U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended March 31, 2003
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from _________ to ________
SURGICARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 58-1597246
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
12727 KIMBERLEY LANE, SUITE 200, HOUSTON, TEXAS 77024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (713) 973-6675
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 9, 2003, 24,863,175 shares of Common Stock, $0.005 par value per
share, were outstanding.
1
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
----------------------------
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements"
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
Consolidated Statements of Operations for the three months ending March 31, 2003
and 2002
Consolidated Statements of Cash Flows for the three months ending March 31, 2003
and 2002
Notes to Consolidated Financial Statements
2
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------------- ------------------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 139,575 $ 262,327
Accounts Receivable:
Trade (less allowance for contractual adjustments and doubtful
accounts of $5,023,000 and $6,496,000 at March 31, 2003
and December 31, 2002, respectively) 1,095,793 1,324,944
Other receivables 465,629 398,834
Note receivable 227,657 223,178
Inventory 380,215 397,772
Prepaid expenses 83,038 69,380
Other current assets 122,141 76,313
------------------ ----------------
Total Current Assets 2,514,048 2,752,748
Property and Equipment
Office furniture and equipment 380,292 378,901
Medical and surgical equipment 3,579,316 3,576,721
Leasehold improvements 941,440 941,440
Computer equipment 379,828 377,495
Transportation equipment 19,015 19,015
------------------ ----------------
5,299,891
Less: Accumulated depreciation and amortization 2,654,307 2,468,662
------------------ ----------------
Total Property and Equipment 2,645,584 2,824,910
Goodwill 8,045,735 8,045,735
Real Estate 4,579,385 4,579,385
Investment in Limited Partnerships 394,296 306,654
Prepaid Limited Partner Distributions 403,748 403,748
Loan fees (net of amortization of $141,694 at March 31, 2003 and $108,321 at
December 31, 2002) 160,343 193,716
------------------ ----------------
TOTAL ASSETS $ 18,743,139 $ 19,106,896
================== ================
3
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS (continued)
March 31, December 31,
2003 2002
------------------------ -------------------------
LIABILITIES (unaudited)
Current Liabilities
Current maturities of long-term debt $ 6,037,475 $ 6,295,389
Revolving lines of credit 1,399,261 1,665,657
Current portion of capital leases 280,882 313,725
Accounts payable 2,181,902 2,362,378
Accrued expenses 569,492 472,645
Payable to a related party 116,909
------------------------ -------------------------
Total Current Liabilities 10,469,012 11,226,703
Long-Term Debt 391,537 454,328
------------------------ -------------------------
Total Liabilities 10,860,549 11,681,031
SHAREHOLDERS' EQUITY
Preferred Stock, Series A, par value $.001, 1,650,000
authorized, 1,225,100 issued and outstanding
(Redemption and liquidation value $6,125,500). 1,225 1,225
Preferred Stock, Series AA, par value $.001, 1,200,000
authorized, 900,000 issued and outstanding 900 900
Common Stock, par value $.005, 50,000,000 shares authorized;
24,863,175 and 21,327,131 issued March 31, 2003 and
December 31, 2002, respectively. 124,316 106,635
Additional Paid-In Capital 16,189,400 15,065,801
Retained Earnings (8,386,683) (7,708,196)
Less: Treasury Stock-at cost, 91,400 and
75,000 shares at March 31, 2003 and
December 31, 2002, respectively (38,318) (32,250)
Shareholders receivable (8,250) (8,250)
------------------------ -------------------------
Total Shareholders' Equity 7,882,590 7,425,865
------------------------ -------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,743,139 $ 19,106,896
======================== =========================
See notes to consolidated financial statements.
