the consummation of the
Acquisitions, the Company consummated the Restructuring, which included
issuances of new equity securities for cash and contribution of outstanding
debt, and the restructuring of its debt facilities. The Company also completed a
one-for-ten reverse stock split (the "Reverse Stock Split"), created three new
classes of common stock (Class A, Class B and Class C Common Stock) and changed
its name. The Company's common stock was converted into shares of Orion's Class
A Common Stock (the "Reclassification").
Also on December 15, 2004, the Company issued 11,482,261 shares of its
Class B Common Stock (the "Investment Transaction") to various investors for
$13,200,000 in cash plus cash in the amount of $128,350, which amount equaled
the accrued but unpaid interest immediately prior to the Restructuring owed to a
subsidiary of Brantley IV by SurgiCare and IPS on amounts advanced prior to
October 24, 2003. At the closing of the transactions, Orion used $5,908,761 to
pay off the debt owed to a subsidiary of Brantley IV. The Company also granted
to Brantley IV the right to purchase shares of Class A Common Stock for cash in
an amount up to an aggregate of $3,000,000 (the "Purchase Right"). Brantley IV
may exercise the Purchase Right at any time after December 15, 2004. Each
additional investment will be: (i) subject to the approval of a majority of the
members of the board of directors of the Company that are not affiliated with
Brantley IV, (ii) consummated on a date mutually agreed by the Company and
Brantley IV, and (iii) accomplished with documentation reasonably satisfactory
to the Company and Brantley IV. Pursuant to the terms of the Purchase Right, the
purchase price per share of the Class A Common Stock will be equal to the lesser
of (a) $1.25, and (b) 70% multiplied by the average of the daily average of the
high and low price per share of the Class A Common Stock on the American Stock
Exchange ("AMEX") or a similar system on which the Class A Common Stock shall be
listed at the time, for the twenty trading days immediately preceding the date
of the closing of the exercise of the Purchase Right.
Additionally, the Company used $3,683,492 of the proceeds of the
Investment Transaction to repay a portion of the indebtedness to unaffiliated
third parties and restructured additional existing indebtedness.
The IPS Merger has been treated as a "reverse acquisition" for
accounting purposes. Statement of Financial Accounting Standards ("SFAS") No.
141 requires that, in a business combination effected through the issuance of
shares or other equity interests, as in the case of the IPS Merger, a
determination be made as to which entity is the accounting acquirer. This
determination is principally based on the relative voting rights in the combined
entity held by existing stockholders of each of the combining companies, the
composition of the board of directors of the combined entity, and the expected
composition of the executive management of the combined entity. Based on an
assessment of the relevant facts and circumstances existing with respect to the
IPS Merger, it has been determined that IPS is the acquirer for accounting
purposes, even though IPS is a subsidiary of Orion.
Accordingly, the IPS Merger has been treated as a reverse acquisition,
meaning that the purchase price, comprised of the fair value of the outstanding
shares of the Company prior to the transaction, plus applicable transaction
costs, has been allocated to the fair value of the Company's tangible and
intangible assets and liabilities prior to the transaction, with any excess
being considered goodwill. IPS is being treated as the continuing reporting
entity, and thus IPS's historical results have become those of the combined
company. Orion's results include the results of IPS for the three months and
nine months ended September 30, 2004 and the results of IPS, the Company's
surgery and diagnostic center business and MBS (which includes DCPS) for the
three months and nine months ended September 30, 2005.
New Line of Credit
On December 15, 2004, Orion also entered into a new secured two-year
revolving credit facility pursuant to the Loan and Security Agreement. Under
this facility, initially up to $4,000,000 of loans could be made available to
Orion, subject to a borrowing base. As discussed below, the amount available
under this credit facility has been reduced. Orion borrowed $1,600,000 under
this facility concurrently with the closing of the Restructuring. The interest
rate under this facility is the prime rate plus 3%. Upon an event of default,
HBCC can accelerate the loans or call the Guaranties described below. In
connection with entering into this new facility, Orion also restructured its
previously-existing debt facilities, which resulted in a decrease in aggregate
debt owed to DVI from approximately $10.1 million to a combined principal amount
of approximately $6.5 million, of which approximately $2.0 million was paid at
the Closing.
Pursuant to a Guaranty Agreement (the "Brantley IV Guaranty"), dated as
of December 15, 2004, provided by Brantley IV to HBCC, Brantley IV agreed to
provide a deficiency guaranty in the initial amount of $3,272,727. As discussed
below, the amount of this Brantley IV Guaranty has been reduced. Pursuant to a
Guaranty Agreement (the "Brantley Capital Guaranty"), dated as of December 15,
F-10
2004, provided by Brantley Capital Corporation ("Brantley Capital") to HBCC,
Brantley Capital agreed to provide a deficiency guarantee in the initial amount
of $727,273. As discussed below, the amount of this Brantley Capital Guaranty
has been reduced. In consideration for the Guaranties, Orion issued warrants to
purchase 20,455 shares of Class A Common Stock, at an exercise price of $0.01
per share, to Brantley IV, and issued warrants to purchase 4,545 shares of Class
A Common Stock, at an exercise price of $0.01 per share, to Brantley Capital.
On March 16, 2005, Brantley IV loaned the Company an aggregate of
$1,025,000. On April 19, 2005, Brantley IV loaned the Company an additional
$225,000. (See Note 2. Going Concern.) Additionally, as part of these loan
transactions, the Company entered into the First Amendment, dated March 22,
2005, with HBCC whereby its $4,000,000 secured two-year revolving credit
facility has been reduced by the amount of the loans from Brantley IV to
$2,750,000. As a result of the First Amendment, the Brantley IV Guaranty was
amended by the Amended Brantley IV Guaranty, which reduces the deficiency
guaranty provided by Brantley IV by the amount of the First Loan to $2,247,727.
Also as a result of the First Amendment, the Brantley Capital Guaranty was
amended by the Amended Brantley Capital Guaranty, which reduces the deficiency
guaranty provided by Brantley Capital by the amount of the Second Loan to
$502,273.
