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 JUNE 30, 2004
[ ] 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)
10700 RICHMOND AVE., SUITE 300, HOUSTON, TEXAS 77042
(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 August 10, 2004, 28,948,685 shares of Common Stock, $0.005 par value per
share, were outstanding.
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 June 30, 2004 and December 31, 2003
Consolidated Statements of Operations for the three months ending June 30, 2004
and 2003
Consolidated Statements of Operations for the six months ending June 30, 2004
and 2003
Consolidated Statements of Cash Flows for the six months ending June, 30 2004
and 2003
Notes to Consolidated Financial Statements
2
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 280,001 $ 141,553
Accounts Receivable:
Trade (less allowance for contractual adjustments and
doubtful
accounts of $3,115,867 and $3,768,846 at June 30, 2004
and December 31, 2003, respectively) 868,285 1,309,682
Other receivables 25,161 59,909
Income tax receivables 159,846
Inventory 341,957 338,470
Prepaid expenses 133,373 133,293
Other current assets 61,375 23,027
----------- -----------
Total Current Assets 1,710,152 2,165,780
PROPERTY AND EQUIPMENT
Office furniture and equipment 399,912 399,912
Medical and surgical equipment 4,802,979 3,748,559
Leasehold improvements 1,184,890 946,890
Computer equipment 384,911 382,263
Transportation equipment 19,015 19,015
----------- -----------
6,791,706 5,496,639
Less: Accumulated depreciation and amortization 3,613,004 3,237,657
----------- -----------
Total Property and Equipment 3,178,702 2,258,982
GOODWILL 8,110,235 8,105,735
REAL ESTATE 2,612,412 4,000,000
INVESTMENT IN LIMITED PARTNERSHIPS 387,609 381,434
PREPAID LIMITED PARTNER DISTRIBUTIONS 440,423 440,423
LOAN FEES (net of amortization of $217,471 at June 30, 2004 and
$198,249 at December 31, 2003) 84,566 103,788
----------- -----------
TOTAL ASSETS $16,524,099 $17,456,142
=========== ===========
3
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
LIABILITIES (unaudited)
CURRENT LIABILITIES
Accounts payable $ 3,378,588 $ 2,864,199
Accrued expenses 2,139,011 1,274,340
Line of credit 1,402,588 1,331,475
Current maturities of long-term debt 8,083,173 6,928,542
Current portion of capital leases 359,587 265,251
------------ ------------
Total Current Liabilities 15,362,947 12,663,807
LONG-TERM CAPITAL LEASE OBLIGATIONS 545,057 103,341
------------ ------------
TOTAL LIABILITIES 15,908,004 12,767,148
SHAREHOLDERS' EQUITY
PREFERRED STOCK, Series A, par value $.001,
1,650,000 authorized, 1,137,700
issued and outstanding at December 31,
2003 (Redemption and liquidation value $5,688,500) 1,138
PREFERRED STOCK, Series AA, par value $.001, 1,200,000 shares
authorized, 900,000 issued and outstanding
at June 30, 2004 and December 31, 2003 900 900
COMMON STOCK, par value $.005, 50,000,000
shares authorized; 28,948,685 issued
and 28,857,285outstanding at
June 30, 2004; 27,082,843 issued and
26,991,143 outstanding at December 31,
2003 144,743 135,414
ADDITIONAL PAID-IN CAPITAL 17,604,714 17,116,523
RETAINED EARNINGS (17,087,694) (12,518,413)
LESS: TREASURY STOCK-at cost, 91,400 at
June 30, 2004 and December 31, 2003 (38,318) (38,318)
SHAREHOLDERS RECEIVABLE (8,250) (8,250)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 616,095 4,688,994
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,524,099 $ 17,456,142
============ ============
See notes to consolidated financial statements.
4
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDING
JUNE 30,
----------------------------
2004 2003
------------ ------------
REVENUES, NET $ 1,652,960 $ 1,939,008
DIRECT COST OF REVENUES:
Surgical costs 391,919 399,109
Clinical salaries & benefits 469,601 455,739
Other 223,170 213,783
------------ ------------
Total Direct Surgical Expenses 1,084,690 1,068,631
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and benefits 365,491 383,975
Rent 226,514 235,062
Depreciation and amortization 188,986 225,085
Professional fees 406,885 299,487
Provision for doubtful accounts 60,161 291,530
Other 301,639 333,102
------------ ------------
Total General & Administrative Expenses 1,549,676 1,768,241
OTHER OPERATING EXPENSES (INCOME):
Gain on sale of partnership interest (319,086)
Impairment on investment in land 1,387,588
------------ ------------
Total Other Operating Expenses (Income) 1,387,588 (319,086)
------------ ------------
Total Operating Expenses 4,021,954 2,517,786
------------ ------------
OPERATING LOSS (2,368,994) (578,778)
------------ ------------
OTHER INCOME (EXPENSE):
Miscellaneous income 28 8,250
Equity in Earnings of Limited Partnerships 18,451 80,297
Interest Expense (471,516) (468,906)
------------ ------------
Total Other Income (Expense) (453,037) (380,359)
LOSS BEFORE MINORITY INTEREST AND FEDERAL INCOME TAX BENEFIT (2,822,031) (959,137)
------------ ------------
MINORITY INTEREST IN LOSSES OF PARTNERSHIPS 49,984
------------ ------------
Loss Before Income Tax Expenses (2,822,031) (909,153)
FEDERAL INCOME TAX BENEFIT
NET LOSS $ (2,822,031) $ (909,153)
============ ============
Loss per share - Basic $ (.10) $ (.04)
============ ============
Loss per share - Diluted $ (.10) $ (.04)
============ ============
Weighted Average Shares Outstanding:
Basic 28,794,399 24,877,900
============ ============
Diluted 28,794,399 24,877,900
============ ============
See notes to consolidated financial statements.