4
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
FOR THE THREE MONTHS ENDING
MARCH 31,
-----------------------------------------------
2003 2002
---------------------- --------------------
Revenues, net $ 2,280,121 $ 3,263,990
Direct Surgical expenses:
Surgical costs 472,577 369,710
Clinical salaries & benefits 471,428 319,221
Other 292,325 119,374
---------------------- --------------------
Total Direct Surgical Expenses 1,236,330 808,305
General and Administrative Expenses:
Salaries and benefits 386,396 331,391
Management and affiliation fees 31,433 24,962
Rent 233,043 132,335
Depreciation and amortization 219,018 148,894
Professional fees 215,097 292,503
Taxes 28,889 10,854
Provision for doubtful accounts 9,162
Other 274,166 200,175
---------------------- --------------------
Total General & Administrative Expenses 1,397,204 1,141,114
Total Expenses 2,633,534 1,949,419
---------------------- --------------------
Operating Income (Loss) (353,413) 1,314,571
---------------------- --------------------
Other Income (Expense):
Loss on sale of assets (168) (2,118)
Miscellaneous income 11,969 79
Equity in Earnings of Limited Partnerships 87,642 39,293
Interest Expense (440,112) (224,083)
---------------------- --------------------
Total Other Income (Expense) (340,669) (186,829)
Minority Interest in (Earnings)
Loss of Partnership 2,034 (425,632)
--------------------- --------------------
Earnings (Loss) Before Income Tax Expenses (692,048) 702,110
Federal Income Tax Expense (Benefit) (13,561) 274,069
--------------------- --------------------
Net Earnings (Loss) $ (678,487) $ 428,041
===================== ====================
Earnings (Loss) per share - Basic $ (.03) $ .03
===================== ====================
Earnings (Loss) per share - Diluted $ (.03) $ .03
===================== ====================
Weighted Average Shares Outstanding:
Basic 23,579,843 14,089,320
===================== ====================
Diluted 23,579,843 15,672,316
===================== ====================
See notes to consolidated financial statements.
5
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
FOR THE THREE MONTHS ENDING
MARCH 31,
---------------------------------------------------------------
2003 2002
------------------------------ --------------------------
Cash Flows From Operating Activities:
Net earnings (loss) $ (678,487) $ 428,041
Adjustments to reconcile net earnings to net cash
provided by operations:
Equity in earnings of limited partnerships (87,642) (39,293)
Minority interest in earnings (loss) of partnerships (2,034) 425,632
Depreciation and amortization 219,018 148,894
Amortization of debt discount 37,460
Provision for doubtful accounts 9,162
Other (9,234)
(Increase) Decrease in:
Accounts receivable 153,194 (1,161,112)
Notes receivable (4,479)
Inventory 17,557 (38,100)
Prepaid expenses (13,658) 5,675
Other current assets (43,794) (346,059)
Federal income tax 274,067
Increase (Decrease) in:
Accounts payable (262,385) 39,274
Accrued expenses 96,846 (100,651)
------------------------------ ---------------------
Net Cash Used in Operating Activities (559,242) (372,866)
------------------------------ ---------------------
Cash Flows From Investing Activities:
Capital expenditures (6,318) (28,901)
Investment in limited partnership (14,865)
Distributions from partnerships 27,000
------------------------------ ---------------------
Net Cash Used in Investing Activities (6,318) (16,766)
------------------------------ ---------------------
Cash Flows From Financing Activities:
Borrowings on lines of credit 1,430,351 2,491,347
Payments on lines of credit (1,696,747) (1,800,808)
Borrowings on debt 532,000
Payments on debt (323,165) (657,693)
Principal payments on capital lease (32,843) (47,189)
Proceeds from issuance of common stock 1,070,105
Proceeds from exercise of warrants 1,175
Distributions to limited partners (160,000)
Purchase of treasury stock (6,068)
------------------------------ ---------------------
Net Cash Provided by Financing Activities 442,808 357,657
------------------------------ ---------------------
Net Decrease in Cash and Cash Equivalents (122,752) (31,975)
Cash and Cash Equivalents - Beginning of Period 262,327 76,274
------------------------------ ---------------------
Cash and Cash Equivalents - End of Period $ 139,575 $ 44,299
============================== =====================
6
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
FOR THE THREE MONTHS ENDING
MARCH 31,
-----------------------------------------------------
2003 2002
------------------------ ---------------------
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest $ 355,948 $ 286,675
Non-cash investing and financing activities:
Issuance of common shares for:
Investment 74,750
Accounts payable 70,000 41,000
Equipment acquired under capital lease
obligation 67,032
See notes to consolidated financial statements.
7
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
SurgiCare, Inc. ("SurgiCare", the "Company", "we", "us", or "our"),
through its wholly owned subsidiaries, owns a majority interest in limited
partnerships or corporations that operate three surgery centers. The Company
also owns a minority interest as general partner in two limited partnerships
that each operates a surgery center. The consolidated statements include the
accounts of the Company and its subsidiaries and its majority owned limited
partnerships. Consolidation of the majority owned partnerships is necessary as
the Company owns 51% or more of the financial interest and, as general partner,
is responsible for the day-to-day management of the partnerships.
These financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
reporting and in accordance with Securities and Exchange Commission ("SEC") Rule
10-01 of Regulation S-X. In the opinion of management, the accompanying
unaudited condensed, consolidated financial statements include all adjustments
consisting of only normal recurring adjustments necessary for a fair
presentation of the Company's financial position and the results of operations
and cash flows for the interim periods presented. The results of operations for
any interim period are not necessarily indicative of results for the full year.