Note 4. Revenue Recognition
The Company's surgery and diagnostic center business recognizes revenue
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 ASC'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 and there have been no material
settlements with third party payers for the three months and nine months ended
September 30, 2005.
IPS records revenue based on patient services provided by its
affiliated medical groups and for services provided by IntegriMED to its
customers. Net patient service revenue is impacted by billing rates, changes in
current procedural terminology ("CPT") code reimbursement and collection trends.
IPS reviews billing rates at each of its affiliated medical groups on at least
an annual basis and adjusts those rates based on each insurer's current
reimbursement practices. Amounts collected by IPS for treatment by its
affiliated medical groups of patients covered by Medicaid and other contractual
reimbursement programs, which may be based on cost of services provided or
predetermined rates, are generally less than the established billing rates of
IPS's affiliated medical groups. IPS estimates the amount of these contractual
allowances and records a reserve against accounts receivable based on historical
collection percentages for each of the affiliated medical groups, which include
various payer categories. When payments are received, the contractual adjustment
is written off against the established reserve for contractual allowances. The
historical collection percentages are adjusted quarterly based on actual
payments received, with any differences charged against net revenue for the
quarter. Additionally, IPS tracks cash collection percentages for each medical
group on a monthly basis, setting quarterly and annual goals for cash
collections, bad debt write-offs and aging of accounts receivable. IPS is not
aware of any material claims, disputes or unsettled matters with third party
payers and there have been no material settlements with third party payers for
the three months and nine months ended September 30, 2005 and 2004,
respectively.
MBS earns revenues based on the collection of MBS's customers'
receivables. Revenues are recognized during the period in which collections were
received.
Note 5. Use of Estimates
The preparation of financial statements in conformity with GAAP
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. While management believes
current estimates are reasonable and appropriate, actual results could differ
from those estimates.
Note 6. Segments and Related Information
In accordance with Statement of Financial Accounting Standards ("SFAS")
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has determined that it has two reportable segments as
of and for the three and nine months ended September 30, 2005 - PPA and MBS, and
one reportable segment as of and for the three and nine months ended September
30, 2004 - PPA. The reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology, operational support and marketing
strategies. The Company's reportable segments consist of: (i) PPA, the pediatric
medical groups that provide patient care operating under management services
agreements ("MSAs"); and (ii) MBS, which provides practice management, billing
and collection, managed care consulting and coding/reimbursement services to
hospital-based physicians and clinics. Management chose to aggregate the MSAs
into a single operating segment consistent with the objective and basic
principles of SFAS No. 131 based on similar economic characteristics, including
the nature of the products and services, the type of customer for their
services, the methods used to provide their services and in consideration of the
regulatory environment under Medicare and the Health Insurance Portability and
Accountability Act ("HIPAA").
F-11
The following table summarizes key financial information, by reportable
segment, as of and for the three months ended September 30, 2005 and 2004,
respectively.
For the Three Months Ended September 30, 2005
---------------------------------------------
PPA MBS Total
------------- ------------ -----------------
Net operating revenues $4,720,121 $2,491,109 $7,211,230
Income from continuing operations 271,410 150,838 422,248
Depreciation and amortization (including
charge for impairment of intangible assets) 107,748 285,180 392,928
Total assets 9,792,125 9,930,670 19,722,795
For the Three Months Ended September 30, 2004
---------------------------------------------
PPA MBS Total
------------- ------------ -----------------
Net operating revenues $4,502,917 $- $4,502,917
Income from continuing operations 364,767 - 364,767
Depreciation and amortization (including
charge for impairment of intangible assets) 21,380 - 21,380
Total assets 10,414,646 - 10,414,646
The following table provides a reconciliation of the key financial
information by reportable segment to the consolidated totals presented in
Orion's consolidated condensed balance sheets and statements of operations as of
and for the three months ended September 30, 2005 and 2004, respectively.
Three Months Ended
September 30,
2005 2004
--------------- ---------------
Net operating revenues:
Total net operating revenues for reportable
segments $7,211,230 $4,502,917
Corporate revenue 145,975 6,946
--------------- ---------------
Total consolidated net operating revenues $7,357,205 $4,509,863
=============== ===============
Loss from continuing operations:
Total income from continuing operations for
reportable segments $422,248 $364,767
Charge for impairment of intangible assets (3,461,351) -
Corporate overhead (1,839,491) (572,081)
Elimination of intercompany transactions (359,801) (364,767)
--------------- ---------------
Total consolidated loss from continuing
operations $(5,238,395) $(572,081)
=============== ===============
Depreciation and amortization (including charge
for impairment of intangible assets):
Total depreciation and amortization for
reportable segments $392,928 $21,380
Charge for impairment of intangible assets 3,461,351 -
Corporate depreciation and amortization 215,616 109,037
--------------- ---------------
Total consolidated depreciation and
amortization $4,069,895 $130,417
=============== ===============
Total assets:
Total assets for reportable segments $19,722,795 $10,414,646
Corporate assets 8,425,867 643,534
Assets held for sale 2,039,621 -
--------------- ---------------
Total consolidated assets $30,188,283 $11,058,180
=============== ===============
The following table summarizes key financial information, by reportable
segment, as of and for the nine months ended September 30, 2005 and 2004,
respectively.
For the Nine Months Ended September 30, 2005
---------------------------------------------
PPA MBS Total
------------- ------------ -----------------
Net operating revenues $14,766,113 $7,684,641 $22,450,754
Income from continuing operations 813,922 613,737 1,427,659
Depreciation and amortization (including
charge for impairment of intangible assets) 352,758 858,062 1,210,820
Total assets 9,792,125 9,930,670 19,722,795
For the Nine Months Ended September 30, 2004
---------------------------------------------
PPA MBS Total
------------- ------------ -----------------
Net operating revenues $12,558,896 $- $12,558,896
Income from continuing operations 925,838 - 925,838
Depreciation and amortization (including
charge for impairment of intangible assets) 65,853 - 65,853
Total assets 10,414,646 - 10,414,646
The following table provides a reconciliation of the key financial
information by reportable segment to the consolidated totals presented in
Orion's consolidated condensed balance sheets and statements of operations as of
and for the nine months ended September 30, 2005 and 2004, respectively.