5
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDING
JUNE 30,
-----------------------------
2004 2003
------------ ------------
REVENUES, NET $ 3,343,484 $ 4,219,129
DIRECT COST OF REVENUES:
Surgical costs 792,745 871,686
Clinical salaries & benefits 950,837 927,167
Other 418,060 506,108
------------ ------------
Total Direct Surgical Expenses 2,161,642 2,304,961
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and benefits 751,156 770,371
Rent 453,028 468,105
Depreciation and amortization 375,348 444,103
Professional fees 940,983 514,584
Provision for doubtful accounts 116,488 300,692
Other 643,173 667,590
------------ ------------
Total General & Administrative Expenses 3,280,176 3,165,445
OTHER OPERATING EXPENSES (INCOME):
Gain on sale of partnership interest (319,086)
Loss on sale of assets 168
Impairment on investment in land 1,387,588
Forgiveness of debt (58,625)
------------ ------------
Total Other Operating Income (Expense) 1,328,963 (318,918)
------------ ------------
Total Operating Expenses 6,770,781 5,151,488
------------ ------------
OPERATING LOSS (3,427,297) (932,359)
OTHER INCOME (EXPENSE):
Miscellaneous income 2,549 20,219
Equity in Earnings of Limited Partnerships 20,586 167,939
Interest Expense (1,165,119) (909,018)
------------ ------------
Total Other Income (Expense) (1,141,984) (720,860)
------------ ------------
LOSS BEFORE MINORITY INTEREST AND FEDERAL INCOME TAX BENEFIT (4,569,281) (1,653,219)
------------ ------------
MINORITY INTEREST IN LOSSES OF PARTNERSHIPS 52,018
------------ ------------
Loss Before Income Tax Expenses (4,569,281) (1,601,201)
FEDERAL INCOME TAX BENEFIT (13,561)
------------ ------------
NET LOSS (4,569,281) (1,587,640)
============ ============
Loss per share - Basic $ (.16) $ (.07)
============ ============
Loss per share - Diluted $ (.16) $ (.07)
============ ============
Weighted Average Shares Outstanding:
Basic 28,373,482 24,232,458
============ ============
Diluted 28,373,482 24,232,458
============ ============
See notes to consolidated financial statements.
6
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDING
JUNE 30,
--------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,569,281) $(1,587,640)
Adjustments to reconcile net earnings to net cash provided by operations:
Equity in earnings of limited partnerships (20,586) (167,939)
Minority interest in loss of partnerships (52,018)
Depreciation and amortization 375,348 444,102
Amortization of debt discount 37,718 74,920
Amortization of loan fees 19,222
Gain on sale of interest in limited partnership (319,086)
Interest expense recognized on beneficial conversion
features of convertible notes payable 206,693
Provision for doubtful accounts 116,488 300,692
Impairment on investment in land 1,387,588
Forgiveness of debt (58,625)
Change in:
Accounts receivable 359,657 186,050
Inventory (3,487) 31,289
Prepaid expenses (80) (64,057)
Other current assets (38,348) 23,250
Federal income tax 159,846
Accounts payable 846,168 274,311
Accrued expenses 864,671 296,041
----------- -----------
Net Cash Used in Operating Activities (317,008) (560,085)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (695,068) (25,795)
Distributions from partnerships 14,411
Proceeds from sale of interest in limited partnership 425,000
Buyout of limited partners (4,500)
----------- -----------
Net Cash Provided by (Used in) Investing Activities (685,157) 399,205
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit 196,625 2,796,768
Payments on lines of credit (125,512) (3,146,527)
Borrowings on debt 1,325,411
Payments on debt (208,498) (502,099)
Principal payments on capital lease (63,948) (50,892)
Proceeds from issuance of common stock 1,069,897
Proceeds from exercise of warrants 16,535 1,375
Purchase of treasury stock (6,068)
----------- -----------
Net Cash Provided by Financing Activities 1,140,613 162,454
----------- -----------
Net Increase in Cash and Cash Equivalents 138,448 1,574
Cash and Cash Equivalents - Beginning of Period 141,553 262,327
----------- -----------
Cash and Cash Equivalents - End of Period $ 280,001 $ 263,901
=========== ===========
7
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE SIX MONTHS ENDING
JUNE 30,
-------------------
2004 2003
---------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 76,930 $667,828
Non-cash investing and financing activities:
Issuance of common shares in payment of accounts payable 273,154 70,000
Equipment acquired under capital lease obligation 600,000
See notes to consolidated financial statements.
8
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 a limited partnership that operates a
surgery center. The consolidated statements include the accounts of the Company
and its subsidiaries and its majority owned limited 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 310(b) of
Regulation S-B. In the opinion of management, the accompanying unaudited
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 unaudited consolidated financial statements should be read
in conjunction with the financial statements and related notes included in
SurgiCare's 2003 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 payers. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account.
NOTE 3 - REVENUE RECOGNITION
Surgical revenue is recognized on the date the procedures are performed,
and accounts receivable are recorded at that time. Such revenues are reported at
the estimated net 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
net 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.
9
Management fees are based on a percentage of customers' collected revenues and
are recognized during the period which services were performed.
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
is no longer amortizing goodwill.
Under SFAS No. 142, goodwill is required to be tested annually and more
frequently if an event occurs which indicates the goodwill may be impaired. Upon
adoption of SFAS 142, as well as on December 31, 2003 and 2002, the Company
performed an impairment test of its goodwill and determined that no impairment
of the recorded goodwill existed.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES," and subsequently revised the Interpretation in
December 2003 ("FIN 46R"). This Interpretation of Accounting Research Bulletin
No. 51, "CONSOLIDATED FINANCIAL STATEMENTS," addresses consolidation by business
enterprises of variable interest entities, which have certain characteristics.
As revised, FIN 46R is now generally effective for financial statements for
interim periods or annual periods ending on or after March 15, 2004. We have not
identified any variable interest entities and the requirements of FIN 46R have
not had a material impact on our consolidated financial statements.
NOTE 6 - LAND IMPAIRMENT
On June 23, 2004, the Company agreed to sell its five tracts of undeveloped
land along with accelerated conversion of its 900,000 shares of Series AA
Redeemable Preferred Stock (see Note 12 -SUBSEQUENT EVENTS below for further
discussion). As a result, the Company recorded an impairment charge of
$1,387,588 in the second quarter of 2004.