The accompanying consolidated financial statements should be read in
conjunction with the financial statements and related notes included in
SurgiCare's 2002 Annual Report on Form 10-KSB.
Note 2- Use of Estimates
The preparation of financial statements in conformity with U.S. 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. Actual results could vary
from those estimates.
The determination of contractual allowances constitutes a significant
estimate. In determining the amount of contractual allowances, management
considers such factors as historical trends of billing and cash collections,
established fee schedules, accounts receivable agings and contractual
relationships with third-party payors. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account.
Note 3 - Revenue Recognition
Revenues at the Company's surgery centers consist of billing for the
use of the centers' facilities ("facility fee") directly to the patient or
third-party payor. The facility fee excludes any amounts billed for physicians'
services, which are billed separately by the physician to the patient or
third-party payor.
Revenue is recognized on the date the procedures are performed, and
accounts receivable are recorded at that time. Revenues are reported at the
estimated realizable amounts from patients and third-party payors (net of
contractual allowances). If such third-party payors 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.
8
Note 4 - Goodwill
Goodwill represents the excess of cost over the fair value of net
assets of companies acquired in business combinations accounted for using the
purchase method. Goodwill acquired in business combinations prior to June 30,
2001 had been amortized using the straight-line method over an estimated useful
life of 20 years. In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill no longer be amortized but instead be reviewed
periodically for possible impairment. The Company has adopted SFAS No. 142
effective January 1, 2002 and will no longer amortize goodwill.
Under SFAS 142, the Company must have completed its initial
assessment of goodwill for possible impairment no later than December 31, 2002.
The Company completed the first phase of this impairment test and, based on an
independent valuation performed by a third party, believes that there was no
impairment of goodwill as of January 1, 2002.
Due to the significant losses incurred during 2002, and the decline
in the quoted market price of the common shares, the Company believed that a
second impairment test as of December 31, 2002 was necessary. Using the same
methodology (mainly the market method) as employed in the transitional
valuation, the Company concluded that no impairment had occurred as of December
31, 2002.
Note 5 - Recent Accounting Pronouncements
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," issued in August 2001, supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This statement retains certain requirements
of SFAS No. 121 relating to the recognition and measurement of impairment of
long-lived assets to be held and used. Additionally, this statement results in
one accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale and also addresses certain
implementation issues related to SFAS No. 121, including the removal of goodwill
from its scope due to the issuance of SFAS No. 142. The Company adopted this
pronouncement on January 1, 2002, which had no impact on its consolidated
financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," issued in June 2002, rescinds Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at its
fair value in the period that the liability is incurred. The provisions of this
Statement shall be effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. Management has determined
that the adoption of SFAS No. 146 will not have a material impact on the
Company's financial position and results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002. The Company has entered into certain guarantees as described in Note
11.
9
In January 2003, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosures." This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement also amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in the financials statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement were effective for the December 31, 2002
financial statements. The interim reporting disclosure requirements became
effective for this quarterly report. Because the Company continues to account
for employee stock-based compensation under APB opinion No. 25, the transitional
guidance of SFAS No. 148 has no effect on the financial statements at this time.
However, the accompanying financial statements presented have incorporated the
enhanced disclosure requirements of SFAS No. 148.
Note 6 - Acquisitions
On May 31, 2002, the Company acquired a 51% interest in the
Tuscarawas Ambulatory Surgery Center ("Tuscarawas Center") located in Dover,
Ohio for an aggregate of $725,000 cash and warrants to purchase 200,000 shares
of the Company common stock at an exercise price of $.01 per share expiring May
31, 2007. The warrants were valued at $590,000. The Company has also entered
into a Management Agreement with the Tuscarawas Center to act as exclusive
manager of the Tuscarawas Center in exchange for 5% of the Tuscarawas Center's
net monthly collected revenue.
Note 7 - Debt
Loan agreements relating to the majority of the Company's credit
lines, notes payable and capital leases contain requirements for maintenance of
defined minimum financial ratios. The Company is not in compliance with all such
provisions as of March 31, 2003. Further, the Company is delinquent in payments
on the majority of its outstanding debt. All notes and capital leases in default
have been shown as current in these financial statements. The Company has
obtained a letter of forbearance through June 30, 2003, in connection with its
senior lender, DVI Business Credit Corp.
The Company has financed its growth primarily though the issuance of
equity, secured and/or convertible debt. As of March 31, 2003, the Company does
not have any credit facilities available with financial institutions or other
third parties to provide for working capital shortages. Although the Company
believes it will generate cash flow from operations in future quarters, due to
its debt load, it is not able to fund its current operations solely from its
cash flow.