Nine Months Ended September 30,
2005 2004
--------------- ---------------
Net operating revenues:
Total net operating revenues for reportable
segments $22,450,754 $12,558,896
Corporate revenue 405,970 26,179
--------------- ---------------
Total consolidated net operating revenues $22,856,724 $12,585,075
=============== ===============
Loss from continuing operations:
Total income from continuing operations for
reportable segments $1,427,659 $925,838
Charge for impairment of intangible assets (9,824,200) -
Corporate overhead (4,723,378) (1,856,293)
Elimination of intercompany transactions (1,150,356) (925,838)
--------------- ---------------
Total consolidated loss from continuing
operations $(14,270,275) $(1,856,293)
=============== ===============
Depreciation and amortization (including charge for
impairment of intangible assets):
Total depreciation and amortization for
reportable segments $1,210,820 $65,853
Charge for impairment of intangible assets 9,824,200 -
Corporate depreciation and amortization 1,124,925 326,047
--------------- ---------------
Total consolidated depreciation and
amortization $12,159,945 $391,900
=============== ===============
Total assets:
Total assets for reportable segments $19,722,795 $10,414,646
Corporate assets 8,425,867 643,534
Assets held for sale 2,039,621 -
--------------- ---------------
Total consolidated assets $30,188,283 $11,058,180
=============== ===============
Note 7. Goodwill and Intangible Assets
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. In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 eliminates pooling-of-interest accounting
and requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method. SFAS No. 142 eliminates the
amortization of goodwill and certain other intangible assets and requires the
Company to evaluate goodwill for impairment on an annual basis by applying a
fair value test. SFAS No. 142 also requires that an identifiable intangible
asset that is determined to have an indefinite useful economic life not be
amortized, but separately tested for impairment using a fair value-based
approach at least annually.
On June 13, 2005, the Company announced that it had accepted an offer
to purchase its interests in the Tuscarawas ASC and the Tuscarawas open MRI
facility in Dover, Ohio. In preparation for this pending transaction, the
Company tested the identifiable intangible assets and goodwill related to the
surgery center business using the present value of cash flows method as of June
30, 2005. Based on the pending sales transaction involving the Tuscarawas ASC
and Tuscarawas open MRI facility, as well as the uncertainty of future cash
flows related to the Company's surgery center business, the Company recorded
a charge for impairment of intangible assets of $6,362,849 for the quarter
ended June 30, 2005.
In November 2005, the Company decided that, as a result of ongoing
losses at its SurgiCare Memorial Village ASC, it would need to either find a
buyer for the Company's equity interests in SurgiCare Memorial Village or close
the facility. In preparation for this pending transaction, the Company tested
the identifiable intangible assets and goodwill related to the surgery center
business using the present value of cash flows method. As a result of the
decision to sell or close SurgiCare Memorial Village, as well as the uncertainty
of cash flows related to the Company's surgery center business, the Company
recorded a charge for impairment of intangible assets of $3,461,351 for the
three months ended September 30, 2005. The Company is in the process of
identifying any charges related to selling or closing SurgiCare Memorial Village
and will record such charges, if any, in the Company's financial statements in
the period in which they are determinable.
Note 8. Earnings per Share
Basic earnings per share is calculated on the basis of the weighted
average number of Class A Common Stock 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, conversion of debt and conversion
of Class B and Class C Common Stock.
F-12
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Net loss $ (6,082,287) $ (896,426) $ (16,110,705) $ (2,603,273)
Weighted average common shares outstanding - basic
10,300,977 8,602,149 9,889,278 8,602,149
Dilutive stock options and warrants (a) (a) (a) (a)
Convertible notes (b) (b) (b) (b)
Class B Common Stock (c) (c) (c) (c)
Class C Common Stock (d) (d) (d) (d)
Weighted average common shares outstanding
- diluted 10,300,977 8,602,149 9,889,278 8,602,149
Net loss per share from continuing operations $ (0.509) $ (0.067) $ (1.443) $ (0.216)
Net loss per share from
discontinued operations
$ (0.082) $ (0.038) $ (0.186) $ (0.087)
Net loss per share - basic $ (0.591) $ (0.105) $ (1.629) $ (0.303)
Net loss per share - diluted $ (0.591) $ (0.105) $ (1.629) $ (0.303)
(a) 1,786,841 and 803,317 options and warrants were outstanding at
September 30, 2005 and 2004, respectively. The information for
2004 relates to SurgiCare prior to the acquisition and
restructuring transactions.
(b) $50,000 and $320,000 of notes were convertible into Class A Common
Stock as of September 30, 2005 and 2004, respectively. The
conversion price was equal to $3.50 per share until January 31,
2004. Subsequent to that date, the conversion price is equal to
the lower of $2.50 or 75% of the average closing price for the 20
trading days immediately prior to the conversion date. The
information for 2004 relates to SurgiCare prior to the acquisition
and restructuring transactions.
(c) 10,642,306 shares of Class B Common Stock were outstanding at
September 30, 2005.
(d) 1,462,120 shares of Class C Common Stock were outstanding at
September 30, 2005.
Note 9. Preferred Stock
On December 15, 2004, as part of the acquisition and restructuring
transactions described in Note 3. Acquisition and Restructuring Transactions,
the Company redesignated its common stock as Class A Common Stock and created
two new classes of common stock and one new class of preferred stock. The
Company is authorized to issue 20,000,000 shares of preferred stock, par value
$0.001 (the "Preferred Stock"). Subject to the limitations prescribed by law and
the provisions of the Amended and Restated Certificate of Incorporation of the
Company, the board of directors is authorized to issue the Preferred Stock from
time to time in one or more series, each of such series to have such number of
shares, voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights, and such qualifications, limitations or restrictions thereof, as shall
be determined by the board of directors in a resolution or resolutions providing
for the issue of such Preferred Stock. Subject to the powers and rights of any
Preferred Stock, including any series thereof, having any preference or priority
over, or rights superior to, the common stock, the holders of the common stock
shall have and possess all powers and voting and other rights pertaining to the
stock of the Company.