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 June 30, 2004. Further, the Company is delinquent in payments
on the majority of its outstanding debt. All notes and capital leases in default
have been shown as current in these financial statements. On August 25, 2003 the
Company's senior lender, DVI Business Credit Corp. and DVI Financial Services,
Inc. ("DVI") announced that it is seeking protection under Chapter 11 of the
United States Bankruptcy laws.
10
In July 2004, SurgiCare and Integrated Physician Solutions, Inc. (see Note
12 - SUBSEQUENT EVENTS) completed negotiations to settle the companies' combined
debt with DVI and U.S. Bank Corp., which totals $10.1 million. The settlement
calls for $6.5 million in payments to be made as follows: $2,000,000 payment at
the closing of the Transactions; $500,000 on the date 12 months after the
closing; $250,000 on the date 18 months after the closing; $2,500 per month for
the first 24 months after closing; $45,628 per month in years starting in the
25th month and continuing through the 72nd month after closing; and a $1,500,000
balloon payment at the completion of 72 months after closing.
The Company has historically financed its growth primarily though the
issuance of equity and secured and/or convertible debt. As of June 30, 2004, the
Company does not have any credit facilities available with financial
institutions or other third parties to provide for working capital shortages.
Although the Company believes it will generate cash flow from operations in
future quarters, due to its debt load, it is not able to fund its current
operations solely from its cash flow.
In November 2003, SurgiCare completed a $470,000 financing for working
capital through the issuance of one-year convertible unsecured promissory notes
bearing interest at 10% per annum. The notes are convertible into shares of
Company common stock, at any time, at the option of the note holders. The
conversion price for the notes was equal to (a) $.35 per share, if the notes had
been converted on or prior to January 31, 2004, or (b) if the notes are
converted after January 31, 2004, the lower of (i) $0.25 or (ii) seventy-five
percent (75%) of the average closing price for the 20 trading days immediately
prior to the conversion date. Based on the relative fair value of the beneficial
conversion feature of the notes, a charge of $123,566 was recorded to interest
expense in the fourth quarter of 2003 and $206,693 in the first quarter of 2004.
The notes were not converted prior to January 31, 2004, and the charge in the
first quarter of 2004 reflects the change in conversion price after January 31,
2004. The note holders also received five-year warrants to purchase an aggregate
of 335,713 shares of Company common stock. The warrants may be exercised at an
exercise price of $0.35 per share, and may be exercised on a cashless basis at
the option of the holder. Based on the relative fair value of the warrants, a
discount of $76,834 was recorded at the time of issuance and is being amortized
to interest expense over the one-year term of the notes. The notes will mature
on October 31, 2004.
In the six months ended June 30, 2004, the Company borrowed $1,325,411 from
a participant in the proposed restructuring transactions (See Note 12) to make
necessary payments on debt and to fund operations.
The Company believes that additional sales of debt and/or equity securities
will be required to continue operations. See Note 12- SUBSEQUENT EVENTS for a
description of a series of transactions recently announced by the Company that,
if consummated, will involve an equity investment and recapitalization of the
Company. Prior to the closing of such contemplated transactions, any additional
sales of debt and/or equity by the Company will be subject to the prior approval
of the counterparties to the applicable transactions. 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 loss per share, include common stock
equivalents, which would arise from the exercise of stock options and warrants
using the treasury stock method, and assumes the conversion of the Company's
preferred stock for the period outstanding, since their issuance.
11
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------------------------------
2004 2003 2004 2003
----------- ---------- ----------- -----------
Basic Loss Per Share:
Net Loss $(2,822,031) $ (909,153) $(4,569,281) $(1,587,640)
=========== ========== =========== ===========
Weighted average shares
outstanding 28,794,399 24,877,900 28,373,482 24,232,458
Dilutive stock options and
warrants (a) (a) (a) (a)
Conversion of preferred shares (b) (b) (b) (b)
Conversion of debt (c) (c) (c) (c)
----------- ---------- ----------- -----------
Weighted average common shares
outstanding for diluted net loss
per share 24,877,900 28,373,482 24,232,458 28,794,399
=========== ========== =========== ===========
Net loss per share - Basic $ (.10) $ (.04) $ (.16) $ (.07)
=========== ========== =========== ===========
Net loss per share - Diluted $ (.10) $ (.04) $ (.16) $ (.07)
=========== ========== =========== ===========
The following potentially dilutive shares are not included because their effect
would be anti-dilutive due to the net loss for the period:
a. 8,085,261 and 10,942,807 options and warrants outstanding as of June 30,
2004 and June 30, 2003, respectively.
b. 900,000 shares of Series AA Preferred Stock convertible into $4,500,000 of
common shares as of June 30 2004 and June 30, 2003. 1,225,000 shares of
Series A Preferred stock convertible into 1,225,000 common shares as of
June 30, 2003.
c. $1,000,000 of debentures convertible into common stock at a price equal to
$1.50 per share at June 30, 2004. $470,000 of notes payable were
convertible into common stock at a price of $.25 per share as of June 30,
2004.
NOTE 9 - LITIGATION
On July 7, 2003, SurgiCare, Inc. was named as a party in the arbitration
entitled Brewer & Pritchard, P.C. vs. SurgiCare, Inc. before the American
Arbitration Association. Brewer & Pritchard have claimed breach of contract and
demanded payment of $131,294.88 in billed and unbilled legal fees plus third
party expenses, interest at the highest legal rate, costs, legal fees and
damages from breach of contract. This case was settled in November 2003 and
SurgiCare issued shares of common stock valued at $117,500 as compensation for
past legal fees.
On February 10, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled S.E. Altman v. SurgiCare. S.E. Altman has sued for breach of contract,
alleging that SurgiCare did not pay monies owed under a "Finders Fee Contract."
Plaintiff asserts damages in the amount of $217,000, plus interest and
attorneys' fees. International Diversified Corporation, Limited has indemnified
SurgiCare with respect to any fees owed to Altman under the Finders Fee
Contract. The case has been dismissed in favor of arbitration. In March 2004,
the parties executed a Settlement Agreement and Release of Claims to resolve the
dispute in which SurgiCare issued Mr. Altman 540,000 shares of common stock,
which was registered with the Securities and Exchange Commission on Form S-8.