The Company believes that additional sales of debt and/or equity
securities will be required to continue operations. The Company is continuing to
pursue additional financing of debt and/or equity, but does not currently have
firm commitments for the additional sales of debt or equity securities. Any such
sales will be made on a best efforts basis. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support its operations, or fund acquisitions for
its anticipated growth. In the event that any future financing efforts are not
successful, the Company will be forced to liquidate assets and/or curtail
operations.
Note 8 - Earnings Per Share
Basic earnings per share are calculated on the basis of the weighted
average number of shares outstanding. Diluted earnings per share, in addition to
the weighted average determined for basic earnings per share, include common
stock equivalents, which would arise from the exercise of stock options and
warrants using the treasury stock method, and assumes the conversion of the
Company's preferred stock for the period outstanding, since their issuance.
10
For the Three Months Ended March 31,
-----------------------------------------------------
2003 2002
----------------------- ----------------------
Basic Earnings Per Share:
Net Earnings (Loss) $(678,487) $428,041
======================= =====================
Weighted average shares outstanding 23,579,843 14,089,320
Dilutive stock options and warrants (a) 211,996
Conversion of preferred shares (b) 1,316,100
Conversion of debt (c)
----------------------- ---------------------
Weighted average common shares outstanding
for diluted net earnings per share 23,579,843 15,672,316
======================= =====================
Net earnings (loss) per share - Basic $(.03) $.03
======================= =====================
Net earnings (loss) per share - Diluted $(.03) $.03
======================= =====================
The following potentially dilutive shares are not included because their effect
would be anti-dilutive due to the net loss for the period:
a. 11,014,474 options and warrants outstanding at March 31, 2003.
b. 900,000 shares of Series AA Preferred Stock are convertible into
$4,500,000 of common shares. 1,225,000 shares of Series A Preferred
stock are convertible into 1,225,000 common shares.
c. $1,000,000 of debentures is convertible into common stock at a price
equal to $1.50 per share.
Note 9 - Litigation
In September 2002, SurgiCare was named as a defendant in a suit
entitled Charles Cohen vs. SurgiCare, Inc. and David Blumfield, in the
234th Judicial District Court of Harris County, Texas. Mr. Cohen sued
SurgiCare for breach of contract and both defendants for defamation. Mr.
Cohen claims that SurgiCare breached his employment agreement when it
terminated his employment (although he remains a Director of SurgiCare as
of the date of this filing) and that Mr. Blumfield and SurgiCare made
defamatory statements about him. Mr. Cohen has made claims for $562,000 for
breach of the employment agreement plus additional damages for the
defamation claim. SurgiCare intends to vigorously defend this suit.
In February 2003, SurgiCare was named as a defendant in a suit
entitled S.E. Altman, individually, and d/b/a Altman & Associates vs. SurgiCare,
Inc., in the County Court at Law No. 1, Harris County, Texas. Altman has sued
SurgiCare for breach of contract based on a finders fee contract in which Altman
claims SurgiCare has not performed. Altman has made claims in the amount of
$217,000 plus attorney's fees. SurgiCare intends to vigorously defend this suit.
In March 2003, SurgiCare Memorial Village, L.P. and Town & Country
SurgiCare, Inc. were named as defendants in a suit entitled MarCap Corporation
vs. Health First Surgery Center-Memorial, Ltd.; HFMC, L.C.; SurgiCare Memorial
Village, L.P.; and Town & Country SurgiCare, Inc. MarCap has sued for default
under a promissory note and refusing to remit payment on a promissory note in
the amount of $215,329.36. SurgiCare has paid $53,832.34 of this balance and is
attempting to arrange for a payment plan to pay the remaining balance.
11
In April 2003, SurgiCare was named as a defendant in a suit entitled
International Diversified Corporation, Limited vs. SurgiCare, Inc. International
Diversified Corporation (IDC) has sued for breach of contract in which IDC
invested $1,000,000 into SurgiCare. IDC has sued for the rescission of the
contract and the return of $1,000,000 or the deliverance of 2,439,024 shares.
SurgiCare intends to vigorously defend this suit.
In April 2003, SurgiCare was named as a defendant in a suit entitled
Jackson Walker, LLP vs. SurgiCare, Inc. Jackson Walker is claiming damages of
$52,247.18 in unpaid invoices for services rendered. SurgiCare is currently
attempting to settle the account.
Note 10 - Employee Stock-Based Compensation
The Company accounts for its employee stock options and warrants
under the Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all employee options and
warrants granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The Company also grants options and warrants to non-employees for
goods and services and in conjunction with certain agreements. These grants are
accounted for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" based on the grant date fair values.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement 123 to stock-based employee compensation.