Also on December 15, 2004, all of IPS's outstanding redeemable
convertible preferred stock, including accrued and unpaid dividends, was
converted to common stock and exchanged for shares of Orion's Class A Common
Stock.
Note 10. Discontinued Operations
On September 19, 2003, IPS entered into a Mutual Release and Settlement
Agreement (the "Settlement Agreement") with Dr. Jane Kao and PediApex Heart
Center for Children (the "Heart Center") to settle disputes as to the existence
and enforceability of certain contractual obligations. As part of the Settlement
Agreement, Dr. Kao, the Heart Center and IPS agreed that, until December 31,
2004, each party would conduct their operations under the terms established by
the MSA between IPS and the Heart Center. Additionally, among other provisions,
after December 31, 2004, Dr. Kao and the Heart Center were released from any
further obligation to IPS arising from any previous agreement, and Dr. Kao
purchased the accounts receivable related to the Heart Center and IPS terminated
its ownership and MSA with the Heart Center. The operating results of the Heart
Center were not included in the consolidated statements of operations of IPS
after September 19, 2003 because this medical group did not meet the criteria
for consolidation after that date in accordance with Emerging Issues Task Force
("EITF") 97-2. The operations of this component are reflected in the Company's
consolidated statements of operations as 'loss from operations of discontinued
components' for the three months and nine months ended September 30, 2004. IPS
recorded a loss on disposal of this discontinued component of $12,366 for the
year ended December 31, 2004. There were no operations for this component in
Company's financial statements in 2005.
The following table contains selected financial statement data related
to the Heart Center as of and for the three and nine months ended September 30,
2004:
F-13
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
Income statement data:
Net operating revenues $ 634,689 $ 1,860,396
Direct cost of revenues 369,598 873,249
Operating expenses 209,729 866,984
------------------------- -----------------------
Net income $ 55,362 $ 120,163
------------------------- -----------------------
Balance sheet data:
Current assets $ 210,836 $ 210,836
Other assets 92,510 92,510
------------------------- -----------------------
Total assets $ 303,346 $ 303,346
------------------------- -----------------------
Current liabilities $ 703,877 $ 703,877
Other liabilities -- --
------------------------- -----------------------
Total liabilities $ 703,877 $ 703,877
------------------------- -----------------------
As part of the acquisition and restructuring transactions that closed
on December 15, 2004, the Company recorded intangible assets related to the
Restructuring. As of the closing of the Restructuring, the Company's management
expected the case volumes at Bellaire SurgiCare to improve in 2005. However, by
the end of February 2005, it was determined that the expected case volume
increases were not going to be realized. On March 1, 2005, the Company closed
Bellaire SurgiCare and consolidated its operations with the operations of
SurgiCare Memorial Village. The Company tested the identifiable intangible
assets and goodwill related to the surgery and diagnostic center business using
the present value of cash flows method. As a result of the decision to close
Bellaire SurgiCare and the resulting impairment of the joint venture interest
and management contracts related to the surgery centers, the Company recorded a
charge for impairment of intangible assets of $4,090,555 for the year ended
December 31, 2004. The Company also recorded a loss on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $163,050 for the quarter ended March 31, 2005. There were no
operations for this component in the second or third quarter of 2005.
The following table contains selected financial statement data related
to Bellaire SurgiCare as of and for the three months and nine months ended
September 30, 2005:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
Income statement data:
Net operating revenues $ -- $ 161,679
Direct cost of revenues -- 221,469
Operating expenses -- 128,627
------------------------- ------------------------
Net loss $ -- $ (188,417)
------------------------- ------------------------
Balance sheet data:
Current assets $ -- $ --
Other assets -- --
------------------------- ------------------------
Total assets $ -- $ --
------------------------- ------------------------
Current liabilities $ -- $ --
Other liabilities -- --
------------------------- ------------------------
Total liabilities $ -- $ --
------------------------- ------------------------
On April 1, 2005, IPS entered into a Mutual Release and Settlement
Agreement (the "Settlement") with Dr. Bradley E. Chipps, M.D. and Capital
Allergy and Respiratory Disease Center, a Medical Corporation ("CARDC") to
settle disputes as to the existence and enforceability of certain contractual
obligations. As part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that
CARDC would purchase the assets owned by IPS as shown on the balance sheet on
March 31, 2005 in exchange for termination of the MSA between IPS and CARDC.
Additionally, among other provisions, after April 1, 2005, Dr. Chipps and CARDC
have been released from any further obligation to IPS arising from any previous
agreement. As a result of the Settlement, the Company recorded a charge for
impairment of intangible assets related to CARDC of $704,927 for the year ended
December 31, 2004. The Company also recorded a gain on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $506,625 for the quarter ended March 31, 2005. For the quarter ended
September 30, 2005, the Company reduced the gain on disposal of this
discontinued component by $238,333 as the result of post-settlement adjustments
related to the reconciliation of balance sheet accounts. The operations of this
component are reflected in the Company's consolidated statements of operations
as `loss from operations of discontinued components' for the three months and
nine months ended September 30, 2005 and 2004, respectively. There were no
operations for this component in the Company's financial statements for the
second and third quarter of 2005.