12
On April 14, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled A.I. International Corporate Holdings, Ltd. v. SurgiCare, Inc. in the
U.S. District Court for the Southern District of New York. Subsequently,
SurgiCare filed suit against A.I. International Corporate Holdings, Ltd. and
First National Bank, S.A.L. of Lebanon in the 215th Judicial District Court of
Harris County, Texas. The New York case involves allegations that SurgiCare
defaulted on its loan agreement. The plaintiffs in the New York case are suing
SurgiCare for $834,252 representing the loan amount and interest, plus $219,000,
representing damages for "No-filing Charges" and "Non-Effective Charges" under
the contract. SurgiCare's lawsuit in Texas asserted that the loan agreement is
usurious. The parties signed an agreement to settle this matter, which will
close after the consummation of the Transactions. Pursuant to this settlement,
SurgiCare will pay Plaintiffs $220,000 in cash and issue 2,100,000 shares of
SurgiCare common stock (210,000 shares after giving effect to the reverse stock
split contemplated in connection with the merger and equity transactions set
forth above), to be paid and issued after the closing of such transactions.
On November 24, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled Vincent A. Giammalva, Trustee v. SurgiCare, Inc., Keith G. LeBlanc, and
Phillip C. Scott; in the 344th Judicial District Court of Chambers County,
Texas. This case involves allegations that SurgiCare defaulted on a contract to
sell a parcel of real estate to plaintiff. Plaintiff also claims that LeBlanc
and Scott committed fraud. SurgiCare states that it could not sell the parcel of
land because of a lien on the property. The plaintiff seeks specific
performance, forcing SurgiCare to sell the property, as well as actual damages.
SurgiCare is negotiating with the plaintiff in an effort to settle this matter.
AII has agreed to indemnify SurgiCare, Inc., Keith LeBlanc and Phillip Scott for
all claims asserted in this litigation by agreement dated June 23, 2004.
In addition, we are involved in various other legal proceedings and claims
arising in the ordinary course of business. Our management believes that the
disposition of these additional matters, individually or in the aggregate, is
not expected to have a materially adverse effect on our financial condition.
However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period.
NOTE 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 loss, 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 loss and loss per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123 to stock-based employee compensation.
13
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- -------------- ------------- -------------
Net loss - as reported $ (2,822,031) $ (909,153) $ (4,569,281) $ (1,587,640)
Deduct: Total stock-based employee
compensation (expense determined under the
fair value based method for all awards),
net of tax effect (52,725) (52,725) (105,450) (105,450)
Pro forma net loss $ (2,874,756) $ (961,878) (4,674,731) (1,693,090)
Loss per share:
Basic net loss per share - as reported $ (.10) $ (.04) $ (.16) $ (.07)
Basic net loss per share - pro forma $ (.10) $ (.04) $ (.16) $ (.07)
Diluted net loss per share - as reported $ (.10) $ (.04) $ (.16) $ (.07)
Diluted net loss per share - pro forma $ (.10) $ (.04) $ (.16) $ (.07)
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net earnings (loss) for future
years because options vest over several years and additional awards could be
made each year.
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 June 30,
2004, the line of credit facility had a balance of $337,054 and is recorded on
San Jacinto's balance sheet, which is not consolidated with the Company's
financial statements. The line is secured by the accounts receivable and
equipment of San Jacinto. The line expires on February 2, 2005.
NOTE 12 - SUBSEQUENT EVENTS
We have negotiated a series of transactions that will restructure SurgiCare
and result in a change of control. The transactions include the acquisition of
three new businesses and issuance of new equity securities for cash and
contribution of outstanding debt. We also intend to complete a reverse stock
split and change our name to Orion. Our board of directors has approved all of
these actions and a special meeting of stockholders in lieu of an annual meeting
will be held to approve them. The highlights of the financial transactions
include:
o Effecting a one-for-ten reverse stock split and re-designating our
outstanding common stock as Class A common stock.
o Issuing a new class of common stock Class B common stock to Brantley
Partners IV, L.P., a private investor ("Brantley IV") or its assignees.
Brantley IV will purchase the Class B common stock for $10 million in cash
plus cash in the amount of the accrued but unpaid interest immediately
prior to the closing of the transactions owed to a subsidiary of Brantley
IV by SurgiCare and Integrated Physician Solutions, Inc. ("IPS") on
amounts advanced prior to October 24, 2003, which as of August 10, 2004
was $92,510. A portion of Brantley IV's cash investment will be used to
pay off the indebtedness owed by SurgiCare and IPS to the subsidiary of
Brantley IV. Based on the interest accrued on such indebtedness through
August 10, 2004, it is estimated that the net cash proceeds to SurgiCare
will be approximately $5,361,287. The shares to be received by Brantley IV
or its assignees will constitute approximately 58.9% of SurgiCare's
outstanding equity after the transactions on an as-converted basis.
Brantley IV will also receive the option to purchase shares of Class A
stock for cash in an amount up to an aggregate of $3 million after the
closing of the transactions.
14
o Acquiring IPS, a holding company whose two business units provide business
management services dedicated to the practice of pediatrics and integrated
business and clinical software applications for physicians, in a merger in
which we will issue Class A common stock to the IPS stockholders and
certain IPS creditors. After the transactions, former IPS stockholders and
creditors will own approximately 18.2% of our outstanding equity on an
as-converted basis.
o Acquiring Medical Billing Services, Inc. ("MBS"), and Dennis Cain
Physician Solutions, Ltd. ("DCPS"), two providers of physician management,
billing, consulting and collection services in an acquisition in which we
will pay between $2.9 million and $3.5 million cash and issue promissory
notes in the aggregate principal amount of $500,000 and Class C common
stock to the current equity holders of MBS and DCPS. The amount of
consideration received depends upon the fair market value of our common
stock at the time of the closing of the transactions, and the
consideration is also subject to retroactive increase or decrease,
including the issuance of additional shares of Class A common stock. We
will also issue shares of Class A common stock as directed by the DCPS and
MBS equity holders, and may be required to make additional payments in
certain circumstances. Immediately after the transactions, the equity
holders of these two companies and their designees will own Class A common
stock and Class C common stock which may amount to as much as
approximately 6.7% of our outstanding equity on an as-converted basis.