Three Months Ended
------------------------------------
March 31, March 31,
2003 2002
---------------- ----------------
Net income (loss) - as reported $ (678,487) $ 428,041
Deduct: Total stock-based employee compensation (Expense determined
under the fair value based method for all awards), net of tax effect (52,725) (43,150)
-------------- --------------
Pro forma net income (loss) $ (731,212) $ 384,891
============== ==============
Earnings (loss) per share:
Basic net income (loss) per share - as reported $(.03) $.03
Basic net income (loss) per share - pro forma $(.03) $.03
Diluted net income (loss) per share - as reported $(.03) $.03
Diluted net income (loss) per share - pro forma $(.03) $.02
The above pro forma effects on net income (loss) and net income (loss) per share
are not likely to be representative of the effects on reported net income for
future years because options vest over several years and additional awards could
be made each year.
12
Note 11 - Guarantees
The Company is guarantor on a working capital line of credit for San
Jacinto Surgery Center, L.P. ("San Jacinto"), in which the Company owns a 10%
general partnership interest through a wholly-owned subsidiary. As of March 31,
2003, the line of credit facility had a balance of $729,000 and is recorded on
San Jacinto's balance sheet, which is not consolidated with the Company's
financial statements. As of the date of this filing, the line has matured and
management is currently working on an extension.
The Company has guaranteed $241,250 of a $1,533,000 bank note payable
of Physicians Endoscopy Center, Ltd. ("Physicians"), in which it owns a 10%
general partnership interest through a wholly-owned subsidiary. The note is
payable in equal monthly payments of principal plus accrued interest and matures
in October 2007. The guarantee also includes a related portion of interest,
legal fees and other expenses. As of March 31, 2003, the note had a balance of
$1,533,000 and is recorded on Physicians' balance sheet, which is not
consolidated with the Company's financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations.
-------------
Forward-Looking Statements
The information contained herein contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward looking statements involve risks and uncertainty,
including, without limitation, our ability to continue our expansion strategy,
changes in federal or state healthcare laws and regulations or third party payor
practices, our historical and current compliance with existing or future
healthcare laws and regulations and third party payor requirements, changes in
costs of supplies, labor and employee benefits, as well as general market
conditions, competition and pricing. Although we believe that the assumptions
underlying the forward looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward looking statements included in this Form 10-QSB will prove to
be accurate. In view of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by management or any other person
that our objectives and plans will be achieved. We undertake no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
Critical Accounting Policies
In December 2001, the SEC requested that reporting companies discuss
their most "critical accounting policies" in management's discussion and
analysis of financial condition and results of operations. The SEC indicated
that a "critical accounting policy" is one that is important to the portrayal of
a company's financial condition and operating results and requires management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of this and
other accounting policies, see Notes 1 and 2 in the Notes to the Consolidated
Financial Statements of our Annual Report on Form 10-KSB. Our preparation of
this Form 10-QSB and our Annual Report on Form 10-KSB requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as of the date of
our financial statements. Therefore, actual results may differ from those
estimates.
13
Revenue Recognition - Revenue is recognized on the date the
procedures are performed, and accounts receivable are recorded at that time.
Revenues are reported at the estimated realizable amounts from patients and
third-party payers. If such third-party payers were to change their
reimbursement policies, the effect on revenue could be significant. Earnings are
charged with a provision for contractual adjustments and doubtful accounts based
on such factors as historical trends of billing and cash collections,
established fee schedules, accounts receivable agings and contractual
relationships with third-party payors. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account.
Investment in Limited Partnerships - The investments in limited
partnerships are accounted for by the equity method. Under the equity method,
the investment is initially recorded at cost and is subsequently increased to
reflect the Company's share of the income of the investee and reduced to reflect
the share of the losses of the investee or distributions from the investee.
Goodwill - Goodwill arises from the acquisition of assets at an amount in
excess of their fair market value. In July 2001, the FASB issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the criteria
for recording intangible assets separately from goodwill. Recorded goodwill and
intangibles are evaluated against these criteria and may result in certain
intangibles being transferred to goodwill or, alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. Under SFAS No. 142, a non-amortization approach, goodwill and certain
intangibles with indefinite lives are not amortized into results of operations,
but instead reviewed periodically for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and certain intangibles with indefinite lives is more than its fair
value. The provisions of each statement which apply to goodwill and intangible
assets acquired prior to June 30, 2001, was adopted by the Company on January 1,
2002. At the review dates of January 1, 2002 and December 31, 2002, the Company
concluded that no impairment had occurred.