The following table contains selected financial statement data related
to CARDC as of and for the three months and nine months ended September 30, 2005
and 2004, respectively:
F-14
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Income statement data:
Net operating revenues $ -- $ 839,094 $ 848,373 $ 2,518,510
Direct cost of revenues -- 588,741 523,255 1,728,828
Operating expenses -- 211,653 286,418 674,482
--------------------- ----------------------- - ------------------------ -----------------------
Net income $ -- $ 38,700 $ 38,700 $ 115,200
--------------------- ----------------------- - ------------------------ -----------------------
Balance sheet data:
Current assets $ -- $ 229,199 $ -- $ 229,199
Other assets -- 11,421 -- 11,421
--------------------- ----------------------- - ------------------------ -----------------------
Total assets $ -- $ 240,620 $ -- $ 240,620
--------------------- ----------------------- - ------------------------ -----------------------
Current liabilities $ -- $ 332,997 $ -- $ 332,997
Other liabilities -- -- -- --
--------------------- ----------------------- - ------------------------ ------------------------
Total liabilities $ -- $ 332,997 $ -- $ 332,997
--------------------- ----------------------- - ------------------------ ------------------------
On June 7, 2005, as described in Note 1. General - Description of
Business, the Company, via its IPS subsidiary executed an Asset Purchase
Agreement with eClinicalWeb to sell substantially all of the assets of
IntegriMED. As a result of this transaction, the Company recorded a loss on
disposal of this discontinued component of $47,101 for the quarter ended June
30, 2005. The operations of this component are reflected in the Company's
consolidated statements of operations as `loss from operations of discontinued
components' for the three months and nine months ended September 30, 2005 and
2004, respectively. There were no operations for this component in the Company's
financial statements for the third quarter of 2005.
The following table contains selected financial statement data related
to IntegriMED as of and for the three months and nine months ended September 30,
2005 and 2004, respectively:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Income statement data:
Net operating revenues $ -- $ 46,597 $ 191,771 $ 156,461
Direct cost of revenues -- -- -- --
Operating expenses -- 468,364 899,667 1,149,130
----------------------- ----------------------- - ------------------------ -----------------------
Net loss $ -- $ (421,767) $ (707,896) $ (992,669)
----------------------- ----------------------- - ------------------------ -----------------------
Balance sheet data:
Current assets $ -- $ 287,656 $ -- $ 287,656
Other assets -- 72,566 -- 72,566
----------------------- ----------------------- - ------------------------ -----------------------
Total assets $ -- $ 360,222 $ -- $ 360,222
----------------------- ----------------------- - ------------------------ -----------------------
Current liabilities $ -- $ 454,337 $ -- $ 454,337
Other liabilities -- -- -- --
----------------------- ----------------------- - ------------------------ -----------------------
Total liabilities $ -- $ 454,337 $ -- $ 454,337
----------------------- ----------------------- - ------------------------ -----------------------
On June 13, 2005, the Company announced that it had accepted an offer
to purchase its interests in the Tuscarawas ASC and MRI facility in Dover, Ohio.
These transactions, which were deemed to be effective as of 12:01 a.m. on
October 1, 2005, and are described in greater detail in Note 14. Subsequent
Events. As a result of these transactions, as well as the uncertainty of future
cash flows related to the Company's surgery center business, the Company
recorded a charge for impairment of intangible assets of $6,362,849 for the
three months ended June 30, 2005. Pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the assets and liabilities of the
Tuscarawas ASC and Tuscarawas open MRI facility have been reclassified as assets
held for sale and liabilities held for sale on the Company's consolidated
balance sheet as of September 30, 2005. The operations of this component are
reflected in the Company's consolidated statements of operations as `loss from
operations of discontinued components' for the three months and nine months
ended September 30, 2005.
The following table contains selected financial statement data related
to the Tuscarawas ASC and Open MRI as of and for the three months and nine
months ended September 30, 2005:
F-15
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
Income statement data:
Net operating revenues $ 737,355 $ 2,408,156
Direct cost of revenues 383,657 1,102,898
Operating expenses 443,772 1,364,214
------------------------- -----------------------
Net loss $ (90,074) $ (58,956)
------------------------- -----------------------
Balance sheet data:
Cash overdraft $ (45,074) $ (45,074)
Accounts receivable, net 615,293 615,293
Other current assets 70,953 70,953
Property and equipment, net 1,327,073 1,327,073
Other long-term assets 71,376 71,376
------------------------- -----------------------
Total assets held for sale $2,039,621 $2,039,621
------------------------- -----------------------
Accounts payable and accrued expenses $617,186 $617,186
Capital lease obligation 374,256 374,256
Long-term debt 454,056 454,056
------------------------- -----------------------
Total liabilities held for sale $ 1,445,498 $ 1,445,498
------------------------- -----------------------
On October 31, 2005, IPS executed the Sutter Settlement with Dr. Sutter
to settle disputes that had arisen between IPS and Dr. Sutter and to avoid the
risk and expense of litigation. This transaction is described in Note 14.
Subsequent Events. The operations of this component are reflected in the
Company's consolidated statements of operations as `loss from operations of
discontinued components' for the three months and nine months ended September
30, 2005 and 2004, respectively.
The following table contains selected financial statement data related
to Sutter as of and for the three months and nine months ended September 30,
2005 and 2004, respectively:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Income statement data:
Net operating revenues $ 106,151 $ 108,861 $ 322,470 $ 327,340
Direct cost of revenues 54,372 55,595 169,353 164,843
Operating expenses 49,068 49,906 144,696 152,170
--------------------- ----------------------- - -------------------------- -----------------------
Net income $ 2,711 $ 3,360 $ 8,421 $ 10,327
--------------------- ----------------------- - -------------------------- -----------------------
Balance sheet data:
Current assets $ 102,924 $ 96,271 $ 102,924 $ 96,271
Other assets 14,066 14,736 14,066 14,736
--------------------- ----------------------- - -------------------------- -----------------------
Total assets $ 116,990 $ 111,007 $ 116,990 $ 111,007
--------------------- ----------------------- - -------------------------- -----------------------
Current liabilities $ 21,778 $ 10,277 $ 21,778 $ 10,277
Other liabilities -- -- -- --
--------------------- ----------------------- - -------------------------- -----------------------
Total liabilities $ 21,778 $ 10,277 $ 21,778 $ 10,277
--------------------- ----------------------- - -------------------------- -----------------------
In November 2005, the Company decided that, as a result of ongoing
losses at its SurgiCare Memorial Village ASC, it would need to either find a
buyer for the Company's equity interests in SurgiCare Memorial Village or close
the facility. In preparation for this pending transaction, the Company tested
the identifiable intangible assets and goodwill related to the surgery center
business using the present value of cash flows method. As a result of the
decision to sell or close SurgiCare Memorial Village, as well as the uncertainty
of cash flows related to the Company's surgery center business, the Company has
recorded a charge for impairment of intangible assets of $3,461,351 for the
three months ended September 30, 2005. The Company is in the process of
identifying any charges related to selling or closing SurgiCare Memorial Village
and will record such charges, if any, in the Company's financial statements in
the period in which they are determinable. The operations of this component are
reflected in the Company's consolidated statements of operations as `loss from
operations of discontinued components' for the three months and nine months
ended September 30, 2005.