These transactions are contingent upon refinancing SurgiCare's, IPS's and
MBS's debt. The transactions and the refinancing will provide SurgiCare with
increased revenues and earnings, an improved balance sheet and the opportunity
to grow the business. Please review our proxy statement for our special meeting
of stockholders in lieu of an annual meeting, filed with the SEC for the full
details of the proposed restructuring.
On August 2, 2004, the Company sold its five tracts of undeveloped land to
American International Industries, Inc. ("AII") and agreed to accelerate the
conversion of SurgiCare's 900,000 shares of Series AA Redeemable Preferred Stock
("Preferred Stock") held by AII into 8,750,000 shares of SurgiCare common stock,
subject to approval of the listing of the shares on the American Stock Exchange
and certain other conditions. The Preferred Stock has a preference value of $4.5
million. Under the previous agreement, 300,000 shares of the Preferred Stock
were to be converted or redeemed annually through June 2006. At a floor price of
$0.41 per share, the potential maximum conversion was 10,975,610 common shares.
As part of this agreement, AII paid SurgiCare $250,000 and paid off SurgiCare's
loan (collateralized by the land) of approximately $1.1 million.
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,
15
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.
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 net 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
net realizable amounts from patients and third-party payers. Contractual
adjustments and accounts deemed uncollectible are applied against the allowance
account. The Company is not aware of any material claims, disputes or unsettled
matters with third-party payers.
INVESTMENT IN LIMITED PARTNERSHIPS - The investments in limited
partnerships are accounted for by the equity method. Under the equity method,
the investment is initially recorded at cost and is subsequently increased to
reflect the Company's share of the income of the investee and reduced to reflect
the share of the losses of the investee or distributions from the investee.
These general partnership interests were accounted for as investment in
limited partnerships due to the interpretation of FAS 94/ARB 51 and the
interpretations of such by Issue 96-16 and SOP 78-9. Under those
interpretations, SurgiCare could not consolidate its interest in those
facilities in which it held a minority general interest partnership interest due
to management restrictions, shared operating decision- making, capital
expenditure and debt approval by limited partners and the general form versus
substance analysis. Therefore, SurgiCare recorded these general partnership
interests as investments in limited partnerships.
16
GOODWILL - Goodwill represents the excess of cost over the fair value of
net assets of companies acquired in business combinations accounted for using
the purchase method. Goodwill acquired in business combinations prior to June
30, 2001 had been amortized using the straight-line method over an estimated
useful life of 20 years. In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill no longer be amortized but instead be reviewed
periodically for possible impairment. The Company has adopted SFAS No. 142
effective January 1, 2002 and is no longer amortizing goodwill.
Upon adoption of SFAS 142, as well as December 31, 2003 and 2002, the
Company performed an impairment test of its goodwill and determined that no
impairment of the recorded goodwill existed. Under SFAS No. 142, goodwill is
tested annually and more frequently if an event occurs which indicates the
goodwill may be impaired.
OVERVIEW
SurgiCare's principal business strategies are to (a) increase physician
utilization of existing facilities, (b) increase both the revenue and profits
from current cases and procedures being performed in existing facilities (c)
achieve growth and expand revenues by pursuing strategic acquisitions of
existing, and the development of new, physician owned ambulatory surgical
centers, and (d) expand into related healthcare facilities, including imaging,
surgical hospitals and practice management.
SurgiCare is in the process of identifying ambulatory surgical centers,
imaging centers and practice management companies as potential acquisition
targets and has, in some cases, conducted preliminary discussions with
representatives of these organizations. No commitments were made for new
acquisitions in the first six months of 2004. 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 entity with whom discussions have been conducted.
17
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 SIX MONTHS
JUNE 30, ENDED JUNE 30,
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ -------
Revenues, net 100.0% 100.0% 100.0% 100.00%
Expenses:
Direct Cost of Services 65.6% 55.1% 64.6% 54.6%
General & Administrative
Expenses 93.8% 91.2% 98.1% 75.0%
Other Operating Expenses
(Income) 83.9% (16.4%) 39.8% (7.5%)
Total Operating Expenses 243.3% 129.9% 202.5% 122.1%
Operating Loss (143.3%) (29.9%) (102.5%) (22.1%)
Other Loss (27.4%) (19.6%) (34.2%) (17.1%)
Minority Interest in Losses of
Partnerships -- 2.6% -- 1.2%
Loss Before Federal Income Tax
Expense (170.7%) (46.9%) (136.7%) -38.0%
Federal Income Tax Expense Benefit -- -- -- .3%
Net Earnings (Loss) (170.7%) (46.9%) (136.7%) -37.6%
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 vs. THREE MONTHS ENDED JUNE 30, 2003
NET REVENUE. Case volume decreased 18.6% to 1,409 in the three months ended
June 30, 2004 from 1,731 in the 2003 comparable period. Revenue declined
$286,048, or 14.8% to $1,652,960 in the three months ended June 30, 2004, from
$1,939,008 in the comparable 2003 period. On a per-case basis, revenue increased
to $1,173 in the three months ended June 30, 2004 from $1,120 in the 2003
comparable period. The average contractual allowance from gross revenues was
75.4% in the three months ended June 30, 2004 compared to 69.5% in the
comparable 2003 period. The decrease in revenue is predominantly due to the
related decrease in case volume, although the Company has lost minimal doctors
who perform cases. Due to the length of time to complete the pending transaction
(see Note 12 to the accompanying consolidated financial statements), and due to
the uncertainty surrounding the Company's financial condition, some physicians
are splitting their caseload with other competing surgery centers, which has
resulted in the decrease in cases.