Overview
SurgiCare's principal business strategies are to (a) increase
physician utilization of existing facilities, (b) increase both the revenue and
profits from current cases and procedures being performed in existing facilities
(c) achieve growth and expand revenues by pursuing strategic acquisitions of
existing, and the development of new, physician owned ambulatory surgical
centers, and (d) expand into related healthcare facilities, including imaging,
surgical hospitals and practice management.
Surgical supply costs are the single largest cost component of any
ambulatory surgical center. Therefore, SurgiCare's goal is to minimize the cost
of surgical supplies. Through participation in national buying groups, SurgiCare
has been able to negotiate discounts on most of the commonly used surgical
supplies. SurgiCare has also implemented a "Just in Time" approach to inventory.
This allows the center to minimize the amount of supplies that it is required to
keep in inventory.
SurgiCare is in the process of identifying ambulatory surgical
centers, imaging centers, surgical hospitals and practice management companies
as potential acquisition targets and has, in some cases, conducted preliminary
discussions with representatives of these organizations. Although there are no
commitments, understandings, or agreements with any other potential acquisition
targets, talks are ongoing for the acquisition of additional entities. All of
such discussions have been tentative in nature and there can be no assurance
that we will acquire any center with whom discussions have been conducted.
14
Financial Condition and Results of Operations
The following table sets forth for the periods indicated the
percentages of revenues represented by income statement items.
Three Months Ended
March 31,
----------------------------
2003 2002
------- --------
Revenues, net 100.0% 100.00%
Expenses:
Direct Cost of Services 54.2% 24.7%
General & Administrative Expenses 61.3% 35.0%
Total Operating Expenses 115.5% 59.7%
Operating Income (Loss) -15.5% 40.3%
Other Income (Loss) -14.9% -5.7%
Earnings (Loss) Before Federal Income Tax Expense -30.4% 21.5%
Federal Income Tax Expense (Benefit) -0.6% 8.4%
Net Earnings (Loss) -29.8% 13.1%
Results of Operations
THREE MONTHS ENDED MARCH 31, 2003 vs. THREE MONTHS ENDED MARCH 31, 2002
Net Revenue. On a consolidated basis, case volume increased 41.6% to
1,786 in the three months ended March 31, 2003 from 1,261 in the 2002 comparable
period. On a same-center basis (which includes unconsolidated centers and
pre-acquisition cases), total utilization increased 47.8% to 4,064 cases in the
three months ended March 31, 2003 from 2,749 in the 2002 comparable period. New
centers accounted for $630,644 in revenue in the three months ended March 31,
2003. However, revenue declined 30.1% to $2,280,121 in the three months ended
March 31, 2003, from $3,263,990 in the comparable 2002 period. On a per-case
basis, revenue decreased to $1,277 in the three months ended March 31, 2003 from
$2,588 in the 2002 comparable period. The decrease was due primarily to a
reduction in our estimates for reimbursement from third-party payors. The
reduction in reimbursement resulted in the higher insurance contractual
allowances, which negatively affected revenue. Such adjustments were necessary
based on our assessment of recent reimbursement activity. The average
contractual allowance in the first quarter of 2003 was 67% compared to 55% in
the comparable prior year period.
Direct Surgical Expenses. Total direct surgical costs increased to
54.2% of revenue in the three months ended March 31, 2003 from 24.7% in the 2002
comparable period. Direct surgical costs per case increased 8.0% to $692 in the
three months ended March 31, 2003 compared to $641 in the same period in 2002.
The increase as a percentage of revenue is primarily due to the decrease in
revenue dollars resulting from the Company increasing its estimates of insurance
contractual allowances discussed above.
15
General and Administrative Expenses. General and administrative costs
increased $256,090, or 22.4% to $1,397,204 in the three months ended March 31,
2003 from $1,141,114 in the 2002 comparable period. The increased costs are
primarily related to the acquisition of the Tuscawaras Center in May 2002.
Total Operating Expenses. As a percent of revenue, total expenses
increased to 115.5% of revenue in the three months ended March 31, 2003 from
59.7% in the 2002 comparable period. The increased costs, expressed both in
dollars and as a percentage of revenue, are related to the factors discussed
above.
Other Income (Loss). Total Other Loss increased $153,840, or 82.3% to
$340,669 in the three months ended March 31, 2003 from $186,829 in the 2002
comparable period. The increase was primarily due to an increase in interest
expense of $216,029, or 96.4% between the two comparable three-month periods
resulting from additional borrowings to complete an acquisition, to attempt to
acquire Aspen Healthcare, and to finance the Company's working capital. The
increased interest expense was partially offset by an increase in the Company's
equity in earnings from limited partnerships of $48,349 between the two
comparable three-month periods.