The following table contains selected financial statement data related
to SurgiCare Memorial Village as of and for the three months and nine months
ended September 30, 2005:
F-16
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
Income statement data:
Net operating revenues $ 61,046 $ 1,329,899
Direct cost of revenues 432,739 1,186,019
Operating expenses 384,836 1,134,303
------------------------- ------------------------
Net loss $ (756,529) $ (990,423)
------------------------- ------------------------
Balance sheet data:
Current assets $ 714,255 $ 714,255
Other assets 552,107 552,107
------------------------- ------------------------
Total assets $ 1,266,362 $ 1,266,362
------------------------- ------------------------
Current liabilities $ 940,149 $ 940,149
Other liabilities 52,546 52,546
------------------------- ------------------------
Total liabilities $ 992,695 $ 992,695
------------------------- ------------------------
The following table summarizes the components of loss from operations
of discontinued components:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------------------- ----------------------------
Loss from operations of discontinued components:
------------------------------------------------
Heart Center
Net income $- $55,362 $- $120,163
CARDC
Net income - 38,700 38,700 $115,200
Gain on disposal - 268,292
Bellaire SurgiCare
Net loss - - (188,417) -
Loss on disposal - - (163,050) -
IntegriMED
Net loss - (421,767) (707,896) (992,669)
Loss on disposal - - (47,101) -
Tuscarawas ASC and Open MRI
Net loss (90,074) - (58,956) -
Dr. Sutter
Net income 2,711 3,360 8,421 10,327
SurgiCare Memorial Village
Net loss (756,529) - (990,423) -
---------------------------------------------------------
Total loss from operations of discontinued
components $(843,892) $(324,345) $(1,840,430) $(746,979)
=========================================================
Note 11. Litigation
On October 5, 2004, Orion's predecessor, SurgiCare, was named as a
defendant in a suit entitled Shirley Browne and Bellaire Anesthesia Management
Consultants, Inc. ("BAMC") v. SurgiCare, Inc., Bellaire SurgiCare, Inc., Sherman
Nagler, Jeffrey Penso, and Michael Mineo, in the 152nd Judicial District Court
of Harris County, Texas, Cause No. 2004-55688. The dispute arises out of the for
cause termination of BAMC's exclusive contract to provide anesthesia services to
Bellaire SurgiCare, Inc. Ms. Browne had filed a charge of discrimination with
the EEOC on February 6, 2004, claiming that she was terminated in retaliation
for having previously complained about discriminatory treatment and a hostile
work environment. She claimed she had been discriminated against based on her
sex, female, and retaliated against in violation of Title VII. The Company
denied Ms. Browne's allegations of wrongdoing. The EEOC mediation took place in
May 2004. The mediation was unsuccessful. The EEOC declined to institute an
action and issued a right to sue letter, which prompted the lawsuit. Ms. Browne
filed suit shortly thereafter. The parties have reached a preliminary
settlement, which has been accrued for as of September 30, 2005, on all matters
for dismissal of all claims.
On July 12, 2005, Orion was named as a defendant in a suit entitled
American International Industries, Inc. vs. Orion HealthCorp, Inc., previously
known as SurgiCare, Inc., Keith G. LeBlanc, Paul Cascio, Brantley Capital
Corporation, Brantley Venture Partners III, L.P., and Brantley Venture Partners
IV, L.P. in the 80th Judicial District Court of Harris County, Texas, Cause No.
2005-44326. This case involves allegations that the Company made material and
intentional misrepresentations regarding the financial condition of the parties
to the acquisition and restructuring transactions effected on December 15, 2004
for the purpose of inducing American International Industries, Inc. ("AII") to
convert its SurgiCare Class AA convertible preferred stock ("Class AA Preferred
Stock") into shares of Orion's Class A Common Stock. AII asserts that the value
of its Class A Common Stock of Orion has fallen as a direct result of the
alleged material misrepresentations by the Company. AII is seeking actual
damages of $3,800,000, punitive damages of $3,800,000, and rescission of the
agreement to convert the Class AA Preferred Stock into Class A Common Stock. The
Company and the other defendants filed an Answer denying the allegations set
forth in the Complaint.
F-17
In addition, the Company is involved in various other legal proceedings
and claims arising in the ordinary course of business. The Company's management
believes that the disposition of these additional matters, individually or in
the aggregate, is not expected to have a materially adverse effect on the
Company's 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 the Company's future results of operations or cash flows
in a particular period.
Note 12. Employee 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 SFAS 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 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.
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------ ------------------
Net loss - as reported $ (6,082,287) $ (896,426) $ (16,110,705) $ (2,603,273)
Deduct: Total stock-based
employee compensation (expense
determined under the fair value-
based method for all awards), net
of tax effect (45,831) (26,363) (109,589) (128,883)
--------------------- ----------------------- ------------------------ -----------------------
Net loss - pro forma $ (6,128,118) $ (922,789) $ (16,220,294) $ (2,732,156)
===================== ======================= ======================== =======================
Net loss per share:
Basic - as reported $ (0.591) $ (0.104) $ (1.629) $ (0.303)
Basic - pro forma $ (0.595) $ (0.107) $ (1.640) $ (0.318)
Diluted - as reported $ (0.591) $ (0.104) $ (1.629) $ (0.303)
Diluted - pro forma $ (0.595) $ (0.107) $ (1.640) $ (0.318)
On June 17, 2005, the Company granted 1,357,000 stock options to
certain employees, officers, directors and former directors of the Company. In
the third quarter of 2005, 360,000 stock options to certain employees were
cancelled as a result of staff reductions related to the consolidation of
corporate functions currently duplicated at the Company's Houston and Atlanta
facilities. No options were granted to employees for the first nine months of
2004. The information for 2004 relates to SurgiCare prior to the acquisition and
restructuring transactions.