DIRECT COST OF REVENUES. Direct Cost of Revenues increased $16,059, or 1.5%
to $1,084,690 in the three months ended June 30, 2004 from $1,068,631 in the
comparable 2003 period. Surgical costs decreased $7,190 or 1.8% to $391,919 in
the three months ended June 30, 2004 from $399,109 in the comparable 2003
period. Direct clinical salaries and benefits increased $13,862, or 3.0% to
$469,601 in the three months ended June 30, 2004 compared to $455,739 in the
comparable 2003 period. These costs are predominantly fixed and the centers were
already at base staffing levels in 2003. Other direct costs increased $9,387, or
4.4% to $223,170 in the three months ended June 30, 2004 from $213,783 in the
comparable 2003 period. The increase is primarily due to pre-lease interim
rental costs on MRI equipment for the Company's new imaging center in Ohio,
which opened in July 2004.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative costs
decreased $218,565, or 12.4% to $1,549,676 in the three months ended June 30,
2004 from $1,768,241 in the 2003 comparable period, primarily due to a decrease
in the provision for doubtful accounts. The provision for doubtful accounts
decreased $231,369, or 79.4% to $60,161 in the three months ended June 30, 2004
from $291,530 in the comparable 2003 period primarily due to an increased focus
on more timely and accurate billings, which included outsourcing the billing and
collections at its centers in Houston, Texas. To a lesser extent, approximately
$43,000 of the decrease in the provision for doubtful accounts is due to the
related decrease in revenues.
18
OTHER OPERATING EXPENSES (INCOME). In the three months ended June 30, 2004,
the Company recorded an impairment charge of $1,387,588 against its investment
in land in connection with its sale of the land in August 2004 (see Note 12,
SUBSEQUENT EVENTS to the accompanying consolidated financial statements). In the
three months ended June 30, 2003, the Company recorded a gain of $319,086
recognized on the sale of the Company's 10% interest in Physicians Endoscopy
Center.
TOTAL OPERATING EXPENSES. Total Operating Expenses increased $1,504,168, or
59.7% to $4,021,954 in the three months ended June 30, 2004 from $2,517,786 in
the comparable 2003 period. As a percent of revenue, total expenses increased to
243.3% of revenue in the three months ended June 30, 2004 from 129.9% in the
2003 comparable period. The increased costs, expressed both in dollars and as a
percentage of revenue, are related to the factors discussed above.
OTHER INCOME (EXPENSE). Total Other Income (Expense) increased $72,678, or
19.1% to $453,037 in the three months ended June 30, 2004 from $380,359 in the
2003 comparable period. The increase was primarily due to a decrease in Equity
in Earnings of Limited Partnerships of $61,846, or 77.0% between the two
comparable three-month periods. The decrease is primarily attributable to the
Company's sale of its interest in Physicians Endoscopy Center in June 2003,
where in the three months ended June 30, 2003, the Company's equity in that
center's earnings was $68,162.
FEDERAL INCOME TAX BENEFIT. For the three months ended June 30, 2004, the
Company did not record a tax benefit on its pre-tax loss of $2,822,031 due to a
valuation allowance recorded against the Company's deferred tax assets. The
valuation allowance was necessary due to the uncertainty of recovery of the
deferred tax assets.
NET LOSS. Due to the factors discussed above, the Company's net loss
increased $1,912,878, or 210.4% to $2,822,031 in the three months ended June 30,
2004 from $909,153 in the 2003 comparable period. The Company's operating
results were negatively impacted by the land impairment of $1,387,588 and the
decrease in gross margin of $302,107 (revenue minus direct cost of revenues).
SIX MONTHS ENDED JUNE 30, 2004 vs. SIX MONTHS ENDED JUNE 30, 2003
NET REVENUE. Case volume decreased 17.9% to 2,886 in the six months ended
June 30, 2004 from 3,517 in the 2003 comparable period. Revenue declined
$875,645, or 20.8% to $3,343,484 in the six months ended June 30, 2004, from
$4,219,129 in the comparable 2003 period. On a per-case basis, revenue decreased
to $1,159 in the six months ended June 30, 2004 from $1,200 in the 2003
comparable period. The average contractual allowance from gross revenues was
76.0% in the six months ended June 30, 2004 compared to 68.2% in the comparable
2003 period. The decrease in revenue is predominantly due to the related
decrease in case volume, although the Company has lost minimal doctors who
perform cases. However, due to the length of time to complete the pending
transaction (see Note 12 to the accompanying consolidated financial statements),
and due to the uncertainty surrounding the Company's financial condition, some
physicians are splitting their caseload with other competing surgery centers,
which has resulted in the decrease in cases performed.
DIRECT COST OF REVENUES. Direct Cost of Revenues decreased $143,319, or
6.2% to $2,161,642 in the six months ended June 30, 2004 from $2,034,961 in the
comparable 2003 period. Surgical costs decreased $78,941, or 9.1% to $792,745 in
the six months ended June 30, 2004 from $871,686 in the comparable 2003 period.
Direct clinical salaries and benefits increased $23,670, or 2.6% to $950,837 in
the six months ended June 30, 2004 compared to $927,167 in the comparable 2003
period. These costs are predominantly fixed and the centers were already at base
staffing levels in 2003. Other direct costs decreased $88,048, or 17.4% to
$418,060 in the six months ended June 30, 2004 from $506,108 in the comparable
2003 period. The decrease is primarily related to the revenue decrease and
included decreases in contract nursing ($44,720), patient transportation
($25,874) and equipment repairs ($23,754).
19
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative costs
increased $114,731, or 3.6% to $3,280,176 in the six months ended June 30, 2004
from $3,165,445 in the 2003 comparable period, primarily due to a an increase in
professional fees. Professional fees increased $426,399, or 82.9% to $940,983 in
the six months ended June 30, 2004 from $514,584 in the comparable 2003 period.
In 2004, the Company recorded a charge of $202,000 to professional fees related
to a settlement with S.E. Altman on a "Finders Fee Contract." The remaining
increase is due to legal, professional and accounting fees related to the series
of pending transactions that will restructure SurgiCare and result in a change
in control. The transactions include the acquisition of three new businesses and
issuance of new equity securities for cash and debt forgiveness (see Note 12 to
the accompanying consolidated financial statements). The increase in
professional fees was offset by a decrease in the Company's provision for
doubtful accounts of $184,204, or 61.3% to $116,488 in the six months ended June
30, 2004 from $300,692 in the comparable 2003 period primarily due to an
increased focus on more timely and accurate billings, which included outsourcing
the billing and collections at its centers in Houston, Texas. To a lesser
extent, approximately $62,000 of the decrease in the provision for doubtful
accounts is due to the related decrease in revenues.