Minority Interest in (Earnings)Losses of Partnerships. In the three
months ended March 31, 2003, the minority interest in (earnings) losses of
partnerships was $2,034 compared to $(425,633) in the 2002 comparable period.
The losses incurred by the partnerships are directly attributable to the
increase in our contractual allowances discussed above.
Federal Income Tax. For the three months ended March 31, 2003, the
Company recorded a tax benefit of $13,561, or 2.0% of its pre-tax loss of
$692,047. The percentage is less than the normally expected rate due to a
valuation allowance recorded against the Company's deferred tax assets. In the
three months ended March 31, 2002, the Company recorded income tax expense of
$274,069 or 39.0% of pre-tax income.
Net Earnings (Loss). Due to the factors discussed above, net earnings
(loss) in the three months ended March 31, 2003 decreased to a loss of $678,487
compared to earnings of $425,041 in the 2002 comparable period.
Liquidity and Capital Resources
Net cash used in operating activities was $559,242 and $372,866 for
the three months ended March 31, 2003 and 2002, respectively. The primary reason
for the increase in cash used in operations was the Company's net loss in the
three months ended March 31, 2003.
Net cash used in investing activities was $6,318 and $16,766 for the
three months ended March 31, 2003 and 2002, respectively.
Net cash provided by financing activities increased to $442,808 for
the three months ended March 31, 2003 from $357,657 in the 2002 comparable
period. The increase was primarily due to the cash raised through the sale of
common stock offset by net pay downs of credit lines and other outstanding debt.
As of March 31, 2003, the Company had cash and cash equivalents of
$139,575 and negative working capital of $7,954,964. SurgiCare has a total of
$6,429,012 in long-term debt and an additional $1,399,261 in revolving lines of
credit currently in default. SurgiCare has defaulted on certain provisions of
its Loan and Security Agreement with its senior lender, DVI Business Credit
Corporation (DVI). However, DVI has agreed to forbear from taking any action to
foreclose on any collateral or place the Company into receivership until June
30, 2003. We are in the process of refinancing these agreements as well as its
other debt arrangements, but can provide no assurance that we will be successful
in our efforts.
16
The Company has financed its growth primarily though the issuance of
equity, secured and/or convertible debt. As of March 31, 2003, the Company does
not have any credit facilities available with financial institutions or other
third parties to provide for working capital shortages. Although the Company
believes it will generate cash flow from operations in future quarters, due to
its debt load, it is not able to fund its current operations solely from its
cash flow.
In March 2003, the Company completed a $1,212,490 private placement
of 3,418,544 shares of common stock to existing physician shareholders, local
Houston physicians, and select Houston individuals. The shares are restricted
under Rule 144. In addition, the investors received a warrant for every two
shares of common stock purchased. The warrants are exercisable for one year and
are priced at $0.35. The Company received proceeds (net of expenses) of
$1,070,105 in cash and $70,000 in reduction in notes/accounts payable. The cash
proceeds of the financing were used for working capital purposes.
The Company believes that additional sales of debt and/or equity
securities will be required to continue operations. The Company is continuing to
pursue additional financing of debt and/or equity, but does not currently have
firm commitments for the additional sales of debt or equity securities. Any such
sales will be made on a best efforts basis. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support its operations, or fund acquisitions for
its anticipated growth. In the event that any future financing efforts are not
successful, the Company will be forced to liquidate assets and/or curtail
operations.
Item 3. Controls and Procedures
-------------------------------
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing
date of this report, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act)
are effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Changes in Internal Controls
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.
--------------------------
In September 2002, SurgiCare was named as a defendant in a suit
entitled Charles Cohen vs. SurgiCare, Inc. and David Blumfield, in the 234th
Judicial District Court of Harris County, Texas. Mr. Cohen sued SurgiCare
for breach of contract and both defendants for defamation. Mr. Cohen claims
that SurgiCare breached his employment agreement when it terminated his
employment (although he remains a Director of SurgiCare as of the date of
this filing) and that Mr. Blumfield and SurgiCare made defamatory statements
about him. Mr. Cohen has made claims for $562,000 for breach of the employment
agreement plus additional damages for the defamation claim. SurgiCare intends to
vigorously defend this suit.
17
In February 2003, SurgiCare was named as a defendant in a suit
entitled S.E. Altman, individually, and d/b/a Altman & Associates vs.
SurgiCare, Inc., in the County Court at Law No. 1, Harris County, Texas.
Altman has sued SurgiCare for breach of contract based on a finders fee
contract in which Altman claims SurgiCare has not performed. Altman has made
claims in the amount of $217,000 plus attorney's fees. SurgiCare intends to
vigorously defend this suit.