F-18
Note 13. Long-Term Debt and Lines of Credit
Following is a summary of the Company's long-term debt and lines of
credit as of September 30, 2005 and December 31, 2004, respectively.
As of
September December
30, 2005 31, 2004
----------- -----------
Promissory note due to sellers of MBS, bearing interest at 8%, interest payable monthly or on
demand, matures December 15, 2007 $1,000,000 $1,000,000
Working capital loan due to sellers of MBS, non-interest bearing, due on demand 299,545 383,112
Term loan with a financial institution, non-interest bearing, matures November 15, 2010 3,114,539 3,135,853
Revolving line of credit with a financial institution, bearing interest at 6.5%, interest payable
monthly or on demand, $500,000 matures December 2005 and $287,650 matures June 2006 777,964 787,650
$2,750,000 revolving line of credit, bearing interest at prime (6.75% at September 30, 2005) plus
3%, interest payable monthly, matures December 14, 2006 2,260,601 1,316,937
Convertible notes, bearing interest at 18%, interest payable monthly, matured October 2004 50,000 320,000
Note payable due to a related party, bearing interest at 6%, interest payable monthly, matures
November 24, 2005 22,569 50,000
Insurance financing note payable, bearing interest at 5.25%, interest payable monthly, matures
January 2006 (8,449) 7,621
Convertible promissory notes due to a related party, bearing interest at 9%, matures April 19,
2006 1,250,000 -
----------- -----------
Total $8,766,769 $7,001,173
Less: current portion (4,889,356) (2,762,334)
----------- -----------
Total long-term debt $3,877,413 $4,238,839
=========== ===========
Note 14. Subsequent Events
On June 13, 2005, the Company announced that it had accepted an offer
to purchase its interests in the Tuscarawas ASC and the Tuscarawas open MRI
facility in Dover, Ohio. On September 30, 2005, Orion executed a Purchase
Agreement (the "TASC Agreement") by and among Tuscarawas Ambulatory Surgery
Center, L.L.C. ("TASC"), each of the individuals holding a minority equity
interest in TASC (the "TASC Selling Investors" and together with Orion, the
"TASC Sellers") and Union Hospital ("Union"). The consummation of the
transactions contemplated by the TASC Agreement (the "TASC Closing") occurred
concurrently with the execution of the TASC Agreement, as amended by the Closing
Distribution Agreement, which was deemed to be effective as of 12:01 a.m. on
October 1, 2005 (the "TASC Closing Date").
Prior to the execution of the TASC Agreement, the TASC Sellers owned
units in TASC, which is organized as an Ohio limited liability corporation.
Under the TASC Agreement, the TASC Selling Investors agreed to sell 19.5
ownership units (the "TASC Units") to Union and Orion agreed to sell 54 TASC
Units, which represents 100% of Orion's equity interests in TASC, to Union, such
that upon the TASC Closing Date, Union would own 70% of the TASC Units.
As consideration for the purchase of these TASC Units, Union paid a
price of $12,666.67 per TASC Unit for a total purchase price of $950,000. The
purchase price, less $82,632.47 in closing costs, was paid to the TASC Sellers
as follows on the TASC Closing Date:
(i) Payment to Orion of $208,823.73 in immediately available funds;
(ii) Retention by Orion of the $250,000 escrow closing deposit previously
paid by Union;
(iii) As a portion of the single note payable from Union to Orion due on or
before March 30, 2006 in the gross amount of $530,547.37 (the
"Note")[which relates to all three transactions described herein], the
amount of $196,638.75; and
(iv) Payment of 100% of the net purchase price to the TASC Selling
Investors (collectively, $217,909.11), such amount to be by cashier's
or certified check.
Additionally, as part of the TASC Agreement, Orion executed a
management services agreement (the "TASC MSA) with TASC for a period of two
years from the Closing Date. The terms of the TASC MSA are substantially the
same as those of the management services agreement under which Orion performed
management services prior to the execution of the TASC Agreement.
On September 30, 2005 and concurrent with the execution of the TASC
Agreement, Union and TASC Anesthesia, L.L.C. ("TASC Anesthesia"), an Ohio
limited liability company whose sole member is TASC, executed an Asset Purchase
Agreement (the "TASC Anesthesia Agreement") to purchase certain assets of TASC
Anesthesia for the purchase price of $77,524.00, payable to the TASC Sellers on
a pro rata basis, determined by the TASC Units that were owned by each TASC
Seller immediately prior to the execution of the TASC Agreement. The
consummation of the transactions contemplated by the TASC Anesthesia Agreement
(the "TASC Anesthesia Closing") occurred concurrently with the execution of the
TASC Anesthesia Agreement, as amended by the Closing Distribution Agreement,
which was deemed to be effective as of 12:01 a.m. on October 1, 2005 (the "TASC
Anesthesia Closing Date"). The consideration for the TASC Anesthesia Agreement
was paid to the TASC and then distributed to the TASC Sellers as follows as of
the TASC Anesthesia Closing Date:
(i) Payment to Orion of $27,908.64 in immediately available funds;
(ii) As a portion of the Note, the amount of $11,960.85; and
(iii) Payment of 100% of the purchase price to the TASC Selling Investors
(collectively, $37,986.76), such amount to be by cashier's or
certified check.
On September 30, 2005, Orion executed a Purchase Agreement (the "TOM
Agreement") by and among Tuscarawas Open MRI, L.P. ("TOM"), each of the
individuals holding a minority equity interest in TOM (the "TOM Selling
Investors" and together with Orion, the "TOM Sellers") and Union. The
consummation of the transactions contemplated by the TOM Agreement (the "TOM
Closing") occurred concurrently with the execution of the TOM Agreement, as
amended by the Closing Distribution Agreement, which was deemed to be effective
as of 12:01 a.m. on October 1, 2005 (the "TOM Closing Date").