OTHER OPERATING EXPENSES (INCOME). Other Operating Expenses (Income)
increased $1,647,881 to a net expense of $1,328,963 in the six months ended June
30, 2004 from a net gain of $318,918 in the comparable 2003 period. In the six
months ended June 30, 2004, the Company recorded an impairment charge of
$1,387,588 against its investment in land in connection with its sale of the
land in August 2004 (see Note 12, SUBSEQUENT EVENTS to the accompanying
financial statements). In the six months ended June 30, 2003, the Company
recorded a gain of $319,086 recognized on the sale of the Company's 10% interest
in Physicians Endoscopy Center.
TOTAL OPERATING EXPENSES. Total Operating Expenses increased $1,619,293, or
31.4% to $6,770,781 in the six months ended June 30, 2004 from $5,151,488 in the
comparable 2003 period. As a percent of revenue, total expenses increased to
202.5% of revenue in the six months ended June 30, 2004 from 122.1% in the 2003
comparable period. The increased costs, expressed both in dollars and as a
percentage of revenue, are related to the factors discussed above.
OTHER INCOME (EXPENSE). Total Other Income (Expense) increased $421,124, or
58.4% to $1,141,984 in the six months ended June 30, 2004 from $720,860 in the
2003 comparable period. The increase was primarily due to an increase in
interest expense of $256,101, or 28.2% to $1,165,119 from $909,018 in the 2003
period. In the six months ended June 30, 2004, the Company recorded a $206,693
charge to interest expense, based on the change in relative fair value of its
convertible unsecured promissory notes (see Note 6 to the accompanying
consolidated financial statements). Since the notes were not converted by
January 31, 2004, the conversion price changed from $.35 per share to $.25 per
share. The remaining increase in interest expense of $49,408 was due to
additional borrowings for working capital purposes. Additionally, Equity in
Earnings of Limited Partnerships decreased by $147,353, or 87.7% between the two
comparable six-month periods. The decrease is primarily attributable to the
Company's sale of its interest in Physicians Endoscopy Center in June 2003,
where in the six months ended June 30, 2003, the Company's equity in that
center's earnings was $131,490.
FEDERAL INCOME TAX BENEFIT. For the six months ended June 30, 2004, the
Company did not record a tax benefit on its pre-tax loss of $4,569,281 due to a
valuation allowance recorded against the Company's deferred tax assets. The
valuation allowance was necessary due to the uncertainty of recovery of the
deferred tax assets.
20
NET LOSS. Due to the factors discussed above, the Company's net loss
increased $2,981,641, or 187.8% to $4,569,281 in the six months ended June 30,
2004 from $1,587,640 in the 2003 comparable period. The Company's operating
results were negatively impacted by: the land impairment of $1,387,588; the
decrease in gross margin of $732,326 (revenue minus direct cost of revenues);
the increase in professional fees of $426,399 due to the Altman settlement and
expenses related to the pending series of transactions; and the increase in
interest expense of $256,101 due to the charge related to the beneficial
conversion factor of the convertible notes and additional borrowings for working
capital purposes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $317,008 and $560,085 for the six
months ended June 30, 2004 and 2003, respectively. The primary reason for the
usage of cash is due to continued operating losses in both periods.
Net cash used in investing activities was $685,157 for the six months ended
June 30, 2004. In the second quarter of 2004, the Company purchased open MRI
(magnetic resonance imaging) equipment and related build-out totaling
approximately $1.2 million, of which $600,000 was financed through a capital
lease. The Company also purchased approximately $86,000 of replacement equipment
for it existing centers. Cash provided by investing activities for the six
months ended June 30, 2003 was $399,205, primarily due to the Company selling
its ownership interest in Physicians Endoscopy Center for $425,000 cash.
Net cash provided by financing activities increased to $1,140,613 for the
six months ended June 30, 2004 from $162,454 in the 2003 comparable period. The
Company has financed its working capital needs primarily through the issuance of
equity, secured and/or convertible debt. As of June 30, 2004, SurgiCare does not
have any credit facilities available with financial institutions to provide for
working capital shortages. In the six months ended June 30, 2004, the Company
borrowed $1,325,411 from a participant in the proposed restructuring
transactions (See Note 12 to the accompanying unaudited financial statements) to
make necessary payments on debt and to fund operations.
In the six months ended June 30, 2003, the Company raised cash of
$1,069,897 through the sale of common stock offset by net pay downs of credit
lines and other outstanding debt of approximately $903,000.
In the first six months of 2004, the Company did not raise any substantial
funds through the sale of equity securities, though $16,535 was recorded on the
exercise of outstanding warrants. Although the Company believes it will generate
cash from operations in the future, 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. See Note 12 to the accompanying
unaudited financial statements for a description of a series of transactions
recently announced by the Company that, if consummated, will involve an equity
investment and recapitalization of the Company. Prior to the closing of such
contemplated transactions, any additional sales of debt and/or equity by the
Company will be subject to the prior approval of the counterparties to the
applicable transaction documents. The Company can provide no assurance that it
will be successful in any future financing effort to obtain the necessary
working capital to support its operations, or fund acquisitions for its
anticipated growth. In the event that any future financing efforts are not
successful, the Company will be forced to liquidate assets and/or curtail
operations.
21
As of June 30, 2004, the Company had cash and cash equivalents of $280,001
and negative working capital of $13,652,796. SurgiCare has a total of $6,267,762
in long-term debt and an additional $1,402,588 in revolving lines of credit
currently in default. SurgiCare has defaulted on certain provisions of its Loan
and Security Agreement with its senior lender, DVI Business Credit Corporation
and DVI Financial Services, Inc. ("DVI"). On August 25,2003, DVI filed for
protection under Chapter 11 of the U.S. Bankruptcy laws. Integrated Physician
Solutions, Inc. ("IPS") and SurgiCare completed negotiations with DVI, which
resulted in a decrease of their combined debt of approximately $10.1 million to
a combined payout of approximately $6.5 million including a buy-out of the
revolving lines of credit. As part of that agreement, the companies have
executed a new loan agreement with U.S. Bank Portfolio Services ("USBPS"), as
servicer for payees, for payment of the revolving line of credit and
renegotiated the term loan amounts. The sum due to DVI at the closing of the
aforementioned merger and equity transactions is $2,000,000. As a part of that
transaction, the companies have signed a term sheet for a new revolving line of
credit, which will be used to pay off the DVI revolving line of credit.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the reports filed
by us under the Securities and Exchange Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As of the end of the period covered by
this report, we evaluated, under the supervision and with the participation of
our management, including our President and Chief Executive Officer and our
Secretary and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on
that evaluation, our President and Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.