In March 2003, SurgiCare Memorial Village, L.P. and Town &
Country SurgiCare, Inc. were named as defendants in a suit entitled MarCap
Corporation vs. Health First Surgery Center-Memorial, Ltd.; HFMC, L.C.;
SurgiCare Memorial Village, L.P.; and Town & Country SurgiCare, Inc. MarCap
has sued for default under a promissory note and refusing to remit payment on a
promissory note in the amount of $215,329.36. SurgiCare has paid $53,832.34
of this balance and is attempting to arrange for a payment plan to pay the
remaining balance.
In April 2003, SurgiCare was named as a defendant in a suit entitled
International Diversified Corporation, Limited vs. SurgiCare, Inc. International
Diversified Corporation (IDC) has sued for breach of contract in which IDC
invested $1,000,000 into SurgiCare. IDC has sued for the rescission of the
contract and the return of $1,000,000 or the deliverance of 2,439,024 shares.
SurgiCare intends to vigorously defend this suit.
In April 2003, SurgiCare was named as a defendant in a suit entitled
Jackson Walker, LLP vs. SurgiCare, Inc. Jackson Walker is claiming damages of
$52,247.18 in unpaid invoices for services rendered. SurgiCare is currently
attempting to settle the account.
ITEM 2. Change in Securities.
-----------------------------
In March 2003, the Company completed a $1,212,490 private placement
of 3,418,544 shares of common stock to existing physician shareholders, local
Houston physicians, and select Houston individuals. The shares are restricted
under Rule 144. In addition, the investors received a warrant for every two
shares of common stock purchased. The warrants are exercisable for one year and
are priced at $0.35. The Company received proceeds (net of expenses) of
$1,070,105 in cash and $70,000 in reduction in notes/accounts payable. The cash
proceeds of the financing were used for working capital purposes.
No underwriters were involved in any of the foregoing sales or
issuance of securities. Such sales or issuance were made in reliance upon an
exemption from the registration provisions of the Securities Act set forth in
Section 4(2) thereof relative to sales by an issuer not involving any public
offering, or the rules and regulations there under. Each recipient either
received adequate information about SurgiCare or had access, through employment
or other relationships, to such information, and SurgiCare determined that each
recipient had such knowledge and experience in financial and business matters
that they were able to evaluate the merits and risks of an investment in
SurgiCare. All of the foregoing securities are deemed restricted securities for
the purposes of the Securities Act.
ITEM 3. Default Upon Senior Securities.
--------------------------------------
SurgiCare has defaulted on certain provisions of its Loan and Security
Agreement with DVI Business Credit Corporation (DVI). However, DVI has agreed to
forbear from taking any action to foreclose on any collateral or place the
Company into receivership until June 30, 2003.
SurgiCare has defaulted on its convertible Debenture Agreement for
failure to file a registration statement for the resale of certain securities
pursuant to the agreement.
18
ITEM 4. Submission of Matters to a Vote of Security Holder.
None
ITEM 5. Other Information.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, we filed a report on Form
8-K, dated January 29, 2003 to report pursuant to Items 5 and 7, (1)
a settlement and mutual general release with the owners of Aspen
Healthcare, Inc., whereby the parties agreed to terminate the Stock
Purchase Agreement dated May 16, 2002 and, (2) a private placement
offering on or about December 11, 2002.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 14, 2003 REGISTRANT:
SurgiCare, Inc.
By: /s/ KEITH G. LEBLANC
Keith G. LeBlanc
Chief Executive Officer
By: /s/ PHIL SCOTT
Phil Scott
Chief Financial Officer
20
CERTIFICATIONS
I, Keith LeBlanc, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SurgiCare, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
--------------------------
Keith LeBlanc
Chief Executive Officer (1)
--------------------------
(1) A signed original of this written statement required by Section 906 has been
provided to SurgiCare, Inc. and will be retained by SurgiCare, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
21
CERTIFICATIONS
I, Phil Scott, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SurgiCare, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
------------------
Phil Scott,
Chief Financial Officer(1)
------------------
(1) A signed original of this written statement required by Section 906 has been
provided to SurgiCare, Inc. and will be retained by SurgiCare, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 *Amended and Restated Certificate of Incorporation of SurgiCare, Inc.
3.2 *Articles of Incorporation of Bellaire SurgiCare, Inc.
3.3 *By-Laws of Technical Coatings Incorporated (now SurgiCare, Inc.)
3.4 *By-Laws of Bellaire SurgiCare, Inc.
4.0 *Certificate of Designation, Powers, Preferences and Rights of Series A
Redeemable, Preferred Stock, par value $.001 per share, of SurgiCare,
Inc.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
23