Prior to the execution of the TOM Agreement, the TOM Sellers owned
general or limited partnership interests in TOM (together, the "Interests"),
which is organized as an Ohio limited partnership. Under the TOM Agreement, the
TOM Selling Investors agreed to sell 29% of the Interests (the "TOM Interests")
to Union and Orion agreed to sell 41% of the TOM Interests, which represents
100% of Orion's equity interests in TOM, to Union, such that upon the TOM
Closing Date, Union will own 70% of the TOM Interests.
F-19
As consideration for the purchase of these TOM Interests, Union paid a
price of $26,640.34 per TOM Interest for a total purchase price of
$2,188,237.35. The purchase price, less $82,632.47 in closing costs, was paid to
the TOM Sellers as follows as of the TOM Closing Date:
(i) Payment to Orion of $486,426.85 in immediately available funds;
(ii) Retention by Orion of the $250,000 escrow closing deposit previously
paid by Union;
(iii) As a portion of the Note, the amount of $321,947.77; and
(iv) Payment of 100% of the net purchase price to the TASC Selling
Investors (collectively, $1,047,230.43), such amount to be by
cashier's or certified check.
Additionally, as part of the TOM Agreement, Orion executed a management
services agreement (the "TOM MSA") with TOM for a period of two years from the
Closing Date. The terms of the TOM MSA are substantially the same as those of
the management services agreement under which Orion performed management
services prior to the execution of the TOM Agreement.
On October 31, 2005, IPS executed the Sutter Settlement with Dr. Sutter
to settle disputes that had arisen between IPS and Dr. Sutter and to avoid the
risk and expense of litigation. As part of the Sutter Settlement, Dr. Sutter and
IPS agreed that Dr. Sutter would purchase the assets owned by IPS as shown on
the balance sheet on October 31, 2005 in exchange for termination of the MSA.
Additionally, among other provisions, after October 31, 2005, Dr. Sutter has
been released from any further obligation to IPS arising from any previous
agreement.
In November 2005, the Company decided that, as a result of ongoing
losses at its SurgiCare Memorial Village ASC, it would need to either find a
buyer for the Company's equity interests in SurgiCare Memorial Village or close
the facility. The Company is in the process of identifying any charges related
to selling or closing SurgiCare Memorial Village and will record such charges,
if any, in the Company's financial statements in the period in which they are
determinable.
F-20
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
------------------ ------------------------------------------------------------------------------------------------------------
Exhibit 2.1 Asset Purchase Agreement, dated as of June 6, 2005, by and among InPhySys, Inc. (f/k/a IntegriMED, Inc.)
and eClinicalWeb, LLC (Incorporated by reference to Exhibit 2.1 filed with the Company's Current Report on
Form 8-K filed on June 13, 2005)
Exhibit 2.2 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Ambulatory Surgery Center,
L.L.C., Orion HealthCorp, Inc., each of the individuals holding a minority equity interest in Tuscarawas
Ambulatory Surgery Center, L.L.C., and Union Hospital (Incorporated by reference to Exhibit 2.1 filed with
the Company's Current Report on Form 8-K filed on October 7, 2005)
Exhibit 2.3 Asset Purchase Agreement, dated as of September 30, 2005, by and between Union Hospital and TASC
Anesthesia, L.L.C. (Incorporated by reference to Exhibit 2.2 filed with the Company's Current Report on
Form 8-K filed on October 7, 2005)
Exhibit 2.4 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Open MRI, L.P., Orion
HealthCorp, Inc each of the individuals holding a minority equity interest in Tuscarawas Open MRI, L.P.,
and Union Hospital (Incorporated by reference to Exhibit 2.3 filed with the Company's Current Report on
Form 8-K filed on October 7, 2005)
Exhibit 10.1 First Amendment to Loan and Security Agreement, dated as of March 22, 2005, by and among Orion HealthCorp,
Inc., certain affiliates and subsidiaries of Orion HealthCorp, Inc., and Healthcare Business Credit
Corporation (Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form
10-QSB filed on May 13, 2005)
Exhibit 10.2 Amended and Restated Guaranty Agreement, dated as of March 22, 2005, provided by Brantley Partners IV, L.P.
to Healthcare Business Credit Corporation (Incorporated by reference to Exhibit 10.2 filed with the
Company's Quarterly Report on Form 10-QSB filed on May 13, 2005)
Exhibit 10.3 Amended and Restated Guaranty Agreement, dated as of March 22, 2005, provided by Brantley Capital
Corporation to Healthcare Business Credit Corporation (Incorporated by reference to Exhibit 10.3 filed with
the Company's Quarterly Report on Form 10-QSB filed on May 13, 2005)
Exhibit 10.4 Convertible Subordinated Promissory Note, dated as of June 1, 2005, by and among Orion HealthCorp, Inc. and
Brantley Partners IV, L.P. (Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on June 7, 2005)
Exhibit 10.5 Convertible Subordinated Promissory Note, dated as of June 1, 2005, by and among Orion HealthCorp, Inc. and
Brantley Partners IV, L.P. (Incorporated by reference to Exhibit 10.2 filed with the Company's Current
Report on Form 8-K filed on June 7, 2005)
Exhibit 10.6 Amendment No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of June 1, 2005 (Incorporated by
reference to Exhibit 10.6 filed with the Company's Quarterly Report on Form 10-QSB filed on August 12, 2005)
Exhibit 10.7 Form of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock Option), dated as of June 17, 2005
(Incorporated by reference to Exhibit 10.7 filed with the Company's Quarterly Report on Form 10-QSB filed
on August 12, 2005)
Exhibit 10.8 Separation Agreement and General Release, dated as of November 8, 2005, by and between Orion HealthCorp,
Inc. and Keith G. LeBlanc
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 Section 1350 Certification
Exhibit 32.2 Section 1350 Certification
-33-