CHANGES IN INTERNAL CONTROLS
During the most recent fiscal quarter, there have been no changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 10, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled S.E. Altman v. SurgiCare. S.E. Altman has sued for breach of contract,
alleging that SurgiCare did not pay monies owed under a "Finders Fee Contract."
Plaintiff asserts damages in the amount of $217,000, plus interest and
attorneys' fees. International Diversified Corporation, Limited has indemnified
SurgiCare with respect to any fees owed to Altman under the Finders Fee
Contract. The case has been dismissed in favor of arbitration. In March 2004,
the parties executed a Settlement Agreement and Release of Claims to resolve the
dispute in which SurgiCare agreed to issue Mr. Altman 540,000 shares of common
stock, which were registered with the Securities and Exchange Commission on Form
S-8 in April 2004.
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On April 14, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled A.I. International Corporate Holdings, Ltd. v. SurgiCare, Inc. in the
U.S. District Court for the Southern District of New York. Subsequently,
SurgiCare filed suit against A.I. International Corporate Holdings, Ltd. and
First National Bank, S.A.L. of Lebanon in the 215th Judicial District Court of
Harris County, Texas. The New York case involves allegations that SurgiCare
defaulted on its loan agreement. The plaintiffs in the New York case are suing
SurgiCare for $834,252 representing the loan amount and interest, plus $219,000,
representing damages for "No-filing Charges" and "Non-Effective Charges" under
the contract. SurgiCare's lawsuit in Texas asserts that the loan agreement is
usurious. The parties signed an agreement to settle this matter, which will
close after the consummation of the Transactions. Pursuant to this settlement,
SurgiCare will pay Plaintiffs $220,000 in cash and issue 2,100,000 shares of
SurgiCare common stock (210,000 shares after giving effect to the reverse stock
split contemplated in connection with the merger and equity transactions
discussed in Note 12 to the accompanying consolidated financial statements) to
be paid and issued after the closing of such transactions.
On November 24, 2003, SurgiCare, Inc. was named as a defendant in a suit
entitled Vincent A. Giammalva, Trustee v. SurgiCare, Inc., Keith G. LeBlanc, and
Phillip C. Scott; in the 344th Judicial District Court of Chambers County,
Texas. This case involves allegations that SurgiCare defaulted on a contract to
sell a parcel of real estate to plaintiff. Plaintiff also claims that LeBlanc
and Scott committed fraud. SurgiCare states that it could not sell the parcel of
land because of a lien on the property. The plaintiff seeks specific
performance, forcing SurgiCare to sell the property, as well as actual damages.
SurgiCare is negotiating with the plaintiff in an effort to settle this matter.
American International Industries, Inc. ("AII") has agreed to indemnify
SurgiCare, Inc., Keith LeBlanc and Phillip Scott for all claims asserted in this
litigation by agreement dated June 23, 2004.
In addition, we are involved in various other legal proceedings and claims
arising in the ordinary course of business. Our management believes that the
disposition of these additional matters, individually or in the aggregate, is
not expected to have a materially adverse effect on our financial condition.
However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period.
ITEM 2. CHANGE IN SECURITIES.
On April 26, 2004, the Company issued 540,000 shares of common stock to
S.E. Altman, an accredited investor, for services rendered. The stock was issued
in a privately negotiated transaction in reliance on the exemption provided by
Section 4(2) of the Securities Act.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
SurgiCare has defaulted on certain provisions of its Loan and Security
Agreement with its senior lender, DVI Business Credit Corporation and DVI
Financial Services, Inc. ("DVI"). On August 25,2003, DVI filed for protection
under Chapter 11 of the U.S. Bankruptcy laws. IPS and SurgiCare completed
negotiations with DVI, which resulted in a decrease of their combined debt of
approximately $10.1 million to a combined payout of approximately $6.5 million
including a buy-out of the revolving lines of credit. As part of that agreement,
the companies have executed a new loan agreement with U.S. Bank Portfolio
Services ("USBPS"), as servicer for payees, for payment of the revolving line of
credit and renegotiated the term loan amounts. The sum due to DVI at the closing
of the aforementioned merger and equity transactions is $2,000,000. As a part of
that transaction, the companies have signed a term sheet for a new revolving
line of credit, which will be used to pay off the DVI revolving line of credit.
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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 and has been sued by the primary debenture holder. The parties
signed an agreement to settle this matter, which will close after the
consummation of the Transactions. Pursuant to this settlement, SurgiCare will
pay Plaintiffs $220,000 in cash and issue 2,100,000 shares of SurgiCare common
stock (210,000 shares after giving effect to the reverse stock split
contemplated in connection with the merger and equity transactions discussed in
Note 12 to the accompanying consolidated financial statements) to be paid and
issued after the closing of such transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 18 U.S.C.ss.1350 Certification
32.2 18 U.S.C.ss.1350 Certification
(b) Reports on Form 8-K
During the quarter ended June 30, 2004, we filed the following reports
on Form 8-K:
Dated May 10, 2004, SurgiCare issued a press release to announce that
on April 27,2004, it filed amended preliminary proxy materials with
the Securities and Exchange Commission.
Dated May 14, 2004, SurgiCare issued a press release announcing its
first quarter 2004 financial results.
Dated June 17, 2004, to provide clarification of unauthorized
information posted on an internet message board.
Dated July 2, 2004 (after the close of the second fiscal quarter),
SurgiCare issued a press release to announce that it had entered into
agreements to: convert its Series AA Redeemable Preferred Stock to
common; sell its five tracts of undeveloped land; and settle its debt
with its senior lender. SurgiCare also announced a change in its CFO
position.
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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: August 13, 2004 REGISTRANT:
SurgiCare, Inc.
By: /s/ Keith G. Leblanc
-----------------------------
Keith G. LeBlanc
Chief Executive Officer
By: /s/ Roger S. Huntington
-----------------------------
Roger S. Huntington
Chief Financial Officer
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